SETTING UP A BUSINESS IN FRANCE LEGAL AND TAX ASPECTS

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1 SETTING UP A BUSINESS IN FRANCE LEGAL AND TAX ASPECTS Maître Laurent VERDES Attorney-at-Law at the Paris Bar - Partner Couturier-Massoni AARPI 23, avenue Bosquet Paris - France lverdes@couturier-massoni.com Tel:

2 SETTING UP CREATION BUSINESS COMPANY IN FRANCE March 2011 PART I - Choosing a legal structure A company incorporated in a European country (the European Company ) wishes to establish a business in France in order to develop its commercial activity has several legal options. It may choose to not create a legal structure (I) or to create one depending on the intended activity (II). I - Development of the French market without creating a legal structure: A - The conclusion of a commercial agency contract: The European company may decide to enter into an Agency agreement with an independent agent who will be responsible for developing its customer base and introduce its products. The contract, if governed by French law, will be relatively protective of the interests of the agent. In particular, unless there is a fault from the agent, the agent will be entitled to indemnities for termination equal to two years of fees even if he has not achieved the intended objectives. Therefore, the principal shall negotiate with care each terms of the contract. Obviously, the European company will invoice its French customers from its country. B - Direct hiring of a French employee: A European company can hire a French employee under an employment contract governed by French law without necessarily constituting a legal structure in France. The French social security scheme will of course be applicable regardless of the nationality of the employee (assuming he is a national EU) from the moment he resides permanently in France. - EO form to be sent to CNFE (Centre National des Firmes Etrangères - National Centre for Foreign Companies): Before hiring the employee, the European company must register with the social security agencies by sending an administrative document called EO and sent it to the CNFE, which will then inform the following agencies: - INSEE (which will send a SIRET number of the foreign business enabling it to communicate with social agencies and make payment of social contributions) - Pôle Emploi (Unemployment Insurance)

3 - The group Novalis - Taitbout (supplementary pension scheme) - The Regional Fund for Pension Insurance (Caisse Régionale d Assurance vieillesse), - The Tax administration and - The Pension Insurance Fund and Health at Work (Caisse d assurance retraite et de la Santé au travail). Payment of social costs will be made directly by the European Company (or through a representative residing in France) to URSSAF Bas-Rhin, being the exclusive organisation for foreign companies with employees in France without having a permanent establishment (branch or subsidiary). - DUE form to be sent to the CNFE: When hiring a first person and for all successive employees, the foreign company must submit to the CNFE a single recruitment form called DUE (Déclaration Unique d Embauche) as to inform in one document all social security organizations. II - The creation of a legal structure: The European Company wishes to settle permanently in France to develop the French market should consider establishing a structure depending on its ambitions. If its aim is initially to take contacts in France or ensure its communication, it is sufficient to establish a representative office. However, if the European Company wants to develop in France a real business with a turnover from France, it should consider establishing a branch or subsidiary. A - Representative office: Legal status: The representative office is above all an ideal vantage point for the foreign parent. It will enable it to take contacts with various people (potential customers, suppliers, etc..), provide information, ensure its communication and advertising, etc.. The office has no legal personality. The office can never enter into a contract on behalf of the parent company, its purpose is not to provide a commercial activity. It has only a relay role, preparatory to the negotiation of commercial contracts between clients contacted and the foreign company. Invoices and contracts must be sent and signed by the foreign parent. Formalities of Incorporation:

