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    On October 9, 2018, the French National Assembly adopted at first reading, the draft PACTE law (Action Plan for Business Growth and Transformation).

    Among the many measures in the draft law, some are aimed at reinforcing the development of a social and solidarity-based economy.

    1- Simplifying conditions of access to “Social and Solidarity-based Enterprise” (ESUS) accreditation

    Since July 1, 2015, companies can receive a “Social and Solidarity-based Enterprise” (ESUS) accreditation for a five-year period (or a two-year period for companies under 3 years old).

    To be eligible for the ESUS accreditation, a company must meet the following criteria:

    • – Pursue “social benefit” as its main objective (provide support to vulnerable people, contribute to combatting exclusion or inequality, take part in sustainable development, energy transition or international solidarity);
    • – Prove that the burden generated by the company’s social benefit objective has a significant impact on its profit and loss account or its financial profitability;
    • – Adhere to a compensation policy meeting two requirements: the average of the compensations paid, including bonuses, to the 5 highest-paid employees or managers must not exceed a yearly limit capped at 7 times the monthly minimum wage (SMIC) and the salary for the highest-paid employee must not exceed a yearly limit capped at 10 times the minimum wage (SMIC);
    • – Equity securities issued by the company cannot be traded on financial markets.

    For ESUS-eligible entities, the measure is aimed at facilitating access to equity capital funding, either through tax breaks (such as the IR-PME scheme), which individuals investing in such entities benefit from, or through the obligation made to funds fiscally encouraged to meet certain investment quotas in the entities concerned.

    Article 29 of the draft PACTE law proposes to introduce the following improvements to the ESUS accreditation measure:

    • – Facilitate access to accreditation, by clarifying the definition of “social benefit” in particular for activities related to ecological transition, cultural promotion and national solidarity;
    • – Simplify the modalities for assessing the impact of social benefit activities on the business model of the companies applying for accreditation;
    • – Eliminate the obligation to include the wage caps in the company statutes, and standardise the application of those caps to all eligible companies.

    The possibility of setting up an online accreditation procedure is also being discussed.

    2- Taking into account a company’s social and environmental aspects

    Article 61 of the draft PACTE law proposes to modify Articles 1833 and 1835 of the Civil Code as follows:

    • – Article 1833 with: “The company shall be managed in its social interest and taking the social and environmental aspects of its activity into consideration.”
    • – Article 1835 with: “The articles of association may specify the purpose, consisting of the principles held by the company and in observance of which it intends to allocate resources for the conduct of its activity.”

    The modifications are aimed at contributing to a much stronger integration of environmental law in the company governance, by highlighting the activity of companies with a genuine commitment to sustainable development.

    Nevertheless, the question arises as to what extent a lack of knowledge of these obligations will create a risk of incurring liability for the company directors concerned.

    The draft PACTE law will be examined by a Senate committee as from January 2019. We will keep you informed of the conditions for the effective implementation of the new measures.

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    Decision by the Social Chamber of the Court of Cassation dated June 21, 2018
    (Cass. Civ 2e. 21 juin 2018, n°17-15.984)

    As per a June 21, 2018 decision, the Court of Cassation answered the following question: Is a skiing accident during a company seminar considered a work-related accident?

    Company seminars bringing together employees often give rise to various activities, in particular sports.

    In this instance, an employee was attending a seminar in the mountains. A day of free time for relaxation was planned, during which the employees could do whatever activities they wanted to. This particular employee chose to go skiing and consequently bought a ski pass for the ski lifts since the employer did not cover the costs for any of the activities. As the employee was skiing down a slope, she was the victim of an accident. She considered that it was a work-related accident since it had occurred during the seminar, however the health care insurance fund (Caisse Primaire d’Assurance Maladie – CPAM) disputed that claim.

    Yet, The Court of Cassation confirmed the Court of Appeal decision, ruling that employees participating in that day remained subject to the employer’s authority as the latter was announced in the seminar schedule, paid as working time and could therefore not be considered as a day off. As such, the skiing accident, which occurred within the free time designated for relaxation, must be considered as a work-related accident.

