Expanding a U.S.-based business internationally is a significant step that requires a thoughtful approach and well-developed strategy. Before diving in, it is important to first learn as much as you can about the legal and business landscape of the market you intend to enter since foreign laws and business practices can vary considerably from those in the U.S. In this 3-part blog series, we will explore three popular expansion targets for U.S . companies – Canada, the UK and France – by reviewing some basic considerations associated with doing business in each one of these markets.
Part 3 – Doing Business in France
With over 500 million consumers, the European Union (EU) and its 27 Member States is the world’s largest market economy. In the wake of Brexit, U.S. companies looking to expand into the EU often consider either France or Germany – the EU’s 2 powerhouses – as possible points of entry, followed by Italy and Spain. The remaining 23 countries are much smaller in comparison, and therefore, are usually not the best choice for most businesses. Ultimately, deciding where to enter the EU market will depend on a company’s product/service offerings, its market position, the location of its target customer base, potential language barriers and tax rates, among other considerations.
That said, many of our clients are drawn to the French market for good reason. Aside from its central geographical location within Europe, France’s economy is itself the 7th largest in the world and represents around ⅕ of the Eurozone’s GDP. Moreover, France is ranked among the best European countries for venture capital investments, in large part due to strong public investment in innovative enterprises and robust accelerator programs. The following overview is intended to help companies successfully navigate entry into the French market.
Support for Innovation
Over the past 3 to 5 years, France has invested considerable time and financial resources in cultivating a strong national and regional startup ecosystem. This focused and high-paced initiative, fueled by the combined efforts of industry accelerators, national and regional incubators, and both public and private sector-specific investors, capitalizes on the creativity of a new generation of savvy entrepreneurs. For example, BPI France, France’s public investment bank, regularly assists French companies of all sizes by providing diverse loans and loan guarantees to banks making loans to startups.
Additionally, two programs created in partnership with the government support international startups. Yei (Young Enterprise Initiative) Start in France, an accelerator program organized by the French Ministry of Europe and Foreign Affairs, helps innovative entrepreneurs expand their business in France and in Europe. The French Tech ticket, a twelve month program organized by the French Tech (France’s renowned technology sector), offers financial support and training to foreign companies looking to set up business in France, including grants, a fast-track to obtaining French resident permits and other benefits.
Entering the French Market
U.S. companies have several options for entering the market in France: (1) without a physical presence, (2) through the use of intermediaries, or (3) with a physical presence/creation of a French entity. The choice usually depends on the company’s goals and stage of growth.
For example, small to medium-sized companies (SMEs) seeking a cost-effective option may consider targeting French-based customers by leveraging their websites and either purchasing a new domain name in France or setting up a subdomain within their main website which will feature French content. Websites and web analytics are both excellent business development tools, provided they are compliant with applicable privacy rules and other consumer protection regulations.
Another preliminary option is setting up a representative office and engaging an intermediary to serve as the company’s point of contact in France. In this situation, French law does require that the intermediary be a national from either the EU, a member state of the Organisation of Economic Co-operation and Development (OECD), or a country with a reciprocity agreement with France. Although a representative office is not a legal entity (and therefore not permitted to participate in any type of commercial activities), it can be used to promote your business, seek potential clients and collect information about the French market. Similarly, a U.S. company could consider hiring a referral agent to help network with potential customers pursuant to a written agreement that defines the scope of the engagement as temporary and non-exclusive, while avoiding the appearance of a principal-agent relationship, which is highly regulated under French and European law.
After “testing the waters” remotely and gaining experience in the French market, or for U.S. companies with a mature business model that are ready to conduct operations abroad, it may make sense to consider a local presence by setting up French operations or a French subsidiary company as a vehicle for conducting business in France. In this case, there are three main types of corporations to consider: the SA (“Société Anonyme”); the SAS (“Société par Actions Simplifiée”); and the SARL (“Société à Responsabilité Limitée”).
SAS and SARL entities can be formed with a single partner, and there is no minimum capital requirement; whereas a SA entity requires at least 7 shareholders and a minimum capital requirement of €37.000. Although the bylaws of SARL and SA entities must strictly adhere to the provisions of the French Commercial Code, a SAS offers greater flexibility to shareholders over internal organization matters such as rules governing decision-making processes, shareholder meetings, management structure, and transfers of shares. Given its convenience and flexibility, the SAS is typically the legal structure of choice for start-up companies. That said, SAS entities are not completely exempt from French Commercial Code requirements; and therefore, it is advisable to work with legal counsel when forming the entity. Finally, regardless of the type of entity chosen, a non-EEA national must obtain a specific authorization to serve as managing director.
