PHILLIPS GIRAUD
NAUD & SWARTZ


    
49, boulevard de Courcelles
    75008 PARIS

    Téléphone : 33 (0)1 44 29 23 23
    Télécopieur (Fax) : 33 (0)1 42 27 90 85




Branch or Subsidiary in France

Advantages and Disadvantages



Legal nature of branch / subsidiary

A branch is an office through which a foreign company engages in business in France. The branch has no independent legal personality (although it is treated in some respects as though it were independent for tax and foreign financial relations purposes).  It follows that the foreign company is directly and fully responsible for all liabilities and undertakings of its French branch office.

The subsidiary company, on the other hand, is a separate legal entity created under and governed by French law.  It is an independent entity from the foreign parent company shareholder and, in principle, shareholders have no liability for the debts or undertakings of the subsidiary, the recourse of the subsidiary's creditors or co-contracting parties being limited to the assets of the subsidiary.

As a practical matter, even where group financial standing and corporate policy effectively excludes the possibility of a subsidiary's bankruptcy, the existence of limited liability at the subsidiary level - involving the theoretical but legal possibility of leaving the subsidiary's creditors, employees, tax office, etc. with no recourse beyond the subsidiary's assets - may permit a favorable negotiated solution which would not be possible where there exists no legal possibility of limiting liability to the French subsidiary company's assets.

French law permits ensuring essentially the same measure of parent company control over a subsidiary as that of head office control over a branch office.

The subsidiary offers a somewhat greater measure of flexibility in the sense that, as opposed to the branch office, it may issue or transfer shares to third parties (partners, investors, venture capitalists, managers, employees or other group companies within the framework of a reorganization or joint venture).  It may also   issue bonds or shares to the public and obtain quotation on a stock exchange.

On the other hand, the subsidiary form renders applicable a law entitling employees to profit participation when the company's activities reach certain levels.

Psychological considerations

Despite the generally greater security that a branch form accords to creditors, by reason of the direct legal liability of the foreign company, in practice local government administrations, banks, suppliers and customers frequently seem to feel more comfortable dealing with a locally incorporated company (although they may nonetheless request the foreign parent's guarantee).


Foreign exchange control considerations

Foreign exchange controls have been abolished in France and it is virtually inconceivable, in light of France's membership in the European Union and adoption of the Euro currency, that such controls would be reinstated.


Foreign investment control considerations

At the present time, the creation of both branch office and subsidiary require neither advance declaration nor approval. Only the acquisition of certain existing business activity exercised in France requires advance declaration and may, in limited cases, be the object of a government veto.  See the Phillips Giraud  Naud & Swartz Firm Memorandum "Foreign Direct Investment in France".


Commercial lease law considerations

The lease of commercial premises in France confers upon the lessee a kind of property right in the lease, in the form of a renewal right which cannot be contractually excluded.   In case of refusal by the landlord to renew the lease at its expiration, the lessee is entitled to an indemnity representing the prejudice caused to it by the non-renewal.

The law provides that this "renewal right", which is one of the key elements conferring a monetary value upon commercial lease rights, does not benefit non-French companies (other than companies established under the laws of a European Economic Area member state) unless there exist reciprocal rights in the foreign country in question. Since relatively few countries have comparable commercial lease legislation, branch offices of U.S. or Japanese companies, for example, do not benefit from the renewal right.

In certain cases, for example in the case of prime location retail sales premises, the monetary loss to which the absence of the lease renewal right could give rise would dictate the use of a subsidiary rather than a branch.

 


Tax considerations

Both branch and subsidiary are subject to French company tax on their net profits, the rules applicable being essentially the same.


There remain, however, several differences:

-     a branch office is taxable on income effectively connected with its activities (no tax being due on unrelated French source income of the foreign company); a subsidiary is taxable on its entire worldwide income except that which is effectively connected with a branch office outside France.   Nothing, however, prevents the foreign company from directly engaging in transactions in France in which the subsidiary or branch is not involved;

-     a branch office is not permitted to deduct royalties paid to its foreign head office or interest on loans from its foreign head office; head office source financing may, however, transit through another group company or, in the case of financing, through a bank, in which case the relevant royalties or interest may be deducted; in the case of a subsidiary, there is a limit upon the deductibility of interest paid to the parent company based upon the ratio of loans to capital; indirect loans may also escape from these limits;

-    if the losses of a subsidiary company exceed one half of its capital, certain measures must be taken to make third parties aware of that fact and to remedy the situation within a two-year period.  No such obligation exists for a branch office.

-     French source income booked by a foreign head office must be included in the French branch's taxable income if such income is "effectively connected with" the branch office's operations.

-     a branch may deduct a reasonable allocation of head office administration expenses.  In the case of a subsidiary, a deduction is only permitted for clearly identified administrative services invoiced by the parent or other group company;

-    no value-added tax is due upon services invoiced between a head office and a branch; since companies outside the European Union cannot deduct VAT paid unless they export goods to the European Union, there are certain cases in which using a branch rather than a subsidiary to render services would effectively reduce the amount payable by the foreign company.

-    depending upon the rules for fiscal consolidation applicable in the country of the head office, branch profits may be taxable in such country and branch losses may be deducted from head office profits; this factor sometimes leads to choice of structure where losses are initially anticipated.

