France is a civil law jurisdiction where most laws are codified. In the administrative law sphere, case law is paramount, as legal precedents are established by judges. Judges also have an important role to play in judicial matters, in the sense that they interpret and apply the law; they do not, however, create new laws.

The judiciary is independent from the other powers existing in France (ie, executive and legislative powers) and comprises two main branches:

• the judicial branch comprises civil and criminal courts, which deal with civil and criminal matters; and
• the administrative branch comprises administrative courts, which deal with administrative and public law disputes.

Each of these two branches has several levels of courts, from district courts to courts of appeal, and then to the supreme court. The Cour de cassation is the supreme court for civil and criminal matters, and the Conseil d’État is the supreme court for administrative and public law matters (including most tax matters).

In general, foreign investments in France are unrestricted (Article L. 151-1 of the French Monetary and Financial Code). However, in order to ensure the protection of French national interests, investments in certain sectors that are considered strategic and “sensitive” require the prior authorisation of the French Minister for the Economy. Pursuant to Article L. 151-3 of the French Monetary and Financial Code, foreign investments in any sector that is even occasionally related to the exercise of public authority or pertains to activities likely to jeopardise public policy, public safety or national defence interests are subject to prior authorisation, as are foreign investments that are related to activities concerning research and trade in weapons, munitions and explosives.

Prior authorisation is required only when the following transactions are contemplated:

• for any investor (ie, from the EU/EEA as well as non-EU/EEA countries) – the acquisition of a controlling interest (ie, majority of voting rights) in a French company, or the acquisition of all or part of a business line by a foreign investor; and
• for investors from countries outside of the EEA or EEA nationals not residing in the EEA – the acquisition, alone or in concert, of interests exceeding 25% of voting rights in a French company. In the context of the COVID-19 crisis, the French government temporarily lowered this threshold from 25% to 10%, applicable to listed companies only.

Investments in the following areas are subject to prior authorisation:

• activities that are likely to prejudice the interests of national defence, that involve participating in the exercise of official authority or that are likely to prejudice public policy and public security, including:
1. activities relating to weapons, munitions, powders and explosive substances intended for military purposes or war materials and assimilations thereof;
2. activities relating to dual-use items and technologies;
3. activities carried out by entities holding national defence secrecy; and
4. activities carried out in the information systems security sector, including as a subcontractor, for the benefit of an operator operating facilities that could significantly reduce the nation’s war or economic potential, security or capacity for survival if they were to become unavailable (opérateur d’importance vitale);
• activities relating to cryptology equipment and services;
• activities carried out by companies that have entered into a contract for the study or supply of equipment to the Ministry of Defence, either directly or by subcontracting, relating to dual-use goods, means of cryptology or activities covered by national defence secrecy and weapons;
• activities relating to technical equipment or devices that are likely to allow the interception of correspondence or are designed for the remote detection of conversations or the capture of computer data;
• activities relating to the provision of services carried out by approved evaluation centres under the conditions provided for in Decree No 2002-535 of 18 April 2002 relating to the evaluation and certification of the security offered by information technology products and systems;
• activities relating to gambling, with the exception of casinos;
• activities relating to the means intended to deal with the illicit use of pathogenic or toxic agents, or to prevent the health consequences of such use;
• activities relating to the processing, transmission or storage of data, the compromise or disclosure of which is likely to prejudice the exercise of sensitive activities within the meaning of the foreign investments regulation;
• activities that are likely to prejudice the interests of national defence, that involve participating in the exercise of public authority or that are likely to prejudice public order and public security, when they concern infrastructure, goods or services essential to guarantee the following:
1. the integrity, safety and continuity of water supply, energy supply, transport services, telecommunications services, space operations and electronic communications networks, or the operation of an establishment, installation or work of vital importance, the unavailability of which could significantly reduce the nation’s war or economic potential, security or capacity for survival;
2. the exercise of the missions of the national police, the national gendarmerie and the civil security services, as well as the exercise of the public security missions of the customs and those of approved private security companies; or
3. the protection of public health;
• the production, processing or distribution of certain agricultural products;
• the publishing, printing or distribution of press publications for political and general information, as well as online press services for political and general information; and
• research and development activities relating to cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors and biotechnologies, as well as research and development activities relating to dual-use goods, when carried out in the context or for the purpose of one of the above-mentioned sensitive activities.

The request for authorisation must be notified to the Treasury Directorate within the Ministry for the Economy, and the authorisation must be obtained prior to the completion of the contemplated transaction.

The authorised investment transaction must also be declared to the Minister for the Economy as soon as it has been completed.

The target company or the investor (with the consent of the target company) may file a preliminary request (“rescript”) with the Minister for the Economy to obtain confirmation of whether or not the target company’s activities fall within the scope of the foreign investments regulation. The Minister must reply within two months of receiving the request, although lack of response within this period does not mean that the activity in question does not fall within the scope of the prior authorisation regime.

Prior to the completion of any transaction, the investor has to send a request for authorisation to the Treasury Directorate. This request must outline the proposed transaction and provide basic corporate information about the investor, the target company and the structure of the transaction. Upon receipt and provided the application is complete, an initial 30 business day review phase begins, at the end of which the Minister of the Economy (Treasury Directorate) informs the investor that:

• the transaction does not require prior authorisation;
• the transaction is unconditionally authorised; or
• further review is required.

Lack of response within this 30 business day period means that prior approval is not granted.

If an in-depth review phase is opened, the Treasury Directorate has 45 business days to issue its final decision. In the absence of a response within this period, the authorisation is not granted. The Minister can refuse to grant the authorisation when they believe that:

• there is a serious presumption that the investor concerned has committed the offences of drug trafficking, abuse of weakness, procuring, money laundering, terrorism, corruption or criminal association; or
• the conditions attached to the completion of the transaction are insufficient to protect French national interests because, inter alia:
1. the sustainability of industrial capacities would not be preserved;
2. the integrity, safety and continuity of the operation of transport and telecommunications networks and the protection of public health would not be guaranteed; or
3. the contractual obligations of a company holding a public contract relating to public security, national defence and the production of and trade in arms, ammunition and explosives would be compromised.

In their assessment, the Minister may take into consideration whether the investor has a relationship with a foreign government or public body.

Non-compliance with foreign investment regulations may lead to exposure to both criminal and administrative sanctions.

