About this seminar
For any business, staying local but going global presents a number of challenges and opportunities. In this series, Gowling WLG lawyers from around the world discuss, regulatory, tax, employment and IP issues that Canadian companies need to consider before entering these key international markets.
This program counts for up to 0.5 hours of substantive credits towards the mandatory CPD requirements of the LSUC.
To listen to the seminar click here.
I’d like to now move to Continental Europe, to our office in Paris and introduce you to Jérôme Patenotte and Simon Lowe. Our partner Jérôme is also a corporate lawyer specializing in mergers and acquisitions with an emphasis on private equity transactions and transactions in the mid-cap market. We also have with us, Simon. Simon Lowe is a dual qualified lawyer in the UK and France, although he’s spent the last 20 years practicing in Paris. Simon himself specializes in inward investment into France, whether asset or share purchases or the startup of new entities. Jérôme and Simon, let me turn it over to you.
Thanks very much. Good morning Canada from Paris. Jérôme and I are going to run through with you, quickly, the context today, both economic and legal in France. Some opportunities that you might like to consider in the French market, but no doubt you all have businesses and you all know your markets, no doubt better than we do. Then we’ll touch on some legal considerations as well. We have a title of our presentation, was CETA coming and Holland going out, New opportunities for foreign investment in France. Over the last month we’ve had two interesting developments, particularly for Canada. One is CETA and other people will be talking about that shortly. The other is the announcement last week that Francois Hollande will not be standing for re-election as President next May. I’ll just say a word about that because when Francois Hollande came into power 5 years ago, we saw a definite difficulty for foreign investment in France because of the tax regime that was applied. Over the last couple of years there’s been a certain amount of backtracking and I think that France is in a much better position today for business than it was 5 years ago. I think there is some hope and the fact that what business hates most is uncertainty, today the fact that Francois Hollande will not be standing next year, is probably something which will favour inward investment into France. A word to start with about the general regime in France because in fact it is extremely liberal for inward investment. Consequently the fact that may it be Canadian, or a US business, or any other foreign entity wishes to set up in France, by and large the regulation is pretty light based on the fact that you are a foreign company. There are presently approximately 20,000 foreign businesses registered in France for business. The context is that generally speaking when you invest in a French business you don’t require authorization unless you’re in a particularly sensitive area as such as public health or national security. That’s the context as regard foreign investment. Of course, we have regulations in France so if you’re a particular sector, I think somebody was asking a question a few moments about services and so on. Yes, of course we have regulation applying to individual types of services. But those will be the national rules and there will be no distinction made about the fact that you are a foreign entity coming into France. Equally, I think other people will be talking and touching on merger regulation. Of course we have merger regulation but again, the fact that you are a foreign investor, will not in any way prejudice you.
The fact that you are a Canadian investor actually will even improve your situation. As you probably all know CETA, the Comprehensive Economic and Trade Agreement, was signed on the thirtieth of October, this year. And it will enter into force soon, when all the European Country’s Parliaments will have rectified its provisions. The Treaty has been designed to facilitate an increase investments between Canada and the European Union. To provide greater certainty, greater stability, transparency and protection of your investments. Canadian investors will be protected from discriminations in their transactions and will be allowed a transfer without restriction or delay of capital, dividends and interests of proceeds from the sales of any company or liquidations and earnings of the foreign personnel who is working on the investments. The CETA also provides for a dispute resolution mechanism through a dedicated arbitration tribunal composed of 15 arbitrators, 5 Canadians, 5 Europeans and 5 arbitrators from third countries. CETA should really provide an adequate frame to enhance business relations between Canada and the European Union.