-    the fact that the head office and branch are the same legal person permits the French tax administration to require submission of the head office accounts and other information (and thus be in a better position to challenge allocations or interoffice transactions);

-    a subsidiary benefits from the provisions of the tax treaties existing between France and other countries, this is generally not the case for a branch office (which in some cases also may not benefit from the provisions of the treaties concluded by the country in which its head office is located);

-     there exists a 25% "distribution tax" on branch after-tax profits; this tax is reduced or eliminated by most tax conventions concluded by France; when due, the  distribution tax is collected annually together with tax on corporate income, it can be refunded upon submission of proof that the foreign company paid no dividends relating to the year in question;

-    in the case of non-reimbursable funds made available by a parent to a subsidiary other than through a capital increase (often called subsidies), the amounts in question are treated as taxable income of the subsidiary and are, in addition, subject to value added tax at a 19.6 % rate if the subsidy is considered "commercial" as opposed to "financial" in nature.


Concerning transformation of branch into subsidiary (and vice-versa)

The contribution in kind or transfer of the assets and activities of a French branch of a foreign company to a French subsidiary of that company may give rise to both a transaction tax (droit d'enregistrement) and capital gains tax, the tax basis for which may include a goodwill element based upon the branch's turnover.

In certain cases, a tax-free contribution may be possible; however, it may, depending upon the circumstances, require a tax administration ruling and effective limitations upon the right to transfer the subsidiary's shares during a three-year period.

The transformation of a subsidiary into a branch office of a foreign company can also be envisaged within the framework of a European reorganization.  Once again, there may be French tax consequences, and a ruling may be required in order to avoid taxation of capital gains.

The transformations may also give rise to tax consequences in other countries whose entities participate therein.  

If the likelihood of a later transformation is anticipated at the time of the initial investment, the potential tax consequences of transformation should be examined, particularly if it is expected that the branch or subsidiary's business will become highly profitable.


Cost considerations

Although filing fees are approximately the same, the costs of establishing a subsidiary will be somewhat higher by reason of the additional paperwork represented by the preparation of articles of incorporation, etc.  However, registering a branch requires a French translation of the company's Articles of Incorporation, and the difference in establishment costs remains relatively modest.

There is also a minimum capital requirement in the case of most subsidiaries, while no minimum amount need be invested in a branch office.  The minimum capital an S.A., S.A.S. or S.A.S.U is € 37,000, of which at least 50% must be paid up at the time of incorporation.  Since August 1, 2003 there is no longer a minimum capital for an SARL or EURL; however, at least 20% of the capital must be fully paid up at the time of incorporation, and the Supreme Court has held that shareholders may be held personally liable if the capital is manifestly insufficient for the intended activity.

Operationally, the branch does not require a statutory auditor (required by an S.A., S.A.S. or S.A.S.U. and, in limited cases, by an S.A.R.L. or E.U.R.L.); however, required accounting services will otherwise be comparable (except to the extent allocations of head office administrative expenses must be prepared and later defended).  As opposed to the subsidiary, no annual legal and registration fees are required (in connection with shareholder and board meetings) other than upon the occasion of changes of the branch manager, branch office, etc.

Annual branch filing requirements are somewhat more onerous since they bear upon both the foreign company's accounts and the branch's accounts.

On net balance, the branch is somewhat less expensive. The amounts involved however, are such that they would not normally control the decision as to the  structure to be employed.

European Single Market aspects

In theory, the single "borderless" market introduced in 1993 and the Euro currency introduced in 1999 should make the traditional country by country subsidiary formula less attractive than a single "European" company operating throughout the Community, or several companies each having responsibility for defined regions (not necessarily corresponding to national borders).  Various groups have commenced reorganizations along these lines, in some cases transforming their subsidiaries into branches.

In practice, it will probably take time for French public opinion and practice to fully assimilate the idea of "European" as opposed to "French" companies; although the European Union has recently adopted a Directive which, when implemented, will result in a European Company form which may be incorporated in any member state and which will no doubt accelerate the process.  Language and cultural differences, will remain in existence for some time to come. It is therefore possible that the existence of local sales or service provider companies will, at least for the foreseeable future, continue to prove commercially more effective.  Even if this is the case, it of course will not prevent logistics functions such as importing, assembly, warehousing, after sales service and administrative services from being consolidated and regrouped "behind the scenes".


Conclusions

There exist no serious obstacles to being present in the French market through either the branch or the subsidiary form of organization.  Both forms are employed in practice, and although the subsidiary form remains, for the moment, more common, the use of branches is increasing.

Unless relevant tax or cost factors lead to a different conclusion in a specific case, it seems likely that, at this time, the advantages of the local subsidiary formula will generally continue to outweigh the disadvantages.

NOTE FOR U.S. INVESTORS

Use of a E.U.R.L or S.A.S.U. forms of company will permit a U.S. corporate shareholder to elect that the French subsidiary be treated as a branch office for U.S. Federal Corporation Tax purposes under the Internal Revenue Service gcheck-the-boxh regulations.  Such election in no way affects French tax treatment; however, it permits combining limited liability in France with taxation in the U.S. as a foreign branch of a U.S. company.  Use of the S.A.R.L or S.A.S. forms of company permit an election that the French companies be treated as partnerships for U.S. Federal Tax purposes.  No such election is possible for the S.A. company form.    

September 1, 2003

This Memorandum is not a legal opinion.
It reflects published or known laws, regulations and practices as of the date set forth.
It does not seek to treat all possible hypotheses nor pretend
to furnish advice concerning concrete fact situations