Criminal sanctions may be imposed on the investor, including imprisonment for up to five years, seizure of the investment and a fine of up to twice the amount of the investment (multiplied by five if legal entities are held liable). Additional sanctions against legal entities include the shutdown of the establishment for five years or exclusion from public procurement processes.

With regard to administrative sanctions, the PACTE Law No 2019-486 of 22 May 2019 strengthens the powers of the Minister for the Economy to issue injunctions and impose financial penalties for a breach of the foreign investment regulations. The Minister may direct the investor to submit a request for authorisation, modify the investment and have the previous situation restored, at the investor's expense.

If the protection of national interests is compromised, the Minister for the Economy may suspend the voting rights attached to the shares themselves, prohibit the distribution of dividends or suspend the free disposal of all or part of the assets related to the activities that are subject to authorisation.

In addition, if the company does not comply with the obligations attached to the authorisation, the Minister may decide to withdraw the authorisation, direct the company to comply with these obligations or substitute new obligations for the former.

Lastly, the Minister is also given power to impose a financial penalty when an investment is carried out without prior authorisation, in instances when the authorisation has been fraudulently obtained or when the operator fails to comply with the conditions laid down in the authorisation. The maximum penalty will be twice the amount of the unapproved investment, 10% of the annual turnover of the target company (excluding tax), EUR1 million for natural persons or EUR5 million for legal persons, whichever is greater.

The authorisation of the Treasury Directorate may be contingent upon specific undertakings by the investor aimed at ensuring that the contemplated investment does not jeopardise French national interests, such as:

• undertakings to preserve the business operations and the industrial, R&D and related know-how capacities;
• undertakings to preserve the safety of the supply chain;
• guarantees as to the performance by companies that have their registered office in France under procurement contracts, whether as contractor or subcontractor, or contracts concerning public safety, national defence or research, or the production or trading of weapons, ammunitions or explosives; or
• the sale of an ancillary business to a company independent from the investor, if the Strategic Business Sector for which authorisation is required is an ancillary business of the target company.

The French Monetary and Financial Code provides a procedure for renegotiating commitments, under which the conditions may be revised, at the investor's request, in the following cases:

• when there are changes in the economic and regulatory conditions under which the entity that is the subject of the investment conducts sensitive activities, that were unforeseeable at the time the authorised transaction was carried out;
• when there is a change in the shareholding of the invested entity or a change in the members of the control chain; and
• in the application of one of the conditions set out in the authorisation.

In all cases, the application for review must be accompanied by the documents or information necessary to justify that a case for review exists and to enable the application to be examined.

The Minister has 45 business days from receipt of the application to decide. In the absence of a response within this period, the revision request is deemed rejected.

If the Treasury Directorate refuses to grant the authorisation, an appeal may be filed within two months of the decision to the Administrative Court, which may decide to annul the refusal. The jurisdictional procedure may last a little over a year.

The appellant needs to demonstrate that the refusal is based on an error of law and manifest misappraisal of the facts, or that the Minister has failed to comply with the authorisation procedure.

The most common forms of legal entities in the commercial arena in France are the Société Anonyme (SA), the Société à Responsabilité Limitée (SARL) and the Société par Actions Simplifiée (SAS).

SA

The SA is a limited liability company whose shares can be listed on a stock exchange. The minimum share capital of an SA is EUR37,000, and there must be a minimum of two shareholders for a private SA or seven shareholders for a public SA. This type of entity is mainly suited to large businesses potentially contemplating a listing on a stock exchange.

Transfers of shares in an SA are unrestricted, unless the articles of association or a shareholders’ agreement provide otherwise, and are carried out by way of the execution of a transfer form and registration in the corporate books of the SA. Share transfers are subject to registration tax.

SARL

The SARL is a limited liability company that may be formed with only one shareholder. Unlike in an SA, the minimum share capital is only EUR1. The SARL form was commonly used for small businesses before the SAS form was introduced into French law.

Share transfers must be effected in accordance with certain legal obligations and formalities (other than in the case of transfers between existing shareholders), and may also be restricted by the articles of association or a shareholders’ agreement. The transfer of shares to a third party requires the prior approval of a majority of the shareholders, representing at least half of the share capital. In the absence of this approval, the non-selling shareholders must acquire or procure the acquisition of the transferring shareholder’s shares, unless the transferring shareholder has in the meantime decided not to pursue the transfer. Share transfers are subject to registration tax.

In SARLs, the articles of association must be updated when shares are transferred, as they must contain an up-to-date list of shareholders along with details of their shareholdings. The articles of association of SARLs are available to the public.

SAS

The SAS is a limited liability company that may also be formed with a sole shareholder. Like a SARL, the minimum share capital of an SAS is EUR1. The SAS is commonly used by domestic and foreign investors, due to its flexibility. It is notably the preferred vehicle for small businesses, French subsidiaries of international groups and joint ventures.

Although SASs cannot offer securities to the public (unlike SAs), they are allowed to raise capital through private placements.

Transfers of shares in an SAS are unrestricted, unless the articles of association or a shareholders’ agreement provide otherwise, and are carried out by way of the execution of a transfer form and registration in the corporate books of the SAS. Share transfers are subject to stamp duty.

The main steps of the incorporation process for the corporate vehicles described in 3.1 Most Common Forms of Legal Entity (ie, SAs, SARLs and SASs) are as follows:

• preparation and execution of the relevant corporate and contractual documentation (generally the articles of association, a lease or domiciliation agreement for the registered office premises and an auditor’s report, as well as a contribution agreement in the case of contributions in kind);
• in the case of cash contributions, the opening of a bank account and transfer of the amount of the share capital to such bank account;
• completion of the relevant formalities with the trade and companies registry and the tax authorities; and
• issuance of the certificate of incorporation (first “Kbis” extract) by the trade and companies registry, which evidences the fact that the company is legally formed.

The incorporation process is generally quick and straightforward, with the company usually being incorporated between three and seven days from the date on which the final set of required documents is filed. The PACTE Law No 2019-486 of 22 May 2019 established a simplified, entirely digitalised process.

It should be noted that opening a bank account (which is a requirement for setting up a company in the case of a cash contribution) may take some time due to the anti-money laundering requirements imposed by banks.

In France, private commercial companies must comply with certain reporting and disclosure obligations, although not as many as public companies.

