France Given Permission To Extend Tax Free Urban Zones

by Ulrika Lomas, Tax-News.com, Brussels

26 June 2006

Under the state aid rules in the EC Treaty, the European Commission on Thursday authorised France to continue the existing urban tax-free zones scheme until 31 December 2011, to include 15 new zones under the scheme and to extend the area covered by the 29 existing zones.

Small and micro businesses created or opened after 1 January 2006 in the 100 areas classed as urban tax-free zones will be eligible for exemption from employers' social security contributions, profits tax, business tax and real-estate tax.

The Competition Commissioner Neelie Kroes, stated that:

"I am happy to authorise an aid scheme which is compatible with the common market and is designed to relieve the social and economic problems facing the French suburbs without unduly affecting competition".

The first urban tax-free zones started to operate on 1 January 1997 and were relaunched by the Town Planning Act of 1 August 2003. Figures provided by the French authorities show that the results have been encouraging: for the period 2000-05, all the urban tax-free zones recorded a drop in unemployment twice that of the reference area and ten sites showed a drop of between 30% and 40% in the number of jobseekers.

Despite these encouraging results, the unemployment rate remains very high in these tax-free zones: in 2004 it was still more than double the rate for mainland France. Long-term unemployment also remains high, affecting almost one unemployed person in three, and levels of education are still relatively low (40% have reached a level equivalent to or below the primary leaving certificate, compared with 22% in the rest of the urban area).

The Commission therefore took the view that the measures would not cause a distortion of competition contrary to the common interest and that the effect on trade would be very limited, as the main aim of the measures is to combat social exclusion in particularly difficult areas; the scheme covers only small and micro businesses (of the 40,922 businesses benefiting from the measures, 40,020 are micro businesses); and the geographical scope of the measures is limited.

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