    This legal precedent settles various Courts of Appeal hesitations regarding similar cases of accidents during company seminars. Indeed, certain Courts of Appeal have indeed judged that an accident in such circumstances fell within the employee’s private life.

    Thus, with this ruling, the Court of Cassation has indicated that during a company seminar, by nature paid, employees which are paid remain subject to their employer’s authority even though they may have free time for relaxation, unrelated to their professional activity. Any accident that might occur during the seminar is considered a work-related accident.

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    Within the framework of the next finance and social security Bill , several reforms are bound to have an impact on taxes in France for non-residents.

    Overview of the main measures foreseen:

    Exemption of capital gains tax on sale of main residence after departure abroad

    As of today, a tax resident in France who sells his main residence is not taxed on the capital gain made on that sale.

    However, a non-resident who sells the property that was his main residence before his departure abroad is not exempt from that capital gains tax but can only benefit, under certain conditions, from a one-time tax allowance of €150,000.

    The draft Finance Bill for 2019 (PLF 2019) foresees an alignment between the tax systems applicable to residents and non-residents regarding capital gains made on their main residence.

    Consequently, a non-resident who sells the property that was his main residence in France at the time of his departure abroad would not be taxed on the capital gains made, subject to the dual condition that:
        – The sale was concluded at the latest on December 31st of the year following the year of the tax residence transfer (to another country); and
        – The property was not placed at the disposal of a third party, whether for a fee or free of charge, between the transfer of residence and the sale.

    Possible exemption of social levies on capital income

    Currently, in France, non-residents are subject to social levies (including, in particular, CSG, CRDS and solidarity levy), at the rate of 17.2% on their French-earned income from property and capital gains on real estate.

    The draft finance bill on social security for 2019 provides that the people affiliated with a mandatory social security system in another member state of the European Economic Area (EEA) or Switzerland will not be subject to CSG and CRDS in France on capital income but the solidarity levy, whose rate would be increased to 7.5 %, would remain due.

    Nevertheless, that exemption would not concern people having established residence outside of the EEA or Switzerland, and who would therefore remain subject to social charges in France on capital income.

    Various changes in tax modalities of France-sourced income

    The PLF 2019 provides for various measures aimed at bringing the tax system on non-resident income closer in line with the system applied to tax residents in France.

    First of all, French-earned salaries, pensions and life annuity rents paid to non-residents are currently subject to a specific deduction at source, partially discharging tax on income, as specified in Article 182A of the French Tax Code (CGI).

    As from January 1, 2020, that deduction at source would be eliminated and replaced by a flat, non-discharging deduction at source calculated by applying the tax rate by default used for the withholding tax on resident income.

    In addition, starting with taxes on income earned in 2018, the minimum tax rate applicable to France-sourced income of non-residents will rise:
        – From 20% to 30% in Metropolitan France; and
        – From 14.4% to 25% for income whose source is in the French Overseas Departments (DOM).

    Of course, taxpayers can still request the application of the average tax rate to their France-sourced income, resulting from the application of the progressive tax brackets to the whole of their foreign- and France-sourced income, if it is lower than the minimum rate mentioned above.

    Lastly, the PLF 2019 provides that, starting with taxes on 2018 income, non-residents can deduct the alimony paid out, on condition that it is taxed in France and that it has not already entitled the taxpayer to a tax break in his Country of residence.

    To be continued when voted on in late December…

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    Above and beyond potential protection by Copyrights, all graphics or designs can be protected by Design rights.

    Any reproduction, without consent, of graphics or designs protected by design rights constitutes, as a matter of principle, an act of counterfeiting. Consequently, caution is required.

    In two rulings on September 27, 2017 opposing the companies Nintendo and BigBen Interactive GmbH / BigBen Interactive SA, the European Court of Justice (CJEU) nevertheless laid down a strictly-regulated exception to the protection of designs.