With respect to the SA, SARL and SAS, legal representatives must prepare an annual management report, which is presented to the shareholders before they make a decision on the approval of the relevant annual accounts; such shareholder decision must be made within six months of the end of the previous financial year (with possibilities to extend this timeframe).

Once shareholder approval has been obtained, such companies are required to file their annual accounts along with related corporate documentation with the trade and companies registry. This filing must take place within one month of the shareholder decision approving the annual accounts. Subject to specific criteria being satisfied, certain small companies may request that their annual accounts remain confidential.

Amendments to the articles of association, changes of legal representatives, increases or decreases of the share capital, etc, require the relevant corporate documentation to be filed with the trade and companies registry.

An ultimate beneficial owner form must be filed with the trade and companies registry within 15 days of incorporation, and also when the ultimate beneficial owner of the company subsequently changes. The ultimate beneficial owners of a company are the individuals who own at least 25% of the share capital or voting rights of a company, or otherwise control its management or shareholders’ meeting, directly or indirectly.

SA

Two types of management structures exist for SAs.

• One-tier structure – a board of directors (Conseil d’administration) determines the business strategy of the SA and oversees the actions of the managing director (and their deputies, if applicable), who is in charge of the day-to-day management of the SA. The managing director can be the chair of the board of directors. The managing director and their deputies must be individuals.
• Two-tier structure – an executive board (Directoire) is composed of individuals only and manages the SA, while a supervisory board (Conseil de surveillance) oversees the actions of the executive board and determines the business strategy of the SA.

In large SAs, board committees are usually put in place (strategic committee, audit committee, compensation committee, etc).

The directors and officers have broad powers to act on behalf of the company, subject to powers granted by law to the shareholders. Certain decisions are reserved to the shareholders, such as decisions relating to the amendment of the articles of association, share capital increases and changes to the corporate purpose of the SA.

SARL

The management structure of a SARL consists of one or more managers, who may be shareholders but must be individuals. The managers have broad powers to act on behalf of the company, subject to powers granted by law to the shareholders.

SAS

There is only one legal requirement in terms of the governance in an SAS: the existence of a president as legal representative of the company. The president has broad powers to act on behalf of the SAS, and does not need to be an individual (ie, it may be a legal entity).

Apart from the legal requirement to appoint a president, the shareholders can freely provide for a tailored governance structure in the articles of association or in a shareholders’ agreement. For example, it is possible to have one or several deputy managers with powers that can be equivalent to those of the president, or a board of directors, a supervisory board or an executive committee to approve certain strategic management decisions.

Directors and Officers

A derivative civil action against one or more directors or officers of a company may be initiated by the legal representative of the company or by shareholders (at their own cost) acting on behalf of the company against the relevant director or officer. Such an action would seek indemnification for the company (not the claiming shareholders, if applicable) if it has suffered a loss. Shareholders can also initiate an action to seek indemnification for a damage suffered by them directly as a result of a fault on the part of the relevant director or officer. The term “fault” includes breaches of laws and regulations applicable to the relevant company, breaches of the company’s articles of association, and mismanagement (ie, acting in a way that is obviously contrary to the corporate interest of the company).

Directors and officers are rarely held liable towards third parties due to the existence of the separate legal personality of the company. However, in limited circumstances third parties may bring legal actions if the director or officer concerned has acted outside the course of their functions.

Directors and officers may also be held criminally liable for their actions, but only in limited circumstances (eg, misuse of corporate assets).

D&O liability insurance and indemnification

D&O liability insurance is available in France, although criminal fines and civil fines cannot be insured against, nor can intentional faults on the part of directors and officers. In practice, large companies – and listed companies in particular – subscribe to such policies for their directors and officers, and usually pay the related premiums.

In the French market, no indemnification is provided in practice by the company to its directors and officers if their personal liability is claimed, contrary to what occurs in certain other jurisdictions.

Shareholders

The liability of shareholders in SAs, SARLs and SASs is limited to their share capital contributions, but there are exceptions to this principle.

A third party may initiate legal action against one or more shareholders if said shareholders have committed actions, outside the course of their usual shareholder prerogatives, that are intentional and amount to gross misconduct. In practice, such legal actions are usually only brought in the context of insolvency proceedings.

In addition, a shareholder that is involved in the day-to-day management of the company may be deemed to be a de facto manager of the company; qualification as such will depend on the facts. If a shareholder is considered to be a de facto manager, the sanctions applicable to statutory managers will apply to such shareholder.

French employment law is based on several legal sources, listed below in order of priority:

• European regulations and other international treaties;
• French Constitutional Law;
• the French Labour Code;
• collective bargaining agreements (CBAs) entered into between employee unions and employer professional organisations, including:
1. national and multi-industry-wide CBAs;
2. national and individual industry-wide CBAs;
3. regional and industry-wide CBAs; and
4. company CBAs;
• companies’ common practices and unilateral decisions (usages and décisions unilatérales); and
• individual employment contracts.

In principle, a legal source can only provide for a more favourable standard than the legal source immediately above in the hierarchy. A major exception to this principle results from a legal reform dated 22 September 2017, which now allows a simple company CBA to provide for a less favourable standard than the higher CBA's standard in many areas, such as overtime compensation, working time schemes and geographical mobility.

Legislation can change extremely quickly when the government changes the legal rules established through orders, decrees or ordinances. Employers must therefore be constantly aware of legal developments, and their law firms must keep a continuous legal watch on changes in legal rules, even temporary ones, that may be applicable to companies.

An employment contract exists whenever one party undertakes to make their services available to the other party, in consideration for a salary, and places themselves under the legal, operational and disciplinary supervision of this other party (subordination).

The two most common types of employment contracts are indefinite-term and fixed-term contracts, both of which can be entered into on either a full-time or part-time basis.

Fixed-term contracts cannot be used to fill permanent positions – they are only allowed to fill temporary needs, under specific circumstances, such as:

• temporary increase of activity;
• replacement of absent employees;
• seasonal work; and
• temporary assignments for highly skilled employees/engineers.

An employment contract usually sets out, inter alia, the employee’s job title, duties, remuneration, working time, notice period for resignation and trial period (during which the employer is free to terminate the employment relationship at will if it is not satisfied with the employee’s performance), mobility provision and restrictive covenants (non-compete and non-solicitation provisions).

