France maintains its role as a key jurisdiction for foreign investments in Europe
Raphaël Chantelot, Ran Hu, Fanny Nguyen, Hubert Bazin and Nicolas Vanderchmitt of LPA-CGR Avocats explain why the outlook for Chinese investment in France remains promising
Europe is the third economy in the world (after the US and China), and France is one of the largest economies in Europe, with developed infrastructures, a central geographical position, and a stable political system. As such, France is one of the most popular destinations for foreign direct investments (FDI) in Europe, with a variety of targets ranging from luxury goods to high-tech companies.
Following the election in April 2017 of a new, business-friendly President, Emmanuel Macron, a series of reforms have been implemented to make France more attractive to foreign investors. For instance, the government of President Macron has decided to gradually lower the French corporate income tax rate to 25% (from more than 33.3% in 2017), to develop tax incentives for innovation.
Major changes have also been decided to make French labour law more flexible, with a simplification of the employees’ representation system and clear rules for terminating employees (reducing both the severance cost and the risks of litigation).
The re-election of Emmanuel Macron in April 2022 for a second term of five years is a strong signal sent to economic players and foreign investors that France will develop an even more business-friendly environment and will strengthen its efforts to attract foreign investments. The challenge is for France to successfully address post-Covid issues and ensure that its economy and finances can cope with increased uncertainties (war in Ukraine, inflation, etc.).
Chinese investments in France: key figures
Despite the impact of the Covid-19 crisis, that stalled a number of projects, China remained the leading Asian investor in France in 2021, with more than 50 projects recorded (of which almost half are in Ile de France), creating or maintaining nearly 2,100 jobs (up 30% from 2020).
Chinese investment in France targets all kinds of sectors and types of businesses, from family businesses to listed groups (for example, Lanvin, Accor Hotels), in industries as diverse as tourism (Club Med), fashion brands (Baccarat), food and wine, football clubs, electrical equipment, and the automotive sector (car parts manufacturer Le Belier).
In 2021, China was the leading Asian investor in France. To date, there are over 900 subsidiaries of Chinese businesses established in France, where more than 50,000 people are employed. A large diaspora of Chinese companies and Chinese executives are now settled for good in France and contribute to the development of a vibrant Chinese business community in France.
The outlook for Chinese investment in France remains promising. Indeed, despite the effects of the Covid-19 crisis, foreign businesses established in France are not currently considering curbing activities in France, and although certain projects have been postponed, many opportunities can be seized.
Much restructuring and M&A activity is expected, as a lot of French companies will want to refocus on core business and divest other activities, and many other companies will be looking for new investors to bring much needed financing.
France is also 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 US, 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 operations in Europe.
French foreign investment controls
As a principle, foreign investment in France is free and not subject to governmental approval. However, in certain industries which are deemed sensitive or related to national defence, a prior authorisation from the French government may be required.
French law (Section L.151-3 of the French Monetary and Financial Code) traditionally provides that certain foreign investments in activities relating to national security or critical for public safety are subject to prior approval by the French Ministry of Economy.
The French government has been extending the list of industries deemed ‘sensitive’ to the French economy and subject to prior approval. The list now includes, for instance, investments in telecom, transportation or public health (with the addition of ‘biotechnologies’ as a result of the Covid-19 crisis), or technologies with a dual use (civil and military), certain IT and telecom areas (robotics and artificial intelligence, cryptology, communications and transportation networks and services).
The requirement for prior approval applies to investments made both (i) by investors registered in the EU or the European Economic Area (EEA), when they take control of a company active in these industries; and (ii) by investors from other jurisdictions (outside the EU/EEA), when they acquire more that 25% of the share capital and voting rights of a company active in such ‘sensitive’ industries.
As a temporary response to the Covid-19 crisis, the French government has also extended its control to investments in listed companies (for those active in these industries) when they exceed 10% of the voting rights. This measure will apply until December 31 2022.
The authorisation process, however, is quite straightforward: the request is submitted to the Ministry of Economy, which has one month to review the investment and approve it or request additional information (in which case its review must be completed within 45 days of the application). In practice, longer review periods, such as three or four months, should be anticipated if the Ministry of Economy requests supplemental information and/or considers imposing conditions to clear the case.
