France Acts To Stem Flight Of Entrepreneurs

by Arvind Ashta, Groupe ESC Dijon-Bourgogne, for Tax-News.com

02 September 2003

The French Government has recognized some of the barriers - bureaucratic and fiscal - that stand in the way of entrepreneurial activity in France by passing a law to encourage economic initiative and, at the same time, allow the transmission of firms from the old generation to their heirs. A little bit for everyone, quoi?

Administrative formalities are being eased, the personal fortune of the entrepreneur is being protected, funding is being sought and tax and social security advantages offered. With all this, the government hopes to bring the creation of enterprises back to their level in the 1980's. Statistics published by INSEE show that only 175,000 new enterprises are created every year. This is lower than 200,000 per year created in the 1980s. Even Spain today creates twice as many enterprises each year, and it has overtaken France in the total number of enterprises. Enterprises per person are much lower in France than in the UK, USA or Italy

Key regulatory aspects of the reforms are as follows:

• Firstly, the minimum capital provision applicable to limited liability companies (almost half of total enterprises) has been scrapped. Each company is free to fix its own minimum share capital.
• Once registration formalities are complete either with the CFE or with the greffier, this body would give a receipt, mentioning "Waiting for registration". This receipt, valid for 15 days, would be sufficient to unblock the company's capital.
• A company can now be created by internet.
• For a personal enterprise, one can now use one's residence as a matter of right, unless some law disallows this.
• The principal residence of a person, acquired before an enterprise is launched, is now protected from liability against creditors. Even if the person sells his principal residence, the funds therefrom are also protected, as long as he uses the funds to buy another residence within a year.
• The rules covering transition from employed to self-employed status have been eased, particularly with regard to social security payments.

There are also significant tax changes:

• The exoneration of dividends and capital gains already given to Risk Capital Mutual Funds are extended to a new type of Local Investment Fund aimed at mobilising local savings pools.
• People subscribing to Risk Investment Funds can get a tax credit of 25% of their investment, capped at € 12,000 for single persons and € 24,000 for couples.
• For those who subscribe directly to a local firm, quoted or non-quoted on the stock exchange, the 25% reduction of tax, which was capped at € 6000 for single persons and € 12000 for couples, is now capped at € 20,000 for individuals and € 40,000 for couples.
• The deductibility from taxable income of losses resulting from subscribing to capital of new companies are currently capped at € 15,250 for single persons. This ceiling is being raised to € 30,000.
• Capital gains tax exemptions for small businesses have been substantially extended. For trading enterprises, restaurants, real estate agencies and agricultural activities, the capital gains are exempted totally if the total receipts are less than 250,000 Euros.
• If a French resident (for tax purposes) takes a loan to takeover the major part of a non-quoted European small or medium enterprise, 25% of the interest paid on the loan is deductible from his personal income tax. The tax deduction requires keeping the shares for five years and participating in the direction of the enterprise. The target company should have a turnover of less than 40 million Euros or total assets of less than 27 million Euros. The interests eligible for deduction are capped at 10,000 Euros for a single person and 20,000 Euros for a couple.
• Exemptions from gift duty on transfers of goodwill have been considerably increased.
• Wealth Tax exemption provisions were introduced into the Bill at a later stage. 50% of the value of shares are exempted from wealth tax if they form a part of a collective retention agreement with the taxpayer's associates and such shares account for 20% of quoted shares or 34% of non-quoted shares. The shares need to be retained for six years. One of the associates must be working in the direction of the company.

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