France takes the lead as the key jurisdiction for foreign investments in Europe
Raphaël Chantelot, Ran Hu and Hubert Bazin of LPA-CGR avocats report that China retains a strong business presence in France and identify several factors that point to a positive outlook for foreign investment
Europe is the third-largest 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.
The 2023 study from EY reviewing the attractiveness of European countries confirmed that status for 2022. France ranked first in terms of number of FDI in Europe, including R&D centres projects, well above its traditional competitors, the UK and Germany.
Following the election in 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 lower the French corporate income tax rate gradually 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 dismissing employees (reducing the severance cost and the risks of litigation).
The re-election of Emmanuel Macron in April 2022 for a second term of five years sent a strong signal 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 address post-COVID issues successfully 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, which stalled a number of projects, China remained the leading Asian investor in France in 2022. 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 Bélier).
However, as the world recovered from the pandemic, and particularly in 2022, Chinese investments refocused on strategic sectors such as technology and infrastructure.
To date, there are over 900 subsidiaries of Chinese businesses established in France, in which more than 50,000 people are employed. A large diaspora of Chinese companies and Chinese executives are 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 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 with the increase in interest rates, 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 benefiting from Brexit, as the UK was previously one of the preferred investment destinations in the EU, and from China’s 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
In 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 the 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 investments in telecoms, transportation and public health (with the addition of biotechnologies, as a result of the COVID-19 crisis), technologies with a dual use (civil and military), and certain IT and telecoms areas (robotics and artificial intelligence, cryptology, communications and transportation networks and services).
The requirement for prior approval applies to investments made:
By investors registered in the EU or the European Economic Area (EEA), when they take control of a company active in these industries; and
By investors from other jurisdictions (outside the EU/EEA), when they acquire more than 25% of the share capital and voting rights of a company active in such sensitive industries.
Established 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 2023.
The authorisation process is quite straightforward: the request is submitted to the Ministry of the Economy, which has 30 days 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 the Economy requests supplemental information and/or considers imposing conditions to clear the case (which was the case for half the FDI filings made).
However, Regulation (EU) 2019/452, which came into force at the end of 2020, adds a new layer of foreign investment control. Under this regulation, in the course of its review, the French Ministry of the Economy must notify the foreign investment project to the European Commission, and other member states may request that conditions be added where the foreign investment could 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 (approximately $163 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 a 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 by-laws.
In general, there are no requirements that impact a Chinese investor particularly. 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 People’s Republic of China signed a bilateral investment treaty 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 enforce its rights efficiently.
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 International Chamber of Commerce Arbitration Rules) are generally enforceable in other jurisdictions.
Traditionally, Chinese investors would establish holding companies in Luxembourg to benefit from lower corporate income tax (CIT) rates. However, these structures are 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 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 (support for productive investment, R&D, professional training and job creation, among other activities). France also offers 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 have 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 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.
LPA-CGR avocats would like to thank Fanny Nguyen and Nicolas Vanderchmitt, partners of the firm, for their contributions to this article.