We thought we should touch on Brexit, although we allowed Chris to struggle with the subject for a few minutes just now, because it’s more a problem for the UK then it is for us sitting in Paris. I think that we can deal with Brexit rather quickly. There are two levels where I think Brexit could impact, and generally speaking, it probably will actually create opportunities for inward investment into France. It will rather depend, I suspect, on whether there’s a hard Brexit or a soft Brexit. All that essentially boils down to is the extent to which the UK will continue to have free access to the single market. Insofar as that doesn’t happen there may be particular reasons why, and I’ll touch on it in a few moments, why you may wish to use Paris as a hub within Europe. Chris, I imagine you were working last night preparing your presentation, you didn’t get a chance to see what Michele Barnier was saying. He’s the EU negotiator with you. He said you have 18 months and the clock started running. You maybe need to think about your 4 month period. Anyhow, we wish you luck with that.
Also in the legal context in France is the employment environment. The French employment law is truly very specific and it’s often perceived as a scarecrow of our legal environment for foreign investors. However, managed upstream and planned correctly it’s not as bad as people say. It is in fact like a game. You should not play a game when you don’t know the rules. Once explained it becomes really much easier.
We just wanted to run through some specific opportunities we think the Paris market is favourable today. Paris is a European hub. I think you can look at it in two ways. One, geographically. We are a very interesting jurisdiction. In researching my presentation I saw that we were considered to be number one world-wide for cross-border trade. I wasn’t quite sure what the criteria with it, but if it is the number of borders you have, then obviously you’d see why. We have 8 countries border France; Italy, Monaco, Switzerland, Germany, Luxembourg and Belgium. We’re only 2 hours 20 minutes from the Eurostar from London. We are indeed, physically, a great European hub from where you can do business. As I’ve touched upon, it’s too early to say yet, but if there is a hard Brexit then Paris will become more and more attractive as a place for your European headquarters.
Also France has a very dynamic tech and life science sector, for instance. France benefits from excellent universities, private laboratories, training high quality engineers. Technical hubs have been created in Paris, in Lyon where the old French pharmaceutical industry lies. Also in Sophia Antipolis, in the South of France. Where mature companies and startups coexist rather happily. State and private funded incubators of startups have mushroomed in the recent years providing an environment of very interesting targets for foreign investors wishing to set foot in France through an acquisition, for instance.
I just want to touch again on some of the stronger sectors we have. Retail Tourism is one. I think France is still considered to be the number one tourist destination world-wide. Tourism contributes approximately 70 billion Euros to our GDP each year. That represents about 10% of our GDP and 11% of our jobs are tourist based. Luxury goods is another very, very strong sector in France; Louis Vuitton, Chanel, Dior, Hermes, to mention but a few. Real estate, I think, is also, with a lot of investment in French real estate, I think at two rather different levels. Commercial real estate, because France is a physical hub in Europe, we’ve seen a lot of development over the last few years of logistics and the creation of logistics parks throughout France. We also have a very strong office investment sector. We also have three areas of sort of top end residential real estate, where we attract a lot of foreign individuals, very often high net worth individuals. Purchasing a chateau in France, which with the centralization of everything around Paris means that, in fact, the real estate is very reasonable to purchase a chateau and vineyards. That’s an area we quite often act in. Then we have the chalets and the French Alps, which is a very important sector and villas in the South of France.
Another opportunity we wanted to stress is about the tax regime. Thanks to CETA again, Canadian investors will benefit in France from a business friendly tax environment. Suppressing all the withholding taxes, most of them at least, and applying to them for most favoured nation clause, which is in the Treaty. So the tax field is now covered and is really easier than it was before. We’ll turn then to a few legal considerations about potential investment or ventures in France. First, I will touch the sector of the sourcing and supplying of goods and services. From a regulatory standpoint, sourcing and supplying goods for services throughout Europe is possible with a single entry point, thanks to the European passport mechanism. Since the Brexit, sorry Chris, a number of foreign investors envision to switch from the UK to one of the Continental European countries to be the starting point of the passport and France is a very convenient one then to reach out to then rest of Europe. Of course we have a legal environment which for the supplying of goods and services is quite protective of consumers and non-professionals in general. But we can help you manage upstream, again, these legal constraints to achieve your goals.
Wanted to talk to you about establishing a business in France. It’s a pretty straightforward process, as I’ve said, because foreign investment is generally not regulated. It’s a fairly easy process. There are effectively three ways you can come onto the French market and have your own establishment. The first is by setting up the representative office. To be frank, in the 20 or so years that I’ve been practicing in France, it’s very rare that the setting up of the representative office as such has been worthwhile, in my view. You can’t have the commercial activity if you do that. So you can’t use it as a sales office, effectively. If you do so then you become a permanent establishment for tax purposes and you’re fully within the French system. My experience is that you can use it if you are generally looking at the market, and you just want to test the market, but if you are going to actually conduct business then it’s not an appropriate vehicle. The two other choices, and they tend to be tax driven, are the setting up a branch of an existing Canadian company, for example, which is again a straightforward process but you are then in the full French tax regime so you have to file accounts in the same way and make tax declarations in the same way as if you were a French entity. Or, more usually, setting up a fully blown French subsidiary. We have minimal capital requirements. It takes only a few weeks. In fact it would take very little time at all. The one issue, which in practice can be a problem, is actually having a French bank account because the banks are less helpful, than perhaps other areas, in setting up the company. But normally it can be done within 2 or 3 weeks. The other way of coming into France is to acquire an existing business and there are effectively two ways of doing that. Buying the business is a going concern to an asset deal. That has the advantage of course, you purchasing assets, and generally speaking, not liabilities. Jérôme has touched upon the difficulties we have and the bad reputation we have in France for employment law. Not always justified in my view, and under European regulation, we have the obligation to transfer the employees with the business. So in fact if you do an asset deal the key issue, which is very often not understood in my experience by North American clients, is that all the employees have to come over with the business as a going concern. Other than that it is a much simpler process because you don’t actually take over the pre-existing liabilities, which cuts down on due diligence, and obviously on risk.
Having said that, from a tax point of view the going concern value is tax at 5% , which is quite high. Perhaps the more common way is a share transaction. If properly structured you would expect, that’s in the real estate sector where it is slightly different, but if it’s not in the real estate sector you would expect to structure it to pay 0.1% of the share value in tax. So again, very favourable tax regime. I would say that the last 10-15 years we’ve made a lot of progress in France over normalizing our contracts, in that on share deals today we effectively use Anglo-Saxon type of mechanisms and SPA’s. We have the same types of warranties. There’s been a lot of harmonization world-wide, I’d say, over the approach to buying companies. If you are in a modern sector, such as the tech area or life sciences in France, you would expect to probably negotiate the deal in the English language today with the contract being actually signed in English. That’s a sea-change from 10 years ago, or 15 years ago, when it would be very difficult to negotiate a contract in the English language. So that’s what I want to say about share deals.
Still we have a few employment pitfalls when you do transactions in France and a number of these are quite odd for investors. For example, you cannot implement and emanate an action entailing a change of control in the company which employs more than 50, if you do not propose each employee in a company to buy the company first. Or if you do not collect the prior advice of the works council in the company. Not collecting the prior advice of the works council is even a criminal offense. However, this advice is not a veto right. If the works council says, “No. Never.” to a project, well, it doesn’t matter. You can proceed, nevertheless, to the transaction as long as you have an answer. So it is simply a question of process, after all, and don’t worry we’re use to managers so we’ll accompany you.
Thanks Jérôme. Just to sum up, I think France is a jurisdiction which is very much open to business, which welcomes foreign investment. As I say, we have 20,000 businesses already established here and obviously in a presentation like this we have to keep it a very high level. If any of you wish to have an informal conversation with Jérôme: or I, on any of the subjects we’ve touched upon, please just pick up the phone and give us a call. Thanks.
Scott Jolliffe: Thank you very much Simon and Jérôme.