    The company Nintendo filed a counterfeit claim against the video game accessory manufacturer, BigBen Interactive, who was reproducing, for the purpose of selling its products, images of Nintendo console accessories protected by design rights.

    The Court of Justice took a chunk out of rights holders’ monopoly by judging that a design could lawfully be reproduced without prior consent from the holder if that reproduction was an illustration.

    The images were considered illustrative insofar as they allowed to demonstrate the joint use of the BigBen Interactive and Nintendo products to consumers.

    Nonetheless, this lawful reproduction is subject to conditions.

    The Court of Justice requires that the reproduction of the design be made within the framework of loyal competition and that it not threaten the economic balance of its holder. Moreover, it must be possible to identify the holder of the design reproduced.

    Lastly, caution is required since, although the Court of Justice’s interpretation seems to reduce the scope of protection for Community Designs, the exception is nonetheless subject to conditions and may be limited by potential cumulative protection by Copyright.

    European Court of Justice, September 27, 2017, C24/16 and C-25/16, EU:C:2017:724, Nintendo / BigBen Interactive GmbH and BigBen Interactive SA.

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    On October 9, 2018, the French National Assembly adopted, at first reading, the PACTE bill (Action Plan for Business Growth and Transformation).

    Among the many measures in the bill, whose objective is to lower the obligations that weigh on companies, Article 55 is aimed at reinforcing the framework of foreign investments in France.

    The current regime

    Foreign investments in France are free as a matter of principle (Article L.151-1 of the Monetary and Financial Code). Nevertheless, investments in certain sectors, considered strategic, are subject to prior authorisation from the Minister of Economy (Article L.151-3 of the Monetary and Financial Code).

    The authorisation procedure, established in 2005 and strengthened in 2014, currently concerns investments that foreigners wish to make in France and which might infringe upon public order, public security or the interests of national defence.

    Initially, the list of sectors was narrow: gambling, private security, counterterrorism, equipment designed for wiretapping, IT security, companies entrusted with national defence secrets, weapons trade, companies dealing with the Defence Ministry.

    However, in 2014, the list of sectors concerned was extended to also target energy and water supply, transportation and electronic communications networks, vital infrastructures and facilities as defined by the Defence Code, as well as the public health sector.

    In the abovementioned sectors, a foreign investor must make a request to the Minister of Economy for an authorisation to invest. Once the audit has been made, the Minister can: (i) authorise the investment, (ii) deny the investment, if the investor is likely to commit a series of offences or if the investment risks infringing on national interests, or (iii) authorise the investment subject to certain conditions aimed at ensuring that the planned investment does not infringe on national interests.

    In the event that the investor does not comply with the Minister’s decision, the latter may request the investor “not to follow through with the operation, to modify it or to re-establish the former situation at the investor’s expense“.

    If that demand is not complied with, financial sanctions may be imposed, the amount of which may go up to “twice the amount of the irregular investment“.

    The PACTE bill

    The two main changes foreseen by the PACTE bill are as follows:

    • 1. Extension of the business sectors concerned so as to better protect promising sectors. The list of activities would thus be extended to semi-conductors, the space industry, drones, and if related to national security, artificial intelligence, cybersecurity, robotics and mass data storage.
    • 2. Stronger sanctions. The Minister will have a wider, more calibrated range of sanctions since he will be able, in the event of non-compliance with his decision and the conditions imposed on the investment, to define additional conditions not provided in the initial agreement or even order the investor to honour his commitments, subject to penalties. The Minister will also be able to take protective measures such as the suspension of voting rights or the investor’s right to receive dividends, or he can appoint an agent commissioned to ensure the protection of national interests within the company.

      The regime of financial sanctions will also be modified. The fine determined by the Minister will not be able to exceed the highest of the following amounts: twice the amount of the irregular investment, 10% of the target company’s yearly turnover, €1 million for individuals and €5 million for legal entities.