The employer cannot unilaterally amend the material terms of the employment contract, but minor changes can be made without the employee’s prior consent. The employee’s refusal to comply with minor changes can constitute misconduct, justifying a dismissal. The distinction between “material” and “minor” changes is assessed on a case-by-case basis: changes in the nature of the duties or level of compensation would be deemed material, while the mere change of the place of work within a certain scope would simply be considered a minor change.

The standard weekly working time is 35 hours, although this does not mean that work cannot be performed beyond 35 hours:

• some employees are hired on the basis of extended weekly working time; and
• employees hired under the 35-hour standard can work more than 35 hours if they are paid overtime (25% more for the first eight hours and 50% more beyond, unless provided otherwise by a CBA) or offered equivalent time off.

Employees who benefit from autonomy in the performance of their duties and from a high level of responsibility and compensation often work under special working time arrangements, which exclude overtime payment:

• top executives (cadres dirigeants) are legally excluded from the scope of the standard 35 hours' working time, and even from most of the working time regulations; and
• autonomous white-collar workers (cadres autonomes) can agree to work 218 days a year in consideration for a lump-sum salary (forfait jours). This working time arrangement requires the employer to monitor and document the employees’ workload.

Moreover, since 8 August 2016, employers must make sure that employees comply with their “right to disconnect” from their professional devices, in order to ensure a good balance between their professional and personal lives. This is a challenge, given that these employees are supposed to be “autonomous” in the management of their own working time.

Employment contracts can be terminated in different ways:

• by the employer (dismissal);
• by the employee (resignation);
• by both parties (amicable termination agreement);
• by a judge (judicial termination);
• due to the age of the employee (retirement);
• by virtue of the expiration of the contractual term (fixed-term contracts);
• by virtue of a force majeure situation; or
• by virtue of the disappearance of one or both parties.

Termination

Employers can only terminate an employment contract on the basis of personal grounds (poor performance, gross negligence or wilful misconduct) or economic grounds (financial difficulties, technological changes or the necessity to safeguard the competitiveness of the company). Economic grounds must be assessed globally at the level of the company’s operations in France and in the sector of activity to which it belongs.

A standard disciplinary dismissal process would require the employer to:

• invite the employee to a meeting (on five business days' notice);
• explain the reasons for the contemplated dismissal during the meeting and listen to the employee’s comments; and
• send a written and motivated dismissal letter (no earlier than two business days following the meeting).

The steps for an individual economic dismissal process would be similar to the process described above, with additional motivation and redeployment obligations.

Collective Dismissal

A collective dismissal affecting fewer than ten employees requires the employer to:

• inform and consult its works council (now called the Social and Economic Committee – see 4.5 Employee Representations);
• invite each affected employee to a formal meeting; and
• inform the French Labour Administration of the mass dismissal.

A collective dismissal affecting ten or more employees is longer and more complex. The employer must comply with the following obligations:

• the economic rationale needs to be detailed in a memorandum communicated to the works council;
• the employer must inform and consult the works council (it also has to inform different stakeholders, such as the French Labour Authorities);
• the employer must make its best efforts to identify available positions matching the affected employees' professional qualifications – practically, the employer needs to prepare a memorandum setting forth redeployment solutions (also called a social plan);
• the social plan can be negotiated with union representatives or alternatively determined unilaterally by the employer – in any case, it needs to be “discussed” with the works council; and
• in order to ensure that no discrimination affects the collective dismissal, the employer has to:
1. establish the list of eliminated jobs;
2. establish the affected professional pools (ie, the groups of employees performing similar duties, with comparable professional training/academic backgrounds, and whose roles are interchangeable);
3. establish a list of dismissal selection criteria, including the number of dependent relatives, the length of service, any situation that would make finding new employment particularly difficult (disabled or senior employees), the employee’s skills assessed in light of their pool, etc; and
4. once the social plan is approved by the labour authorities, apply the selection criteria within the professional pools to move from a list of jobs to a list of names.

French law gives employers and unions the possibility to enter into a collective amicable termination agreement, which determines the number of redundant employees, the financial terms and conditions of the dismissal, and the available redeployment measures. The works council must be consulted on this agreement, and the French labour administration’s approval is requested.

Abusive Termination

Damages for abusive termination granted by a court to a dismissed employee vary depending on the compensation and length of service of the employee. However, they are capped according to the seniority of the employee (barème Macron), which offers a greater foreseeability and certainty in risk assessments and litigation management. Although several labour courts have departed from the legal cap, claiming that they were not bound by it, the Supreme Court confirmed on 11 May 2022 that the barème Macron was mandatory.

All companies employing 11 or more employees over 12 consecutive months must elect a body of employee representatives called the Social and Economic Committee (CSE).

In companies with more than 50 employees, the CSE has broader duties, and must be consulted on the strategic orientation, the financial and economic situation, and any contemplated reorganisation that could affect the size or structure of the workforce (eg, economic dismissals).

The union representatives and the employer can agree to transform the CSE into a Company Counsel (Conseil d’Entreprise), which in addition to the role of the CSE would have an exclusive negotiation power to enter into CBAs with the employer.

French personal income tax on employment income is withheld by the employer from the employee’s pay cheque, at progressive rates up to 45%.

The same applies for French social security contributions, which are assessed at progressive rates up to approximatively 40% for the employer share and up to approximatively 20% for the employee share.

French Withholding Tax (WHT)

Outbound dividends are subject to WHT at the rate of 12.8% for individuals and 25% for companies, unless the shareholder can rely on the provisions of the EU Parent-Subsidiary Directive or a double tax treaty.

Outbound royalties as well as income derived as a consideration for services rendered or used in France are subject to WHT at the rate of 25%, unless the recipient can rely on the provisions of a double tax treaty or, for royalties, the EU Interest and Royalties Directive.

Outbound interest payments are generally exempt from any WHT. Dividends and royalties paid to a loss-making EU company can benefit from a WHT deferral.

French Value Added Tax (VAT)

French VAT is levied on any supply of goods or services realised for a valuable consideration by any person carrying out an economic activity in France. Four different VAT rates are applicable in France:

• a standard VAT rate of 20%;
• an intermediate rate of 10%; and
• two reduced rates of 5.5% and 2.1%, which apply to the supply of certain goods and services.

Several VAT exemptions apply to exports and EU supplies of goods and services, and to most financial services.

