Corporate Law in France 2011

I. Compliance with Regulations concerning Foreign Investments in

France

General:
Foreign investments in France are free of any administrative restrictions
although mandatory declarations or permits are required in special cases. In
general, investors are able to acquire French companies or create their own legal
entity, buy or rent property, without having to comply with any specific
undertakings, including minimum investment or job creation levels. The
repatriation of capital is also free of any restrictions, with the exception of some
specific cases where there are declaratory requirements.

Declarations:
o For statistical reasons, foreign investors have to file a return if they
acquire 10% or more of the equity or voting rights in a French company.

o Foreign investors have to file a return for information purposes with the
Ministry for the Economy, Industry and Employment in relation to (i) an
investment that creates a new company and represents an investment in
excess of € 1.5 million (ii) or, without being subject to any minimum
threshold, any acquisition of all or part of a line of business, or the
acquisition of a direct or indirect equity interest in a French company
amounting to more than a third of its shares or voting rights (unless the
investor already has a majority interest in the French company).

Prior Authorizations:
o In certain business sectors as gambling, private security services, trade in
weapons, other military equipments, etc. an authorization is required to
acquire a controlling interest and the direct or indirect acquisition of all
or part of a business line.

Regulated Activity:
o Certain activities such as lawyers, accountants, real estate agents,
architects, doctors, insurance, etc are regulated and the investor must
check whether the regulatory requirement have been satisfied before
commencing any such activity.
 II. Procedures and Formalities

Competent Authority:
All the legal, tax, social and administrative formalities for setting up a new
company can be dealt with in one place: the Company Formalities Center (CFE)
(“Centre de Formalités des Entreprises”). This organization centralizes all the
documents required to set up a company in France and will forward the
registration application file to the various relevant authorities. The CFE’s are
part of the local Chamber of Commerce (“Chambre de Commerce et d’Industrie”)
for companies, and businesses. There is a separate Formalities Centreat the
social security offices (“URSSAF”) for regulated independent activities.

Timeframe:
The company will officially come into existence when it has been duly registered
on the Commercial Court Registry (“Registre du Commerce et des Sociétés”).
This generally takes between 2 to 10 days after the documents have been filed
with the CFE, plus time beforehand to prepare all the necessary documents
abroad and in France. A registration certificate (the “K-bis”) will be issued upon
incorporation. Some registration formalities can be performed on-line. It is not
usual in France to use “off-the-shelf” companies.

Legal Expenses:
The expenses for setting up the company generally amount to :

- publication expenses of approximately € 200 (i.e. publishing an official

announcement in a legal gazette);

- registration expenses with the Commercial Court Registry of

approximately € 150.

Documents Required for Registration:

Whatever the corporate structure chosen by the investor, the following
documents have to be prepared in French and registered with the Commercial
Court Register:
- the application form provided by the Company Formalities Center;
 - the by-laws (“statuts”) (if real estate is contributed in payment up of the
share capital, a notary will need to publish the land transfer on the land
registry);

- shareholders’ resolution appointing the directors, copies of their passport

or identity card (and their business permit (“carte de commerçant
étranger”) if they are nationals of countries other than those of the
European Economic Area,), a statutory declaration indicating that they
have no criminal record and an attestation of filiation confirming the
identity of the director’s parents;,

- shareholders’ resolution appointing auditors (if necessary);

- proof of the company’s registered address (lease, authorization of

domiciliation etc.),

- all documents in a foreign language must be translated into French by

an official translation,

- choice of a company name, although the investor is not required to

provide evidence that the name can be used, it is always advisable to
carry out searches at the French institute of industrial property (“Institut
National de la Propriété Industrielle”) (INPI) before incorporation in order to
ensure unrestricted use of the name free of third party rights.

The choice of the corporate structure and the preparation of the Articles of
Association will give rise to important legal and tax considerations. It is
therefore strongly recommended that one seeks the assistance of a French
lawyer when forming a new company and drafting the necessary documents.

III. Business Structures

The business structure will depend on the kind of the business, the investor’s
strategy and the degree of independence that the French operations are to have
from the parent company.

A foreign company may choose between establishing a branch or a subsidiary to

conduct its business in France.