Complying With Tax Obligations
The French corporation tax rate is 26.5% for SMEs. However, there are a wide range of tax credits and deductions available to help promote competitiveness and investment in the market. For example, revenues derived from the exploitation of intellectual property rights are taxed at a reduced corporate tax rate of 10%. Moreover, for companies with a physical presence in France, there are also a number of subsidies and tax refunds related to investments in R&D and innovation. For example, the Research Tax Credit (RTC), the cornerstone of France’s R&D ecosystem, is available to any company with R&D-related expenses in science, technology or software and computing. Likewise, the Innovation Tax Credit is designed to support SMEs (companies with fewer than 250 employees and annual revenue of less than €50 million or a balance sheet totaling less than €43 million) with innovation expenses outside of R&D, such as prototype design and piloting new products. This credit provides for a tax break covering 20% of annual innovation expenses, up to €400.000. Finally, young innovative companies (“Jeunes Entreprises Innovantes”) are eligible to receive a tax credit on corporate taxes, local taxes and social security contributions for the first 8 years of operation. To be eligible, these companies must be SMEs, under 8 years old with a minimal amount of research expenditures, totally independent from another company, and created from scratch.
Applying for Work Visas and Residence Permits
Under French law, a non-EU national cannot operate a business in France unless they have first obtained a business permit (work visa). Additionally, if a U.S. citizen wishes to relocate to France in connection with a business venture, a residence permit is required. There are three main categories of residence permits: (1) skilled residence permits for qualified employees of innovative enterprises, (2) skilled residence permits for founders, and (3) skilled residence permits for investors. All three residence permits are multi-year and allow family members to accompany the permit holder to France and be issued a residence permits so they can also work.
Building a Local Workforce
U.S. companies doing business in France can hire non-EU or non-E.E.A. nationals, even if they do not create a French legal entity, as long as their employees obtain the appropriate work and residence permits. With respect to France’s employment laws and regulations, a law adopted in August 2016 (the “Loi Travail”) has bolstered the competitiveness of French companies in the global marketplace by encouraging productivity and empowering employers to dismiss employees for economic reasons. That said, French labor law does provide a fair amount of protection for employees. Unlike the United States, there is no such thing as “at will” employment in France. Employees cannot be dismissed by an employer at any time and for any reason. To dismiss an employee, an employer must establish genuine and serious reasons for the termination, based on a limited list of “legal” grounds for dismissal.
Finally, it is important to note that employment contracts in France are, by default, open-ended; fixed term contracts are allowed only in strictly limited cases as specified by law (e.g., replacement of an employee, employees hired for seasonal work, temporary increase of activity) and cannot be used on a long-term basis for jobs related to a company’s regular activity. Although French law only requires fixed-term contract to be in writing, open-ended contracts are usually in writing as well. Also, employment contracts are required by law to be written in the French language. If a bilingual version of the contract is created, the French version shall be deemed to prevail in the event of a dispute.
Registering Intellectual Property
Intellectual property rights are territorial by nature, which means that U.S. patents, trademarks, copyrights or licenses will not by recognized in France without filing for protection in that country. Therefore, a U.S. company looking to enter the French market should first secure all necessary IP rights and licenses before commencing operations. The process for registering rights in France is centralized and can be done online with the INPI (“Institut National de la Propriété Intellectuelle”), the French patent, copyright and trademark office. Once rights are obtained in one EU member state, those rights will be recognized throughout the EU pursuant to European law.
In lieu of filing with the French office, it is also possible to file for intellectual property protection with the European Union Intellectual Property Office (EUIPO). In this case, although IP rights will be valid across all EU Member States, they will still be considered separate rights from the rights issued by individual EU member states.
Although software is explicitly excluded from patentability in France, it can be protected by copyright. Furthermore, software can be registered with the Agency for the Protection of Computer Programs, or APP, which can be useful as a proof of ownership to enforce any alleged violation of rights. The same applies to databases, which is given its own protection under French and EU law.
Finally, with respect to IP rights in copyrighted works created by employees, the general rule is that such rights vest in the employee, absent any contractual provision to the contrary. However, in the specific case of software developed by employees, France recognizes the employer as the rightful owner of any IP rights. Meanwhile, independent contractors hired to develop software will retain ownership in the IP, unless there is an IP assignment clause granting ownership to the employer in the independent contractor agreement.
Contracting under French Law
It goes without saying that doing business in France, whether with or without a physical presence in the country, implies complying with French laws and regulations, including the 1994 law which requires use of the French language in all commercial and legal matters related to a business (e.g., legal notices, advertising, presentations of goods and services).
Like any other business opportunity, exploring the possibility of a foreign expansion should involve some basic diligence about the target market, particularly its laws and business practices. Seeking the advice of an attorney who is qualified to practice in both the U.S. and the country of interest can also help when formulating a strategy for growth beyond U.S. borders. If you are interested in learning more about the French market or foreign expansion in general, please contact Stephan Grynwajc for more information or assistance. Stephan can be reached at firstname.lastname@example.org or 347-543-3035.
Stephan Grynwajc is admitted to the practice of law in the U.S., Canada, U.K. and in France/the European Union. He has served as a senior in-house attorney for several blue-chip technology corporations (e.g., Intel and Symantec) in France, the U.K. and the U.S., and today, focuses his practice on advising U.S.-based clients on navigating the EU, UK and Canadian legal and regulatory landscape.