    The PACTE bill will be examined by a Senate committee as from January 2019. We will keep you informed of the conditions for the effective implementation of the new measures having a direct impact on foreign take-over operations of a French company.

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    Decision by the Social Chamber of the French Supreme Court dated September 12, 2018
    (Cass. Soc. 12 September 2018, n° 16-11.690)

    As per a September 12, 2018 decision, the French Supreme Court (called “Cour de cassation”) answered the following question: Can an employee who denigrates his/her employer in a limited and closed group on Facebook be dismissed for gross misconduct ?

    In the case at hand, an employee created a closed group on Facebook entitled “Extermination des Directrices chieuses” (Extermination of Crappy Directors) in which the employee made insulting and threatening remarks about her immediate supervisor. Upon becoming aware of the remarks, the employer dismissed the employee for gross misconduct.

    The Supreme Court confirmed the Court of Appeal decision, ruling that the dismissal was without good and sufficient cause, and therefore unjustified, as the remarks had been posted in a closed group to a limited number of people. In fact, the group had been set up by the employee and could only be accessed by people she had authorised, namely 14 people. As such, the Supreme Court ruled that it was a private conversation.

    The Supreme Court clearly made a distinction between public remarks (open groups, large number of people) and private remarks (closed group, limited number of people) to justify a dismissal for gross misconduct.

    This decision deserves credit for dispelling certain doubts that existed before, since this is the first time the Supreme Court has ruled on the legitimate character of a disciplinary dismissal for a cause such as this one. However, it gives rise to other questions.

    Indeed, as the Supreme Court retained two cumulative conditions, both the closed group and the limited number of people, it is logical to wonder if the decision would have been the same if the closed group had been made up of a large number of members or if the group members had been the company’s employees.

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    For the past several months, French legislators (deputies) have sought to implement a tax break on transfers by gift or inheritance.

    To this end, last May, legislators introduced a bill mainly aimed at increasing the tax allowance beyond which an inheritance or a gift is taxed, raising it from €100,000 to €159,325.

    Those legislators also proposed to apply tax allowances every 10 years instead of every 15 years as is currently the case in effect.

    Although the bill has not been voted on, it now seems to have little chance of being passed.

    In answering two ministerial questions raised, the French Government expressed its intention of not changing those tax rules.

    As per the increase of the current €100,000-allowance, the Ministry of Economy and Finance considers that the amount is “very close to the median net assets of all households, which, according to the INSEE, reached €113,900 per household in early 2015” and “that, on its own, it results in a very large majority of transfers being tax exempt“.

    As for the time period related to past gifts, the Ministry considers that the current time period is adequate, and as a reminder points out that “contrary to the sentiment expressed by (public) opinion, over three-fourths of inheritances are exempt from the payment of gift or inheritance tax.

    It is therefore in the best interest of taxpayers with a substantial estate to plan the transfer of their assets to their descendants in advance.

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    As summer ends, now is as good a time as any to be reminded of an indispensable precautionary measure that should be taken by all entrepreneurs!

    Unlike in the American system, under French law, your company is not automatically the owner of the creations (such as artwork, design or photo) that you order from and which are developed by external service providers, or those developed in-house by your company’s own employees.

    In order to be allowed to use those creations freely, within the framework of your employment contracts or your service contracts concluded with external service providers, your company must make sure to include a transfer of rights clause adapted to your business sector, scrupulously complying with the provisions set forth in the French Code of Intellectual Property. If such a transfer has not been set up – or in the event of a poorly prepared transfer – the property rights regarding the creation will remain in the ownership of the creator who can object to the said creation being used by your company, in any form whatsoever.

    That negligence is not without consequences for your company, whose entire business could, in extreme cases, be jeopardised.

    The absence of a transfer of invention rights to your company might also delay action by certain investors or buyers, or even cause them to reconsider their planned acquisition or investment.

    As a result, it would be especially unfortunate to be confronted with this complication when, in fact, it can be avoided beforehand, by making simple, albeit specific and adapted, arrangements in advance.