1. Branches (“succursales”)
The foreign company can perform business in France directly under its own
name.
The branch does not have its own legal personality. Therefore, the foreign
company forming the branch is responsible for the activities of the branch; if the
branch encounters financial problems, the foreign company has unlimited
liability for its debts.
Nevertheless, the branch must be registered with the French Commercial Court
as any legal entity conducting business in France, the registration relating
essentially to the foreign company and the legal representative of the branch. In
addition to the documents aforementioned, the following documents have to be
translated into French (official translation) and be supplied with the applicable
form requesting registration:

o a copy of the certificate of incorporation of the foreign company;

o a copy of the by-laws of the foreign company;

o shareholders’ or directors’ resolution of the foreign company authorizing

the opening of the branch in France and appointing the legal
representative of the branch.

If the branch is recognized as being a permanent establishment, it must file its

own accounts with the French Commercial Court on an annual basis.

From a tax point of view, the branch which actively conducts business
constitutes a permanent establishment and is subject to corporate income tax
and VAT and may be subject to withholding tax on the branch’s profits
(depending on the tax residency of the foreign company and the relevant tax
treaty if any; no branch withholding tax applies to branches of EU companies).

Branches which conduct preparatory activity only (e.g. representation, liaison

offices) and/ or an auxiliary activity (e.g. storage) are not regarded as
constituting a permanent establishment and are not subject to corporate
income tax.

There are provisions in French company law and tax regulations that enable
branches to be subsequently transformed into a French company by its
business assets and on-going business constituting it’s a contribution-in-kind
to the share capital of a new subsidiary; such a transformation can benefit
from a favorable tax regime, provided that certain conditions are complied with
(sometimes including formal approvals from the tax office).
It is also possible to merge a French company into its EU parent, thus
transforming the subsidiary into a branch; in certain circumstances this can be
performed under a favorable regime.

 Pros : one legal entity.

 Cons : reporting and administrative requirements (for tax, social,

accounting, commercial and corporate purposes similar to a subsidiary);

 unlimited liability for the foreign company having a French branch;

 no VAT applies on services and delivery of goods between a foreign

company and its French branch – this may result in restrictions on VAT
deductions;

 restrictions on corporate tax deductibility of interest paid by the branch

to the foreign company or head-office.

2. Subsidiary – Creation of a French Company

2.1. Joint Stock company (“Société Anonyme” - SA)

a. General requirements

 Minimum capital stock: € 37,000 or 225,000 for listed companies

(NB : the capital of all French companies must be denominated in
Euros),

 Minimum number of shareholders: 7,

 Liability of the shareholders: limited to shareholder’s participation

in the company,

 Statutory auditors (“Commissaire aux Comptes”): a statutory

auditor has to be appointed (2 auditors when the company has
subsidiaries and must file consolidated accounts). A deputy
statutory auditor has also to be appointed by the company.
b. Corporate Governance / Management

b.1. There are two types of Joint Stock Company:

 The joint stock company which is managed by a Board of

Directors (“Conseil d’Administration”). The Board members
(“Administrateurs”) are either individuals or companies
(minimum of 3 – maximum of 18). They are appointed by the
shareholders. Since 2009, the Board members are no longer
required to be shareholders themselves of the company. The
Board of Directors appoints a President (“Président du Conseil
d’Administration”) from amongst its members. It will also
appoint the Chief Executive Officer (“Directeur Général”) who
can also be the President. The Board decides whether to
appoint delegate executive officers to assist the Chief Executive
Officer. The President, the CEO or delegate CEO (“Directeur
Général Délégué”) are all natural persons as opposed to legal
entities.

or

 The joint stock company which is managed by two different

boards (based on the German model): the Executive Board
(“Directoire”), formed by natural persons (maximum of 5, or 7 if
the company is listed), who may or may not be shareholders,
principally in charge of the management of the company, and
the Supervisory Board (“Conseil de Surveillance”), the members
of which are not required to be shareholders unless the Articles
of Association stipulate the contrary. The members of the
Supervisory Board may be natural persons or legal entities
(minimum of 3 – maximum of 18), who are principally in charge
of the supervision and control of the executive board’s
management.

b.2. General Meetings (“Assemblées Générales”)

 There are two types of general meetings:
 The extraordinary general meeting: in general, when the
decisions give rise to a modification of the Bye-laws,
which shall be passed by a vote representing more than
66.66 % of the votes of the attending or represented
shareholders.