4 - The European Company will register its representative office at the Center for business formalities of the Chamber of Commerce and Industry of the place of its address. - This formality entails the allocation of SIRET and SIREN numbers by INSEE. - The Tax Office will also be informed of such registration. Recruitment of employees: If employees are hired, formalities and payment of contributions must be made by the company (or a designated representative residing in France) to a single body: the CNFE (Urssaf of Bas-Rhin). Tax Status: Tax on profits : Not making any sale and not directly providing any services to clients of the foreign company, it is not subject to income tax in France. VAT : Not making any sale and working exclusively on behalf of its headquarters abroad, it is not subject to VAT. Warning: If the liaison office makes a real business virtually independent of the foreign firm, it must keep records, register at the Commercial Register, pay French tax and register employees at URSSAF of its place of residence and not at URSSAF Bas-Rhin. The European Company will therefore be very careful about its objectives in France as to avoid tax and URSSAF controls. B - Branch: The branch is not independent from the parent company, even if its operating rules (accounting, reporting of results) show some independence. It carries out a commercial activity, has customers but does not own legal autonomy. As such, it has no legal personality. The branch must be registered with the Register of commerce within fifteen days after its opening. The European Company will be registered in the Register of commerce as a foreign corporation. C - Subsidiary: There are several forms of commercial companies in France. For small and medium enterprises, the choice will generally be between the limited liability company (SARL : Société à responsabilité limitée) and the simplified joint stock company (SAS : Société par actions simplifiée). 1 - The SARL (Société à responsabilité limitée): The SARL is the company s form the most widespread in France. Its main feature is that it limits the liability of shareholders.

5 The SARL can be made by a single partner at the minimum and maximum of 100. Partners may be individuals or entities. The law does not require a SARL to have an auditor unless the company exceeds at least two of three following thresholds: - Amount of net sales exceeding 3.1 million euros; - Total assets exceeding EUR 1.55 million; - SARL over 50 employees. Share capital The amount of capital is freely set by the partners according to the size, activity, and capital needs of the company. It may well be 1 but it is generally recommended that it be of at least Management The company is headed by one or several managers (called : gérant), who must be only individuals and not companies. The manager can be appointed from among members or outside them. Tax The SARL is subject to corporate tax. The tax rate is 33.33% of the net income. Nevertheless, it is 15% on the first 38,120 of profits for companies whose turnover is less than 7,630,000 and whose capital is owned at least at 75% by individuals. 2 SAS (Société par actions simplifiée): A SAS is a company largely unregulated. The partners have considerable freedom in the context of the drafting of statutes. A SAS consists of one or more individuals or legal entities without limitation in number. Share capital The partners are free to determine the amount of the share capital. The partners may make contributions in cash or in kind. Unlike SA, SAS can not make a public offer of its securities on a regulated market. Management The only compulsory social body is the President. The articles may also consider the creation of other bodies such as the General Director or the Board of directors...) Auditors The obligation to appoint an auditor in the SAS is required only if one of the following conditions are met:

6 - SAS is beyond, at the end of year two, the following thresholds: total assets exceeding one million euros, net sales exceeding two million euros, and / or the average number of permanent employees during the year more than 20 employees - SAS controls or is controlled by one or more companies, - One or several shareholders representing at least a tenth of the capital can request for an interim president at the commercial Court and the appointment of an auditor. Tax The SAS shall pay corporate tax. The tax rate is 33.33% of net income. Nevertheless, the corporation tax is 15% on first 38,120 of profits for companies whose turnover is less than 7,630,000 and whose capital is owned at least at 75% by individuals. PART II: HIRING AN EMPLOYEE I - The European employee seconded to France: A - The temporary secondment: The principle is that companies whose headquarters are based outside France can temporarily reassign an employee in France to perform a service. The secondment can be considered only for very specific missions of short duration. The expected duration of work in the country in question must not exceed 12 months. This period may be extended for additional 12 months if the work continues due to unforeseen circumstances. B - The expatriation of the European employee in France: The principle is that the European Company sends its employee in France under conditions not covered by the secondment, that is to say for a long time. In this case, the employee is subject to French social security law. No other national law can be applied. The foreign company must register and declare the employee to the CNFE or URSSAF of the place of residence in France. II - The hiring of a French employee:

