Setting Up a Business in France

Setting Up a Business in France

Any foreign company or individual planning to start or expand a business in France must decide on the appropriate legal structure.

This decision will impact the company’s legal status, tax obligations, assets, share transfer procedures, and the rights and responsibilities of its partners.

Liaison Office: Temporary Setup

A liaison office does not engage in commercial activities. Instead, it is typically used to prepare for a future commercial presence in France. Its activities are limited to preparatory tasks such as market research, advertising, information gathering, and storing goods.

A liaison office represents the foreign company but does not form a separate legal entity. As a result, all agreements made by the office must be approved by the foreign company, which remains solely responsible for its actions.

To facilitate interactions with public authorities, the office’s representative may file a declaration of existence. Registration is only required if the office has its own premises or employs staff.

From a tax perspective, a liaison office is not subject to corporate income tax as long as its activities are limited to preparatory tasks. However, if the office shift to commercial activities, it might be re-characterized by the tax authorities as a permanent establishment and autonomous establishment, and therefore its profits will be taxed in France. Similarly, if the office is considered an employer, it will be liable for social securities taxes.

Branch and Subsidiary: Permanent Setup

Foreign companies can also operate in France through a branch or subsidiary.

A branch allows a foreign company to conduct commercial activities in France. While it operates under the same business as the parent company, it has its own customer base and direct interactions with clients. However, a branch is not a separate legal entity and has no independent assets. The parent company remains financially liable for the branch’s obligations.

A branch is managed by a representative of the parent company, who has the authority to act on its behalf.

It must be registered with the local trade and companies register (Registre du Commerce et des Sociétés or RCS).

From a tax perspective, a branch is considered a permanent establishment and is subject to corporate income tax, VAT, and local taxes. The profits allocated to the branch and taxable in France shall be determined as if the branch was a distinct and separate entity dealing at arm’s length with the non-French parent company. In this respect, the branch shall charge an arm's length fee to the parent company for the services rendered to the latter. Such fee could be computed on a cost plus basis (transfer pricing policy to be determined).

The expenses incurred for the purposes of the permanent establishment are deductible, including the executive and general administrative expenses incurred, but excluding expenses which would not be deductible if the permanent establishment were a separate entity. However, the permanent establishment cannot deduct interest on a loan granted by its parent company.

The French permanent establishment must satisfy French tax obligations and in particular must file annual tax returns, being noted that the tax authorities are entitled to ask for the presentation of all accounting documents, inventories and all other documents justifying the tax results of the permanent establishment.

Provided that the parent company is eligible to the provisions of the relevant double tax treaty, no withholding tax will apply on the branch profits repatriated to the parent company. 

Its employees are also subject to French labor laws. The branch must maintain separate accounting records, and the parent company’s financial statements must be filed annually (and translated if necessary) with the relevant RCS.

Under certain conditions, a branch can be converted into a subsidiary.

A subsidiary is a separate legal entity under French law, with its own legal personality and autonomy. Its assets are distinct from those of the parent company, which becomes a shareholder. As a result, the subsidiary is solely responsible for its debts.

During the setup phase, the founders are personally liable for the subsidiary’s legal commitments. This liability ends once the subsidiary is registered with the RCS.

In terms of taxes and social contributions, the subsidiary is subject to the laws and regulations of France.

Same treatment as the branch for CIT purposes. However, a subsidiary is entitled to deduct interest on a loan granted by its parent company.

Dividend distributions made by the subsidiary to its parent company shall give rise to a 3% tax at the level of the subsidiary and a French withholding tax.

Commonly Used Business Structures

French corporate law offers various options for setting up a business. The most commonly used structures are:

1. Limited Liability Company (SARL): Typically used for small, often family-owned businesses. The SARL is highly regulated, with strict rules on decision-making and share transfers. In case of a share transfer, the partners must hold a meeting to amend the company’s bylaws and follow an approval process if the shares are sold to third parties.

   Registration fees for share transfers are higher than for other structures, at 3% of the sale price (5% if real estate is involved), after a €23,000 deduction.

   
   

2. Simplified Joint-Stock Company (SAS): The SAS is the preferred choice for medium and large private companies. It offers significant flexibility in its organization and operations, as these are governed by its bylaws rather than strict legal requirements. Partners can freely decide on share transfer conditions, voting rules, governance structures, and more.

   Registration fees for share transfers are capped at 0.1% of the sale price.

   
   

3. Public Limited Company (SA): The SA is a more rigid structure, primarily used by large companies and listed firms. Its governance is strictly regulated by French law, with fixed rules on majority requirements, quorum, and the division of powers between management and shareholders.