VAT incurred by a taxpayer on the acquisition of goods or services (input VAT) is deductible from the VAT invoiced by the taxpayer in the course of its business (output VAT), to the extent that the acquired goods or services are used to carry out an activity that is subject to VAT without benefiting from an exemption. Any excess input VAT is reimbursed.

The 2021 Finance Law introduced a VAT group regime, the purpose of which is to neutralise intra-group transactions for VAT purposes. Only French VAT taxpayers may elect to form a VAT group, and only if they are closely bound to one another by financial, economic and organisational links (in accordance with the VAT Directive).

French Business Tax

Companies operating a business in France are generally liable to French business tax, which includes two different taxes:

• the CFE (cotisation foncière des entreprises); and
• the CVAE (cotisation sur la valeur ajoutée des entreprises).

The CFE is assessed on the gross cadastral rental value of real estate assets that are available to the relevant companies and used in the course of their business. The CFE rates are determined by local authorities, so may vary significantly from one location to another.

The CVAE is due from companies whose annual turnover exceeds EUR500,000. It is assessed on the added value generated by the companies, capped at 80% or 85% of their annual turnover (depending on whether or not the turnover exceeds EUR7.6 million). The CVAE standard rate is 0.75%. Companies whose turnover does not exceed EUR50 million benefit from progressive CVAE reliefs, resulting in a lower effective CVAE rate.

However, the sum of the CFE and the CVAE due from a company must not exceed 2% of the company’s added value.

Companies subject to French CIT may benefit from various credits.

The most notable is the R&D tax credit, which is equal to 30% of eligible R&D expenses (mainly including compensation paid to employees who perform R&D activities) below EUR100 million, and 5% above EUR100 million. Small and medium-sized enterprises are eligible for an additional innovation tax credit equal to 30% of eligible innovation expenses, which are capped at EUR400,000 per year.

Companies subject to French CIT are entitled to form a tax-consolidated group for CIT purposes, provided that:

• the parent company of the group is subject to CIT in France and 95% or more of its share capital is not owned by another company that is subject to CIT in France;
• the subsidiaries are subject to CIT in France and at least 95% of their share capital is owned, directly or indirectly, by the parent company of the group;
• the parent company of the group and its subsidiaries have, in principle, matching fiscal years, the duration of which does not exceed 12 months; and
• both the parent company of the group and its subsidiaries file an election to be part of the same group.

Sister companies subject to French CIT whose direct or indirect parent company is established in an EU member state or an EEA state are also entitled to form a horizontal tax-consolidated group including their French subsidiaries.

Companies subject to French CIT may face the following interest deduction limitation rules.

• Interest incurred on loans granted by direct shareholders and controlling entities is deductible within the limit of a maximum interest rate published by the French tax authorities or – with respect to loans granted by controlling entities – the market rate, where the borrower can evidence that the market rate in this specific case would be higher.
• Net financial expenses (ie, the positive difference between financial expenses and financial income) are deductible up to 30% of the restated EBITDA or EUR3 million, whichever is greater, unless the borrower is thinly capitalised (ie, the amount of its debt towards controlling entities, on a standalone or tax-consolidated group basis, exceeds 1.5 times the amount of its – or the group’s – net equity), in which case lower thresholds apply.
• Interest incurred in connection with the purchase of shares in a company that joins the tax-consolidated group of the acquiring company is limited where the shares are acquired from a controlling person.

French transfer pricing rules generally follow the OECD guidelines and principles. Multinational companies with French operations must consequently ensure that the pricing of intercompany transactions meets the arm's length standard.

The following French companies are required to prepare a full transfer pricing documentation package, which is to be made available to the French tax authorities in the course of a tax audit:

• those whose annual turnover or gross asset value exceeds EUR400 million;
• those that are controlled by a French or foreign entity exceeding one of these thresholds; or
• those that are part of a tax-consolidated group including a company exceeding one of these thresholds.

French companies that meet an equivalent threshold of EUR50 million are also required to file a simplified transfer pricing declaration annually, within the six-month period following the deadline for filing CIT returns.

Special rules aim to include net income generated by a controlled foreign corporation (CFC) in the French parent company’s tax base where:

• the French parent company holds, directly or indirectly, more than 50% of the CFC’s share capital, voting rights or financial interests (or more than 5% if more than 50% of the CFC is owned by companies that are established in France or controlled by companies established in France); and
• the CFC is liable to taxes in its home jurisdiction that amount to less than 60% of the taxes to which it would have been liable had it been established in France.

The above rules do not apply if the owning of shares in the CFC or the activities performed by the CFC do not constitute an artificial arrangement to avoid or reduce French taxes (if the CFC is located within the EU), or if the business of the CFC is effectively carried out in its jurisdiction (if the CFC is located outside the EU).

Anti-hybrid rules prevent the deduction of an outbound expense in France, or impose the taxation of inbound income in France, when that income or expense results from a hybrid mismatch. Hybrid mismatches are situations where an asymmetric legal and tax treatment of a financial instrument or entity in two jurisdictions (or more) allows a payment between related entities to give rise to a deduction in two jurisdictions (double deduction), or to a deduction in one jurisdiction without taxation in the other (deduction without inclusion).

Subject to safe harbour provisions, the following special anti-avoidance rules aim to discourage French companies from closing transactions with non-co-operative states and territories (currently including Anguilla, the British Virgin Islands, Panama, the Seychelles, Vanuatu, the Bahamas, Turks and Caicos, Fiji, Guam, the US Virgin Islands, American Samoa, Palau, Samoa, and Trinidad and Tobago):

• the WHT rates applicable to outbound income paid to these jurisdictions are increased to 75%;
• interest payments and service fees paid to these jurisdictions are not deductible for French tax purposes; and
• the participation-exemption rules do not apply to dividends and capital gains derived from these jurisdictions.

France has a long-standing tradition of being open to the conduct of business, while consumer protection and fair distribution are also integral to France’s economic policy.

Companies and, in certain instances, individuals infringing competition law may face sanctions. The French Competition Authority (FCA) enforces the relevant rules, with appeal possible to the Paris Court of appeal. French commercial courts also have jurisdiction to enforce competition law as well as distribution law, with specific French rules stating that the abrupt termination of a long-standing relationship or a significant imbalance in companies’ rights and obligation, for example, may give rise to significant damages.