7 A - The employment contract: It is conceivable that the European Company wishes that the employment contract is subject to European law. Nevertheless, it would have no interest in it because in any case, French law will apply in addition to the law of the company and the French courts will be competent. The employee will benefit from the rights recognized by both the European and French labor codes. 1 - The indefinite duration contract (CDI : Contrat à durée indéterminée) : The Contract may include a trial period. For executives (cadres), it is a maximum period of four months unless the collective agreement is more favorable for employees. The Contract should be written in French if the employee is French and even if the contract must be performed abroad. 2 - The term employment contract (CDD : contrat à durée déterminée) : The CDD must be in writing and include mandatory information (time, object: for example, replacing an employee on maternity leave...). The duration of the CDD can not exceed 18 months in principle. In some cases, it may not exceed 9 months (urgent work) or 24 months (working abroad). A CDD shall be concluded for specific reasons specified by law and which are mainly: - Replacement of an employee due to sickness or maternity - The temporary increase in business activity, - As part of a seasonal job. B - Formalities: The employer must fill before hiring the employee a declaration which shall be registered at the organization of social protection which it depends (Social Security). This formality is accomplished by using the single declaration hiring (DUE: Déclaration Unique d Embauche), which comprises all the formalities involved when hiring someone. This declaration must be made not later than the last business day prior to hiring. C - Working hours and holidays: The legal duration of the actual work is 35 hours per week. Beyond that, it is counted paid extra-hours as follows: - 25% for the first 8 hours - 50% after those 8 first hours.

8 Or, hours or days off for the employee. For employees who have considerable autonomy in organizing their work or for managing directors, it is possible to agree on convention package in hours or days per year where overtime hours would not be counted. An employee, who had worked with the same employer for a time equivalent to at least 10 days of actual work, is entitled to holidays of 2.5 working days per month of work. The total period of holidays shall not exceed 30 working days or 5 weeks. D - Social protection of the employee: The appointment of a staff representative (délégué du personnel) is obligatory in companies employing at least 11 workers. The creation of a works council (comité d entreprise) is mandatory for companies with at least 50 employees. All employees are subject to the general social security covering the risks (sickness, maternity, accidents and occupational diseases), age and family benefits (family allowances, housing allowances). PART III - RENT PREMISES To be registered at the Register of commerce, a company must provide evidence of its address by a lease agreement or the property of the offices. When it wishes to lease premises, the company may: - take up residence further to a domiciliation contract. - Or rent offices further to a commercial lease agreement, - Or take up residence at the home of its Director. I - The contract of domiciliation: This contract does not envisage any difficulty in application. It can be concluded for an indefinite period with a short notice for termination. Nevertheless, it is concluded for a period of at least 3 months. Such contracts may provide a simple domiciliation or provide furnished offices. Its cost is however usually high. In the event of termination of the contract, the domiciliation company shall inform the Register of commerce of such termination. The domiciliation company shall also inform the Register of commerce if its client has not taken up its mails since more than three months.

9 The company may then be removed from the Register of commerce. As of this radiation, it will have a period of 6 months to apply for re-registration. Otherwise, it will be dissolved and another company will need to be incorporated. II - The Commercial Lease agreement: Whether it is to rent commercial premises (eg shop) or offices, it is customary to arrange a commercial lease governed by the Commercial code. This lease has the following features: - The lease has a term of 9 years. But this term shall be respected only by the lessor. The tenant can always leave every 3 years. For this, it is imperative to address the termination letter six months before the end of the three years period by service of a bailiff. Otherwise, the tenant will be engaged for a further period of 3 years. - At the end of the period of 9 years, if the tenant wants to stay in the premises, it shall, six months before the end of the lease, address a termination letter with a proposal of renewal so that the lease can be extended for a further period of 9 years. Otherwise, the lease will continue by tacit agreement after 9 years but the landlord may terminate it at any time. - At the end of the last 9 years, the landlord may refuse to renew the lease. In this case, it must pay an indemnity to the tenant unless the refusal was due to a fault from the tenant (eg non-payment of rent). III Domiciliation at the address of the Director: The company can be domiciled at the home of its director (gérant of the SARL or President of the SAS) but not at the home of a partner or an employee. Such domiciliation may be for an indefinite period unless the lease or the condominium rules (règlement de copropriété) is prohibiting it. In this case, the company may still be domiciled at the domicile of the director but only for a period of 5 years. In this case, the director of the company shall notify the lessor or the union of co-owners of his intention to domicile the company at his home. For more information, please do not hesitate to contact: Maître Laurent VERDES Attorney-at-Law at the Paris Bar - Partner Couturier-Massoni AARPI 23, avenue Bosquet Paris - France lverdes@couturier-massoni.com Tel: