France: Land of opportunities
Chinese investment into France held steady in 2019 while it dropped across the rest of Europe. Raphaël Chantelot, Fanny Nguyen, Hubert Bazin and Nicolas Vanderchmitt of LPA-CGR avocats review the jurisdiction’s investment advantages
France remains one of the most popular destinations for foreign direct investment (FDI) in Europe, with targets ranging from luxury goods to high tech companies. Chinese FDI in France remained stable in 2019 while overall Chinese FDI in Europe decreased quite significantly.
The impact of the Covid-19 crisis is obviously hard to assess to assess at this stage but it is likely to result in a lot of restructuring and M&A activities. Some French companies will be on the verge of bankruptcy and others will have to refocus on their core business and divest non-core activities.
The 2019 decrease in the volume and number of transactions in Europe seems to be due both to the lasting restrictions imposed by the People's Republic of China (PRC) authorities on outbound capital flows and to the increased FDI controls put in place by European governments.
Chinese investment in France targets all kinds of sectors and types of businesses, from family businesses to listed groups (for example, Lanvin, Accor Hotels etc), in industries as diverse as tourism (Club Med), fashion brands (Baccarat), food and wine, football clubs, the automotive sector (listed car parts manufacturer Le Belier), among many others.
France traditionally welcomes foreign investment and has a positive and welcoming attitude towards Chinese investment, with various cooperation initiatives, both public and private, designed to promote Chinese investment in France. The recent visit by President Xi Jinping to France in March 2019, following President Emmanuel Macron's visit to China in 2017, illustrates the long-term and close relationships between China and France.
A series of political and legal measures have also recently been implemented to make France more attractive to foreign investors. For instance, President Macron's government decided to gradually lower the French corporate income tax (CIT) rate to 25% by 2022 (from 33.3% today) and to develop tax incentives for innovation (such as a strong research and development (R&D) tax credit system). Major changes have been agreed to make French labour law more flexible, with a simplification of the employees' representation system and amendments to the rules for dismissing employees (which will lead to reductions to both severance costs and the risks of litigation). Despite some social unrest, reflected by the "yellow jackets" movement, France remains an attractive market for Chinese investment.
France typically has no limitations on foreign investment. But as with all investment originating from outside the European Union, Chinese investment in France remain subject to certain limitations (which are further detailed below). The outlook for Chinese investment in France in the coming months is quite promising, as the positive trend observed in 2018 should continue into 2019. Indeed, France is benefitting from Brexit, as the UK was previously one of the preferred investment destinations in the EU, and from the rising trade tensions with the United States, which traditionally absorbed one of the largest chunks of Chinese FDI. These circumstances, combined with the positive effects of President Macron's reforms, make France a desirable entry point for Chinese investors looking to develop their operations in Europe.
As a principle, foreign investment in France is free and not subject to governmental approval. However, foreign investment in certain industries which are deemed sensitive or related to national defence may require prior authorisation from the French Ministry of Economy and Finance.
French law (section L.151-3 of the French Monetary and Financial Code) provides that foreign investments in activities relating to national security or which may disrupt public safety, or are in the research, production or sale of military weapons, are subject to prior approval from the French Ministry of Economy and Finance. Such restrictions apply to investments from investors registered in jurisdictions outside either the EU or the European Economic Area (EEA).
The list of industries impacted by these restrictions has been expanded to include industries deemed to be of national strategic interest, for instance telecoms, transportation or public health, or technologies with dual civil and military use, certain IT and telecoms areas (for example cryptology, communications and transportation networks and services). This extended list now includes key artificial intelligence technology, the aerospace industry, data storage and semiconductors. Other measures include the creation of golden shares, which would enable the French state to exercise specific rights in companies listed in these sensitive industries, in order to prevent their sale to foreign investors.
The authorisation process is quite straightforward. The request is submitted to the Ministry of Economy, which has two months to review the investment. If no opposition or request for further information is issued within this timeframe, the authorisation is deemed granted. It is worth noting that there was a recent regulation adopted by the EU at the beginning of 2019 designed to enhance cooperation between European countries with a focus both on FDI transaction that impact several jurisdictions and on subsequent changes in the investments made by foreign investors (if they increase their stake, if there is a change in their shareholding or if they use an EU acquired vehicle to subsequently carry-out acquisitions in the EU). It is likely that French rules will be adapted in the coming years to implement these new EU rules.
As for foreign currency or foreign exchange restrictions, there are none in France.
In terms of competition policy, the French authority that oversees competition clearance is the French Competition Authority (Autorité de la Concurrence), which is an independent administrative agency.
French merger control applies if the turnovers of the parties to a transaction (the acquirer, the target and their subsidiaries) exceeded, in the last financial year, certain (cumulative) thresholds provided in Article L. 430-2, I of the French Commercial Code. The thresholds include a worldwide turnover by all parties exceeding €150 million or a turnover in France exceeding €50 million for at least two of the parties. Transactions are not subject to notification in France if they are notified at the EU level.
Under Article L. 430-3 of the French Commercial Code, a notifiable merger cannot be finalised before it is cleared by the French Competition Authority. There is no filing fee. Failure to notify a reportable transaction is subject to daily penalties and fines.
The majority of notified transactions are cleared within 25 business days of their notification filing. However, certain transactions go through a more in-depth Phase II review which requires an additional 65 business days. Investment techniques French corporate law offers various forms of corporate vehicles that can be used for an acquisition or joint-venture, including the equivalent of a limited liability company and a company limited by shares. One of the most commonly used legal entities used by Chinese investors for large transactions is the simplified joint stock company (SAS), as it is a very flexible corporate form: it can be established with a single shareholder and with limited share capital, and the rules governing its functioning are very flexible and can be organised to a large extent freely in the by-laws.
In general, there are no specific requirements that impact a Chinese investor. It is worth noting that French law does not require the participation of a French citizen or entity in French commercial companies, either as shareholders or as directors or officers. Recent regulations requiring the disclosure of the ultimate beneficial owner of a French company however do sometimes raise disclosure issues with Chinese investors.
On November 28 2007, France and the PRC signed a bilateral investment treaty (BIT) which came into force in France in 2011. It is worth highlighting that French courts are independent and commercial matters are judged in courts composed of professional judges, with an appeal process in front of professional judges. There are also various summary proceedings that can allow an investor to efficiently enforce its rights.
French courts also duly deliver the exequatur allowing foreign judgments and international arbitration awards and deeds received by foreign officers when such judgments and awards have complied with basic principles designed to ensure the fairness of the trial and rights of the defendant.
Furthermore, France is party to multiple European and international conventions as well as bilateral treaties (including with the PRC) that provide simplified legal frameworks for the recognition and the enforcement of foreign judgments and judicial cooperation. French judgments and arbitration awards rendered in France (for instance under the ICC Arbitration Rules) are generally enforceable in other jurisdictions.
Traditionally, Chinese investors would establish holding companies in Luxembourg in order to benefit from lower corporate income tax (CIT) rates. However, these structures are now coming under scrutiny from French tax authorities and there is an increasingly common requirement to have "substance" in Luxembourg (for instance, actual staff and operations), which is quite costly and burdensome to meet. Since French CIT rates are being reduced and should match Luxembourg CIT rates by 2022, this type of tax structuring via Luxembourg will no longer be useful.
As of the financial year beginning on or after January 1 2020, a 28% CIT rate applies to the first €500,000 of taxable income, the part in excess of €500,000 being subject to a 31% rate (or 33.33% for MNEs whose turnover exceeds €250 million – article 219- I of the French Tax Code). This rate will be reduced progressively to 25% by 2022. Small companies (for example, enterprises at least 75% owned by individuals or by other small enterprises and with a turnover of €7.63 million or less) are taxed at a reduced rate of 15% on the first €38,120 of profits and at the standard CIT rate on any excess (article 219-I-b of the French Tax Code).
Gross dividends distributed to corporate shareholders outside France are subject to a final withholding tax of 30%, unless there is a tax treaty between France and the foreign country that provides for reduced withholding tax rates (as described below, China and France have signed a treaty providing for a favourable tax treatment). However, no withholding tax is levied on dividends paid by a French company to a qualifying parent company resident in the EEA if certain conditions are met.
Foreign companies established in France enjoy the same government aid and incentives as French companies (such as support for productive investment, R&D, professional training and job creation, among other activities). France also offers some tax and non-tax incentives to French and foreign businesses that are creating new, or expanding existing, businesses in certain French regions, acquiring declining industries or decentralising their activities out of the Paris and Lyon regions.
In addition, taxpayers in France (including foreign investors who have established a business in France) may benefit from the attractive R&D tax credit system. The R&D credit, which takes into account the annual volume of expenditure, amounts to 30% of the expenses related to R&D operations up to a value of €100 million, and 5% for anything above that. Higher rates apply to companies that never benefited from the credit and those that did not benefit from the credit for a five-year period. Certain conditions must be met.
France and China signed a revised double taxation agreement (DTA) on November 26 2013. This agreement reduces the withholding tax rates applicable to dividends, royalties and interests. A Chinese investor will be taxed only 5% on the repatriation of dividends from France if the investor holds 25% of the shares or voting rights in the French company (the withholding tax rate will be at 10% in all other cases). Withholding taxes on royalties and interests paid to investors resident in China are also reduced to 10%.
The DTA also helps to eliminate any double taxation arising from cross-border transactions and to secure the tax position of Chinese investors.
Partner and head of the China Desk in Paris, LPA-CGR avocats
Tel: +33 (0)1 53 93 30 00
Raphaël Chantelot is a partner focusing on M&A transactions and joint-ventures.
He is admitted to the Paris and New York bars and has more than 15 years of experience in corporate transactions and international business law. Before joining the firm as a partner in 2011, Raphaël spent five years in Shanghai working for French firm Gide and before that, five years in the corporate and M&A department of the Paris office of US firm Cleary Gottlieb.
Based in the corporate and M&A department in Paris, Raphaël advises French and foreign clients on corporate and financial matters, including crossborder M&A, project finance and capital market transactions, in deals involving listed and unlisted companies, in Europe and in Asia. Raphaël received his LLM from Georgetown University (Washington DC) and a master's in business law from the Sorbonne University. He graduated from the Paris Institute for Political Studies (Sciences Po).
Partner, LPA-CGR avocats
Tel: +86 21 6135 9966
Fanny Nguyen is a partner who advises European companies in China. She is an acclaimed expert in China on corporate law, M&A and international taxation. She counsels international clients on issues involving establishment, cross-border transactions and negotiations with the Chinese authorities. With a wealth of experience from over 10 years' in business and law, she advises her clients in China on local regulations while taking into consideration the needs of European companies.
Fanny is highly knowledgeable in tax matters and advises clients on tax issues in cross-border transactions, transfer pricing and tax optimisation (for employees and businesses), as well as fiscal restructuring. She also lectures on Chinese tax at Sciences Po Lyon.
Partner, LPA-CGR avocats
Tel: +86 21 6135 9966
Hubert Bazin is a partner based in the Shanghai office. A member of the Paris Bar, Hubert has been practicing in China for over 20 years and is one of the most active and experienced French lawyers in China. He advises French and European groups on all their set up and development projects in China in relation to M&A, acquisitions of Chinese companies, joint-ventures and partnership agreements, as well as on all their day-to-day matters: contracts and commercial law, economic and financial law and litigation. He also assists Chinese companies and directors on their projects in France and Europe. A specialist in Chinese law, he is also involved since 2006 in the preparation of the Ricci Dictionary of Chinese Law (first trilingual Chinese-French-English legal dictionary).
Partner, LPA-CGR avocats
Hong Kong SAR, China
Tel: +852 2907 7882
Nicolas Vanderchmitt is a partner and head of our Hong Kong SAR office. Nicolas has advised a broad array of clients for over 15 years in most areas of business law, including M&A, venture capital and private equity transactions, as well as complex cross-border corporate and commercial transactions. He regularly assists French and international groups through all stages of their projects in the Greater China Region, including legal and tax structuring between Europe and Asia, foreign direct investment and negotiation of regional joint-venture/shareholders' agreements and commercial contracts. He advises Chinese companies through their expansion plans in Europe and Africa. Nicolas also plays an active role in the French business community in Hong Kong SAR in his capacity as Secretary General and member of the Executive Committee of the French Chamber of Commerce in Hong Kong SAR (since 2011).