Moreover, the antitrust agency of the French Minister for the Economy and Finance (DGCCRF) plays an increasing role in the implementation of not only competition law but also French Commercial or Consumer Code provisions; companies may receive fines if they infringe such legal provisions (violation of invoicing rules or payment terms, unfair advertising, etc).

Mergers may be subject to either EU or French merger control rules. If the applicable EU notification turnover thresholds are met, then companies have the “one-stop shop” benefit of notifying only the European Commission – ie, making one EU filing with one single clearance decision. If the applicable French notification turnover thresholds are met, then companies must comply with the French notification requirements.

Notification is mandatory under French and EU merger control rules, and must be filed before the closing of the transaction and the implementation of any reportable “concentration”. Transactions must be reported to the European Commission or the FCA if they cumulatively:

• are considered to be a “concentration” within the meaning of competition law – ie, a transaction involving a change in the nature of the control of the target company; and
• meet the relevant EU or French turnover thresholds.

The concept of a “concentration” is defined broadly under EU and French law. Apart from “standard” mergers and joint ventures, the acquisition of direct or indirect control over a company is also considered to be a “concentration”. Control is defined as the possibility of exercising decisive influence over a company, considering both legal (including shares and voting rights) and factual elements. The acquisition of a minority interest without any veto rights over the strategic decisions of a company (eg, the appointment or removal of management, or the adoption of a budget or business plan) does not require any prior approval from the European Commission or the FCA.

Significant sanctions may be imposed for implementing a reportable concentration without prior notification or before receiving clearance (up to 5% of the French pre-tax turnover at the French level and up to 10% of the worldwide pre-tax turnover at the EU level). The FCA has already imposed several fines on companies for failure to notify reportable transactions, or for closing a deal without having obtained prior approval.

In the absence of an extension (eg, to negotiate commitments or to “stop the clock”), the FCA or the European Commission must issue a decision within 25 business days of receiving a completed notification, either authorising the concentration with or without commitments (Phase I), or opening an in-depth investigation (Phase II).

From the opening of Phase II, in the absence of an extension, a decision must be issued by the FCA within 65 business days for France, or by the European Commission within 90 business days for the EU.

In France, the Minister for the Economy and Finance may review the FCA’s decision and determine to override it for reasons of general interest other than competition law (eg, industrial development, the competitiveness of companies in the context of international competition, or the creation or preservation of jobs); the Minister has done this in one case so far.

Transactions that do not raise any specific competition concerns, including those involving investment funds, are generally cleared before the end of the 25 business day deadline. Furthermore, both the FCA and the Commission generally favour the granting of conditional authorisations at the end of Phase I rather than pursuing in-depth investigations (Phase II).

While carrying out an in-depth investigation, the FCA and the Commission apply a test to assess the effects of the concentration on competition. This test aims to determine whether such concentration may significantly impede competition, particularly through the creation or strengthening of a dominant position.

The FCA and Commission analysis of the effects of a transaction takes into account several factors that may offset the anti-competitive effects that have been identified, such as any substantiated efficiency gains brought about by the concentration.

If serious anti-competitive effects are identified that cannot be sufficiently mitigated by any positive effects, the contemplated concentration will be either prohibited (just two cases in France) or authorised subject to commitments to restore competition.

Both French and EU law prohibit cartels and other anti-competitive agreements/concerted practices, such as price fixing, the exchange of sensitive information, market partitioning, etc.

Companies infringing the relevant competition rules are subject to fines of up to 10% of their aggregate worldwide pre-tax turnover. Fined companies can also be sued before French courts by customers, suppliers, competitors, etc, for damages resulting from an infringement of competition law. Finally, under French law, individuals may also be criminally prosecuted in limited circumstances (although this has never been applied in practice).

Both French and EU law prohibit abuses of a dominant position (refusal to supply, long-term exclusivity, discriminatory practices, etc). French law also specifically prohibits abuses of a state of economic dependency, even if implemented by a company that is not in a dominant position (ie, does not have a significant market position).

When a company has participated in an anti-competitive practice (eg, cartel, abuse of a dominant position, abuse of a state of economic dependency), it may apply for leniency by reporting the infringement to the FCA or the Commission in order to obtain full or partial immunity from fines. Among other conditions, leniency requires the company to put an immediate end to its involvement in the anti-competitive practice(s) concerned, and to genuinely and fully co-operate with the FCA or the Commission. Full immunity for a violation can only be obtained by the first company applying for leniency. If the company is not the first to apply for leniency, its ability to obtain a reduction in the fine will depend primarily on its place in the queue of companies applying for leniency and the added value of the information provided by the applicant. A reduction may be up to 50% of the fine that would otherwise have been imposed.

Where an investigation of a company has already been initiated by the FCA or the Commission, leniency may still be possible, albeit not full immunity. Several other options are available, according to which such a company may:

• defend itself in challenging the objections raised by the FCA or the Commission;
• enter into a settlement procedure and waive the right to challenge the notified objections (in which case the General Rapporteur of the FCA communicates a settlement proposal to the company, setting the minimum and maximum amounts of the fine); or
• propose commitments to the FCA or the Commission to put an end to the anti-competitive practice(s) concerned. In practice, this is only possible for unilateral or vertical practices. This solution has the advantage of accelerating the resolution of cases in which the average timeframe for a final decision may range from three to six years.

A patent is an industrial property title relating to a technical invention, which can be either a process or a product, and grants its owner an exclusive right of use. Under French law, in order to be patented, an invention must be:

• new – ie, novel in relation to the prior art;
• inventive – ie, not obvious to a person skilled in the art;
• patentable – ie, it cannot constitute a discovery, a scientific theory, a mathematical method, an aesthetic creation, etc;
• capable of industrial application; and
• clear – ie, sufficiently comprehensive to be reproduced by a person with an average knowledge and ability in the relevant technical field.

Patents are registered with the French Industrial Property Office (Institut National de la Propriété Industrielle – INPI), which may refuse to grant a patent on substantial grounds (eg, the subject matter is excluded from patent protection) or formal grounds (eg, the name of the inventor is missing).

The INPI will publish the patent application 18 months after its filing date or priority date. Since 2020, the publication of the grant of a French patent opens a nine-month opposition period.

The term of a French patent is 20 years from the filing date of the application.

A patent infringement action can be brought by the patent holder. An exclusive licensee can also directly initiate a patent infringement action if certain requirements are met, or may join the action brought by the patent holder. A non-exclusive licensee may only join the procedure initiated by the patent holder to recover damages for its own loss.