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    On June 21, 2018, the French Senate finally adopted the Bill aimed at transposing European Directive 2016/943 on trade secrets adopted by the European Parliament in June 2016 and introducing a new Title V in the French Commercial Code entitled “Protection of Trade Secrets”.

    The text in the reform is aimed at protecting company know-how and information against industrial espionage and unfair competition, regardless of their size or field of business.

    Companies should adopt good practices in compliance with these new regulations as of now:

    1. Information covered by the protection

    Trade secrets deal with information of various types such as technical, commercial, accounting and financial, or strategic data.

    In order to be considered a trade secret and be covered by the new protection regime, information must meet the following three requirements. It must:

    – be secret, i.e. not readily accessible by the public,
    – have commercial value,
    – be the subject of reasonable protective measures, such as pre-contractual or contractual measures or personnel awareness measures.

    2. Acts considered as an infringement of trade secrets

    If the abovementioned prerequisites are all met, the law makes it possible to object to access, use and disclosure of the protected information as well as punish the perpetrator whose conduct was unfair or who must have been aware, under the circumstances, of the illicit character of his/her act(s).

    The perpetrator having committed acts constituting direct infringement of the trade secret shall be civilly liable according to the terms of Article L. 152-1 of the Bill and may be sentenced to pay damages if the infringement of the information occurred without the legitimate holder’s consent.

    With regard to any person who imported, exported, produced or marketed products reproducing secret know-how, the reform provides stronger protection compared to the current regime since it makes it possible, in particular, to punish that person even if s/he did not personally participate in the misappropriation of the know-how, provided it can be proven that s/he knew, or ought to have known, of the fraudulent origin of the information. To that end, it will be possible to send a letter of warning to the perpetrator beforehand “informing of potential infringement”.

    3. Additional exceptions to the protection

    In view of the criticism targeting the European Directive, regarding the violation of the right to freedom of expression, the national legislator decided to extend the situations in which trade secrecy cannot be raised.

    While, in accordance with the European Directive, Article L. 151-7 of the Bill provides that trade secrecy cannot be raised when “acquisition, use or disclosure of the secret is required or allowed by European Union or national law”, Article L. 151-8 of the Bill adds an additional exception for situations in which acquisition of the information took place “within the framework of the exercise by employees or their representatives of their right to information and consultation”.

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    Decision by the Social Chamber of the Court of Cassation dated May 3, 2018 (Cass. Soc. 3 mai 2018, n°17-11.048).

    While it is customary for an employer to request certain personal documents for operational purposes, there is nevertheless sensitive information in an employee’s private life that an employer is not allowed to request.

    Requesting documents pertaining to an employee’s personal life does not necessarily characterize infringement on the right to privacy in their private and family life. That is the conclusion that should be drawn further to a ruling by the Social Chamber of the Court of Cassation dated May 3, 2018 (Cass. Soc. 3 mai 2018, n°17-11.048).

    To justify her claim for damages, an employee referred to a clause in her employment contract requiring that she informs her employer of any changes occurring to her name (marital status), family situation, or place of residence.

    The question put to the Court of Cassation was therefore to know whether the employer could, based on that clause, lawfully collect such information.

    The Court of Cassation judges answered in the affirmative, even though the laws on the matter are clearly established and protect employees from excessive interference by the employer in the employee’s private life (*). Indeed, the judges considered that the Court of Appeal had validly held that “the information requested was necessary in order for the employer to assure the employee’s rights” and that, as such, the litigious clause could not constitute a breach of the employee’s fundamental rights and freedoms.

    By means of the present ruling, the Social Chamber reiterated the scope of the notion of ‘interference in an employee’s privacy’ and rejected such a condition when the request for personal information is in the employee’s interest.

    (*) Article 9 of the French Civil Code, Article 8 of the European Convention on Human Rights, and Article L1121-1 of the French Labour Law.

© Schmidt Brunet Litzler