 The ordinary general meeting: when the decisions do not

trigger a modification of the by-laws. These decisions,
adopted by a majority vote, are principally those
appointing, dismissing or substituting the members of
the Boards, appointing the statutory auditors and
approving the annual accounts of the company.

c. Taxation of the Company’s Income:

Joint stock companies are subject to corporate income tax.

d. Pros and Cons

 Pros : The joint stock company (“SA”) is suitable for large companies; they
(as well as SCA’s – see below) are mandatory in order to be quoted and to
operate in the banking and insurance business.

 Cons : the SA’s rules are less flexible and more cumbersome for medium
size and smaller companies; they always require the appointment of
statutory auditors : it is today common for these entities to be
transformed into SAS’s.

2.2. Simplified Joint Stock Company (“Société par Actions Simplifiée” - SAS)

a. General Requirements

 Minimum capital stock: no specific requirement but cannot be

created with zero capital stock.

 Minimum number of shareholders: 1 – no maximum (natural

persons or legal entities). If there is only a single shareholder, the
 SAS, is called a SASU (“Société par Actions Simplifiée
Unipersonnelle”).

 Liability of the shareholders: limited to shareholder’s participation

in the company.

 Statutory auditors: a statutory auditor has to be appointed only if

the company exceeds two of the three following thresholds:

 € 1,000,000 of total assets on the balance sheet;

 € 2,000,000 of net sales;

 20 permanent employees;
or if the company controls or is controlled by another company.

b. Corporate Governance / Management

 The shareholders are free to choose in the by-laws or pursuant to a

shareholders’ agreement how the management of the company is to be
organized (with or without a Board, Steering Committee, etc.). The
shareholders can also freely stipulate in the Artilces of Association that
decisions are to be taken by majority vote.

 The company is run, managed and represented vis-à-vis third

parties by a Président, who can be a natural person or legal entity and
may delegate part of its powers to one or several Managing Directors
(“Directeur Général”).

 General Meetings

 The following decisions have to be taken by the

shareholders: operations relating to the capital stock
(increase, reduction...), restructuration operations
(merger...), appointment of the statutory auditors when
required, approval of the annual accounts, dissolution,
 and transformation of the company into another legal
form.

 The other decisions, such as the appointment of

directors, the transfer of the head office, change of the
trade name of the company, amendments to the By-laws
may be taken by the President if so stipulated in the by-
laws.

c. Taxation of the Company’s Income :

SAS’s are subject to corporate income tax.

d. Pros and cons

 Pros: SAS’s provide for more flexibility due to the possibility of

drafting the by-laws to reflect the investor’s needs as regards
corporate governance, the admission or withdrawal of a
shareholder, etc.

In this respect, it is also a highly suitable entity for organizing

joint-ventures, holdings, private equity schemes such as LBO’s…

 Cons: a statutory auditor is required for larger SAS’s.

2.3. Limited Liability Company (“Société à Responsabilité limitée » - SARL)

a. General Requirements

 Minimum capital stock: no specific requirement but cannot be

created with zero capital stock.
  Minimum number of shareholders: 1 – Maximum : 100.

If there is a single shareholder, the SARL is called an EURL

(“Entreprise Unipersonnelle à Responsabilité Limitée”).

 Liability of the shareholders: limited to shareholder’s participation

on the company.

 Statutory auditors: a statutory auditor has to be appointed only if

the company exceeds two of the three following thresholds:

 € 1,550,000 of total assets on the balance sheet;

 € 3,100,000 of net sales;

 50 employees.

b. Corporate Governance / Management

 The company is run by one or several managers (“gérant(s)”). The

managers cannot be a legal entity, they must be natural persons.

 General meetings

 An extraordinary general meeting is required when the

decisions taken trigger a modification of the by-laws, which
shall be passed by a vote representing more than 66.66 % of
the shares (one share = one vote).

 An ordinary general meeting is required when the

shareholders have to approve (by a majority vote) the annual
accounts, when they want to appoint or dismiss the
manager(s) or appoint the statutory auditors –when needed-,
and more generally when the decisions to be taken do not
trigger a modification of the by-laws.
 c. Taxation of the company’s income :
SARL’s are generally subject to corporate income tax, but where the
shareholders of an SARL are natural persons who belong to the
same family or where there is only one shareholder and he is a
natural person, then the SARL may elect to be tax transparent and
consequently be liable to income tax.

d. Pros and cons

 Pros: SARL’s are simple to set up and to run. Directors owning the
majority of the capital can benefit from a cost effective social
security regime.