Patent holders may seek remedy in the civil courts, mainly in the form of an injunction or damages. Civil remedies may also include, inter alia, the recall, confiscation or destruction of the infringing products and the publication of the judgment.

An infringer may also face criminal liability in the form of a fine of up to EUR300,000 (or EUR750,000 in certain circumstances) and imprisonment for up to three years (or seven years in certain circumstances).

European patents may be granted by the European Patent Office (EPO) through a single-grant procedure, as national patents, in the contracting countries to the European Patent Convention as designated in the application (38 countries in total).

The EPO may also deliver a unitary patent, which is a single title valid throughout 25 EU member states (except Spain and Croatia). The Unified Patent Court has been active since 1 June 2023 and has exclusive jurisdiction over unitary patents; the seat of its central division is in Paris.

A trade mark is a protected sign that distinguishes a company's products or services from those of other companies. Signs (eg, words, numbers, graphic images, colours, holograms, shapes, slogans and/or sounds) that can be represented in an appropriate form using generally available technology may be registered as trade marks as long as the representation is clear, precise, self-contained, easily accessible, intelligible, durable and objective.

Trade marks are registered with the INPI. The application process includes a formal examination and a substantial examination, but does not include a search of prior rights. The publication of a trade mark application opens a two-month opposition period.

A single opposition may be based on one or several prior rights (trade marks, domain names, company names, trade names, etc), provided that they all belong to the same holder.

Actions for invalidity and the revocation of French trade marks are under the shared jurisdiction of the INPI and civil courts. Thus, standalone actions for revocation or invalidity on absolute grounds (non-distinctive, misleading trade marks, etc) or on relative grounds (existence of earlier rights) have to be brought before the INPI.

A trade mark is protected for ten years from its filing date, and may be renewed indefinitely for subsequent periods of ten years.

A trade mark is said to be infringed when a sign that is identical or similar to such trade mark is used in relation to the same or similar goods and services and, in the case of similarity, is likely to cause confusion on the part of the public. The legislation provides for specific protection for well-reputed and well-known trade marks. If another sign reproduces or imitates a well-reputed or well-known trade mark, and is likely to damage or unduly exploit said trade mark, then an infringement action can be initiated even if the signs relate to products or services that are not similar.

Similar to patents, a trade mark infringement action can be brought directly by the trade mark holder or by the exclusive licensee. Non-exclusive licensees may only join the procedure initiated by the trade mark holder to recover damages for their own loss.

In terms of remedies, the rules applicable to patents also apply for trade marks.

Signs can also be protected by European Union trade marks registered with the European Union Intellectual Property Office (EUIPO), which are valid throughout the 27 EU member states.

An industrial design protects the aesthetic or ornamental aspect of all or part of an object. A design may be either three-dimensional, based on the shape or surface of the object, or two-dimensional, based on the object’s patterns, lines or colours.

To be registered, an industrial design must:

• be new – ie, no identical or almost identical design may have been made available to the public prior to the filing date;
• be non-functional – ie, not consist of features solely determined by the object’s technical function; and
• have an individual character – ie, produce the overall impression that it differs from any design disclosed to the public before the filing date.

Industrial designs are registered with the INPI, which will review the application but will not conduct a search of prior rights or published art to ensure the design is new and has an individual character.

Unlike trade marks, designs cannot be challenged before registration. There is no opposition proceeding.

The publication of an industrial design can be postponed by a maximum of three years from the filing date.

A registered industrial design is protected for an initial term of five years, which can be extended in five-year increments up to a maximum of 25 years.

Similar to patents and trade marks, an industrial design infringement action can be brought by the design holder or by the exclusive licensee of the industrial design, if certain requirements are met. Non-exclusive licensees may only join the procedure initiated by the design holder to recover damages for their own loss.

The unauthorised use of a registered or unregistered design constitutes infringement. In terms of remedies, the rules applicable to patents also apply for industrial designs.

Designs can also be protected by:

• registered Community designs;
• unregistered Community designs, which benefit from a shorter (three-year) and narrower protection; and/or
• copyright law if the holder can prove that the design is “original”.

Copyright law protects literary works and musical, graphic and plastic creations, as well as software, applied art creations, fashion creations, etc. Performers, producers of videograms and phonograms, and audiovisual communication companies also have rights related to copyright.

A work can be protected by copyright law when it is fixed in a material form and original (endowed with the personality of its author). Copyright does not protect ideas or concepts.

A creation is protected without formalities from the day it is created, whatever its form (written/verbal), genre (painting/novel/photography), merits (author’s talent) or destination (purely artistic work/applied creation).

Copyright gives the author two types of rights:

• moral rights that protect the author from disclosure of their work without their consent, allow the author to use their own name on the work or to remain anonymous, protect the integrity of the work (eg, protect the work from being modified), and allow the author to decide to make changes (right of repentance) or to stop its distribution (right of withdrawal); and
• economic rights that allow the author to prohibit or authorise the use of their work for free or in return for remuneration.

Moral rights are perpetual, inalienable and not subject to statutes of limitation, whereas economic rights last 70 years after the author’s death, or after disclosure of the work when it belongs to a legal person.

In terms of remedies, the rules applicable to patents also apply for copyright.

Databases

Databases can be protected by both copyright law and a sui generis right when the database producer can demonstrate a substantial investment.

Geographical Indications

A specific protection is granted when a sign is used on products that have a specific geographical origin and qualities, notoriety or characteristics related to that place of origin.

Semi-conductor Topographies

Final or intermediary topographies of semi-conductor products (electronic circuits incorporated into chips) are protectable by an industrial property right, which grants its holder an exclusive right of exploitation and reproduction for ten years after its filing date or its first exploitation.

Software

Software programs can be protected by copyright law and by patent law, if certain requirements are met (this is limited in practice since only protected technical innovations implemented through the program may be protected – ie, coding is not protectable).

Trade Secrets

Trade secrets are protectable without any procedural formalities and for an unlimited period. The information must:

• be secret (ie, not generally known or readily accessible among people who usually deal with such kind of information);
• have commercial value because it is a secret; and
• have been subject to reasonable steps to maintain its secrecy.