It should be noted, however, that a new EU Regulation 2019/452, which came into force at the end of 2020, adds a new layer of foreign investment control. Under this new regulation, in the course of its review, the French Ministry of Economy must notify the foreign investment project to the EU Commission and other member states may request that specific conditions be added where the contemplated foreign investment can also have an impact in their jurisdiction on their own public safety or public order.
There are no foreign currency or foreign exchange restrictions in France.
In terms of competition policy, the French authority that oversees competition clearance is the French Competition Authority (Autorité de la Concurrence), 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.
In terms of 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 (société par actions simplifiée or 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 bylaws.
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, does 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 China) 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.
Now, the CIT rates in France and in Luxembourg are nearly similar, therefore, this type of tax structuring via Luxembourg is no longer be useful.
Indeed, since January 1 2022, a 25% CIT rate applies to all companies, regardless of turnover.
Small companies (for example, enterprises at least 75% owned by individuals or by other small enterprises and with a turnover of €10 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 25%, 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.
T: +33 01 5393 3000
Raphaël Chantelot is a partner in LPA-CGR avocats’ corporate and M&A department. His area of expertise is mergers and acquisitions (M&A) transactions and joint ventures. He is a member of the Paris and New York bars and has more than 20 years’ experience in corporate transactions and international business law.
Raphaël advises French and foreign clients on corporate and financial matters, including cross-border M&A, project finance and capital market transactions, in deals involving listed and unlisted companies, in Europe and in Asia. He has developed a particular expertise in energy projects and in the healthcare sector.
Raphaël received his LLM from Georgetown University and a masters’ degree in business law from the Sorbonne University. He graduated from the Paris Institute for Political Studies (Sciences Po). Before joining the firm as a partner in 2011, he spent five years in Shanghai working for Gide and prior to that, five years in the corporate and M&A department of the Paris office of Cleary Gottlieb Steen & Hamilton.
T: +33 01 5393 2960
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Ran Hu is a partner in LPA-CGR avocats’ corporate and M&A department. Her particular expertise is in cross-border M&A and joint ventures.
Ran assists Chinese clients with projects in France and Africa, and French clients with projects in China. She has also developed significant expertise in technology transfer between France and China.
Ran has a bachelor’s degree and a masters’ degree in law from Shanghai University. She also has a master’s degree in business law, private law specialising in industrial property and real estate and construction law from the University of Paris II Panthéon-Assas. She is a member of the Paris Bar and holds the certificate of aptitude for the legal profession in China.
T: +86 21 6135 9966
Fanny Nguyen is a partner at LPA-CGR avocats, who advises European companies in China. She is an acclaimed expert in China on corporate law, M&A and international taxation.
Fanny has more than 11 years’ experience in business and law and is highly knowledgeable in tax matters, advising clients on tax issues in cross-border transactions, transfer pricing, tax optimisation (for employees and businesses), and fiscal restructuring.
Fanny is a lecturer of Chinese tax at Sciences Po Lyon.
T: +86 21 6135 9966
Hubert Bazin is a partner in the Shanghai office of LPA-CGR avocats. A member of the Paris Bar, he has been practicing in China for over 20 years and is one of the most active and experienced French lawyers in China.
Hubert advises French and European groups on set up and development projects in China in relation to M&A, acquisitions of Chinese companies, joint-ventures and partnership agreements, as well as contracts and commercial law, economic and financial law and litigation. He also assists Chinese companies and directors on their projects in France and Europe.
Since 2006 Hubert has been involved in the preparation of the Ricci Dictionary of Chinese Law (first trilingual Chinese-French-English legal dictionary).
T: +852 2907 7882
Nicolas Vanderchmitt is a partner and head of LPA-CGR avocats’ Hong Kong SAR office. He has advised clients for over 16 years in most areas of business law, including M&A, venture capital and private equity transactions, and complex cross-border corporate and commercial transactions.
Nicolas regularly assists French and international groups through all project stages in the greater China region, including legal and tax structuring between Europe and Asia, FDI and negotiation of regional joint venture/shareholders’ agreements and commercial contracts.
Nicolas advises Chinese companies through expansion plans in Europe and Africa. He 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).