 Cons: there is little flexibility to adapt the corporate governance

through the drafting of the by-laws in this type of structure.
Higher tax cost for the transfer of shares (see below).

Other types of companies are also available in France:

2.4. Civil Company (“Société civile”) :

 used for non trading activities such as holding of real estate,

construction activities, portfolio management;

 Unlimited personal liability of the partners.

 Taxation of the company’s income: Tax transparent entities, therefore the

shareholders are liable for personal income tax (“l’impôt sur les revenus”)
on the profits received. Election for corporate income tax is possible and
can be automatic if the company engages in commercial activity.

 Pros and cons:

- Pros : Good vehicle for holding real estate (“Sociétés Civiles

Immobilières”: SCI’s) and for portfolio holding. No requirement to file
annual accounts with the Commercial Court.

- Cons : restricted scope of activities : in the event the SCI actively

undertakes commercial activities, there exists a risk of exposure to
 corporate income tax. Personal unlimited liability of the partners –
higher tax cost for the transfer of the shares.

2.5. Incorporated Commercial Partnership (« Société en nom collectif » -

SNC) :

 Unlimited joint liability of the partners

 Taxation of the company’s income: Tax transparent as business income

whatever activity is performed. Possible election for corporate income tax.

 Pros and cons :

- Pros : Adequate structure for joint ventures and for achieving a

form of tax consolidation (often referred to as “intégration sauvage”)
when 95% threshold is not met, through the receipt by the partners
of the taxable profits or losses of the subsidiary.

- Cons : risky structure when the partners are not entities subjected
to limited liability due to the joint unlimited liability. Higher tax
cost for the transfer of shares.

2.6. Limited Partnership by Shares (“Société en Commandite par Actions”

– SCA) : rarely used nowadays

 Taxation of the company’s income: SCA’s are subject to corporate income

tax.

2.7. Limited Partnership (“Société en Commandite Simple” - SCS) : rarely

used nowadays
  Taxation of the company’s income: Profits related to silent partner’s rights
(“commandité”) are taxed according to tax transparent rules. Profits
related to active partner’s rights (“commanditaire”) are subject to
corporate income tax. Election for corporate income tax possible for the
silent partner.

2.8. Undisclosed partnership (“Société en Participation” – SEP)

 Taxation of the company’s income: Tax transparent entities.

If the identity of the partners is not disclosed to the tax authorities: becomes
subject to corporate income tax. Election for corporate income tax possible.

 Pros and cons:

- Pros : suitable for a joint venture where the partners wish to remain
undisclosed vis-à-vis third parties. It is however fully disclosed to the
tax authorities. No accounts to file.

- Cons : only designed for very specific purposes.

2.9. (European) Economic Interest Group (“ Groupement (Européen)

d’intérêt Economique” GIE (and GEIE)) : corporate entity in which the
main purpose is to achieve savings for its members, and to develop the
activities of the members. Suitable for joint ventures which have such
goals.

 Taxation of the company’s income: Tax transparent entities.

2.10. European Company (“Société Européenne” SE) : Similar to the SA

but with the focus to operate in several EU jurisdictions. Recently enacted
into French corporate law.
 Taxation of the company’s income: SE’s are subject to corporate income
tax.

2.11. Limited Liability Sole Trader (Entrepreneur Individuel à

responsabilité limitée” EIRL) : Pursuant to a law enacted on 1 January
2011, sole traders may register their business assets with the Commercial
Court, thus limiting their liability to these assets and excluding their private assets.

 Taxation of the EIRL: they are subject to income tax but may elect to pay
corporate income tax.

3. Relevant Tax Aspects Linked to Corporate Law

3.1. Corporate Tax (“Impôt sur les sociétés » - IS)

The taxation of French companies is based on a territorial principle.