Law No 2018/670 of 30 July 2018, transposing Directive (EU) No 2016/943, strengthened the regime for the protection of know-how by providing for the possibility of obtaining measures, provisional or otherwise, to prohibit, destroy or recall products resulting from an infringement of a trade secret.

The main regulations applicable to personal data protection (hereinafter referred to collectively as the “Data Protection Regulation”) are:

• Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (GDPR);
• Act No 78-17 of 6 January 1978 on information technology, files and freedoms and its application texts (the French Data Protection Act), as amended by Act No 2018-493 dated 20 June 2018 and Ordonnance No 2018-1125 dated 12 December 2018; and
• Decree No 2019-536 dated 29 May 2019.

The Data Protection Regulation applies to personal data processing that falls within the scope of this regulation and is implemented by the following establishments:

• those located in France (establishment clause);
• if not located in France, those that target French residents (targeted business clause); or
• those located in a place where French law applies by virtue of public international law.

The establishment clause has a very broad scope of application. It first applies where the establishment exercises any real and effective activity, even a minimal amount, through stable arrangements in France. For example, any French-based sales offices promoting or selling advertising or marketing, particularly to French or EU residents, fall within the scope of the establishment clause. The Data Protection Regulation also applies where such an establishment processes the personal data of non-EU residents, “regardless of whether the processing takes place in the European Union or not”, as long as the establishment remains the data controller.

In the case of a conflict between French law and the data protection legislation of other EU member states, the Data Protection Regulation provides that French law applies where data subjects are French residents. Such an exemption applies only if the data controller is not established in France, unless the processing is implemented for the purposes of journalistic, academic, artistic or literary expression.

Under the targeted business clause, the Data Protection Regulation can apply where the processing activities are related either to the offering of goods or services (for free or against payment) to any data subject in France, or to the monitoring of their behaviour.

For offerings of goods and services (but not monitoring), the mere accessibility of a website from France is insufficient. In addition to being accessible from France, it must be clear from the website – or from any other means used to reach the potential data subjects – that the legal entity intends to direct its activities to French data subjects. The use of the French language/currency, the ability to place orders in French and references to French users or customers will be relevant.

Alternatively, “monitoring” specifically refers to any online tracking of individuals that aims to create profiles, including where decisions rely on such profiling to analyse/predict personal preferences, behaviours and attitudes.

In practice, any legal entities meeting the targeted business clause must appoint a representative based in France.

The Data Protection Regulation also applies to the processing of personal data by a controller established in any other location where French law applies by virtue of public international law, even outside of the European Union. For example, any processing of personal data implemented by a French consulate in a third country where EU member state law applies by virtue of public international law is subject to the Data Protection Regulation.

Assuming that the intended processing of personal data falls within the geographical scope mentioned above, there are exceptions according to which the processing may not be subject to the Data Protection Regulation. French law provides exceptions for any temporary copies made in the context of technical operations of the transmission and provision of access to a digital network for the purpose of the automatic, intermediate and transitory storage of data and with the sole aim of allowing other recipients of the service to benefit from the best access possible to the transmitted information. This exemption is particularly intended, for internet service providers storing data (eg, IP addresses and the addresses of websites consulted) temporarily in order to more quickly serve future requests for that data (also called “cache functionality”).

The French data protection authority is called the Commission nationale de l’informatique et des libertés (CNIL) and is vested with the following six main functions:

• informing and educating – informing individuals of the rights granted to them by the Data Protection Regulation;
• regulating and advising – establishing and implementing soft law standards intended to support companies in their efforts to comply with the Data Protection Regulation;
• assisting in compliance – certifying persons, products, data systems or procedures that comply with the Data Protection Regulation;
• protecting the rights of individuals – receiving data subjects’ complaints through a dedicated online service;
• investigating/overseeing – verifying whether the operational conditions under which companies implement their processing activities of personal data comply with the Data Protection Regulation; and
• enforcement – having the prerogative to impose wide-ranging sanctions.

CNIL agents can access any corporate premises and request all documents and any useful information or proof that is necessary for the exercise of their duties. In the case of investigation, secrecy can only be invoked under very limited circumstances (such as information covered by attorney-client privilege). In addition, CNIL agents are now entitled to use fake identities, subject to certain conditions, for the purposes of conducting online inspections.

The Chair of the CNIL is vested with limited enforcement powers, allowing them to:

• inform data controllers or data processors that their processing of personal data is in violation of the Data Protection Regulation;
• notify data controllers or data processors that they must comply before a given deadline (usually three months, potentially renewed for the same period); and
• refer the case to the enforcement committee of the CNIL.

The enforcement committee of the CNIL is vested with greater powers, and has the authority to take the following decisions/measures after a procedure that guarantees the right to be heard for an entity against which enforcement action is sought:

• a warning;
• an injunction to ensure the compliance of the processing of personal data, under penalty if necessary;
• a cease-and-desist injunction with respect to the data processing;
• the suspension of cross-border data flows;
• a withdrawal of the certification given by the CNIL;
• an order to satisfy the requests from data subjects, under penalty if necessary; and
• a fine up of up to EUR20 million or 4% of the total annual global turnover (such a fine can be published in the press at the cost of the breaching entity). The risk of exposure to substantial financial penalties remains moderate as it would require successive complaints to the CNIL from data subjects over a short period of time.

A new simplified sanctions procedure has been created for cases of lower complexity. Specifically, the simplified procedure consists of a warning, a compliance order with a maximum fine of EUR100 per day for non-compliance, and a fine of EUR20,000, which could be exercised by the President of the CNIL's Restricted Committee (or one of its appointed members).

Any sanction can be appealed to the French Supreme Administrative Court within two months of the notification or the publication of the CNIL’s decision.

In cases of immediate and serious violations of fundamental rights and freedoms, the CNIL chair shall refer a request to the competent jurisdiction to order any measure necessary for the security of data. It may also report any violations of the French Data Protection Act to the public prosecutor.

Data Privacy

The following major legislative reforms in the field of personal data protection are expected in the near future:

• the Regulation of the European Parliament and of the Council concerning the respect for private life and the protection of personal data in electronic communications and repealing Directive 2002/58/EC (Regulation on Privacy and Electronic Communications);
• the Regulation of the European Parliament and of the Council on harmonised rules on fair access to and use of data (Data Act);
• the Regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) and amending certain union legislative acts; and
• the Regulation of the European Parliament and of the Council on the European Health Data Space (HDS).