Therefore, French companies carrying on their business outside France will
not be taxed in France (subject to some exceptions) on their foreign source
income.
The standard corporate tax rate is 33.3%.
 A social security surtax of 3.3% is due on the portion of corporate tax
which exceeds € 763,000, thus bringing the tax rate to 34.43% on this
portion. However, this surtax will not apply to smaller companies
which meet the following criteria :
- the company’s turnover exclusive of VAT is less than € 7,630,000,
and;

- at least 75% of the company is owned by natural persons or legal

entities that themselves satisfy this condition as well as the
turnover condition.

 A reduced corporate tax rate of 15% applies to the first € 38,120 of a

company’s profits, for small companies as defined in the preceding
paragraph.
  Tax losses can be carried forward indefinitely, and carried back over
three years, if the company continues to run the same or similar
business.

 An optional tax consolidation regime applies to companies subject to

French corporate income tax when the parent has a 95% direct or
indirect ownership in the subsidiary.

3.2. Transfer taxes on the sale of shares

 A 3% transfer tax capped at € 5.000 based on fair market value
applies on the sale of shares of SA’s, SAS’s, SCA’s, SE’s.

 This 3% transfer tax is not capped for the sale of shares of SARL’s,
SNC’s, SC’s, SCS’, SEP’s, GIE’s.

 Irrespective of the legal form of the company, when more than half of
the fair market value of the company’s assets relates to real estate
(not used for running the company’s active business), a 5% transfer
tax will apply.

4. Ongoing requirements
- For accounting and tax purposes the book keeping should be kept in
French under French accounting principles and following French tax
rules.

- Annual financial statements in French derived from the accounts should

be prepared, and audited when a statutory auditor is required to be
appointed.

- For all entities (except SC’s, SEP’s, SCS’, GIE’s and SNC’s in some cases),
the financial statements, (the statutory auditor’s report when requested),
the management’s (or board’s) report to the general meeting, and extracts
of the shareholder’s resolution approving the financial statements must
be filed with the Commercial Court no later than seven months after the
closing of the financial year. Failing to do so triggers civil penalties and
may give rise to penal fines. The standard cost of filing is € 25. Anyone
can have access to this information, either directly at the Commercial
Court or through on-line services.

- The initial by-laws as well as all subsequent changes, and changes in

management of the company should be filed with the Commercial
Register. This information is again accessible to anyone.
 5. Trust companies and Anonymity/ Transparency

- Bearer shares are no longer permitted under French corporate law.

- For all types of companies, except SAs, SASs, and SEP’s, the list of
shareholders is included in the by-laws. The shareholders of SAs and
SASs are known by the tax authorities through returns disclosing the
recipients of dividend income. Both the SA and SAS are required to
maintain a register of shareholders but this is not filed with the
Commercial Court or made public. All information about SEP’s partners
and by-laws are normally disclosed to the tax authorities.

- A new kind of structure similar to a trust has recently been introduced

into French law (“Fiducie”). Since 1 February 2009, it is also available to
natural persons. Its use however is far more restricted than the English
law concept of trust because in France, it is is mainly used for
structuring credit and financial activities. “Fiducies” carry no tax
advantages.

- Other trusts do not exist under French law but French law and Courts
recognize the legal and tax aspects of foreign trusts.

- “Anti money laundering” legislation has been enacted recently, according

to which given transactions and, their effective beneficiaries must be
investigated and checked by banks, insurance companies, financial
institutions, domiciliation companies and professionals such as
accountants, notaries, lawyers, insurance brokers, real estate agents, etc,
who all have a disclosure obligation.

6. Mergers and Acquisitions and Concentration Clearance

Mergers are known as “fusions” in France, where one company completely

absorbs another. In the absence of any agreement, mergers between companies
of different nationalities can give rise to a number of issues, in particular the
identity of the applicable law.

Merging companies can benefit from a favorable tax regime, where capital gains
tax on the absorbing company is postponed indefinitely until the sale of the
assets, whereupon taxation will then be calculated.

When companies intend to merge, or take over another company, they may
result in a “control of concentrations” under EC Regulation 139/2004 if certain
turnover thresholds are reached. This is to ensure that the European market is
not rendered uncompetitive by the merger. Where the EC Regulation is not
applicable, companies performing mergers or acquisitions in France may be
subject to a domestic clearance control of concentrations if the worldwide
turnover of the groups that are party to the transaction exceeds €150 million
and if the French turnover achieved by at least 2 of the parties to the
concentration process exceeds €50 million. (Art. 430-2 et al of the French
Commercial Code).