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    On April 11, 2019, the Law “for the growth and transformation of enterprises” (PACTE Law) was adopted by the French Parliament.

    With regard to commercial companies’ requirement to appoint a statutory auditor, three major considerations deserve attention:

    1/ The thresholds that trigger the requirement for commercial companies to appoint a statutory auditor have changed

    The PACTE Law specifies and standardizes the thresholds beyond which the appointment of a tatutory uditor is mandatory for all commercial companies.

    Article 20 of the PACTE Law provides that commercial companies (which include SA, SCA, SAS, SAS, SARL, SNC, SCS) are required to appoint a statutory auditor if they exceed two out of three thresholds which will be defined in a forthcoming French decree and are expected to be modelled on the European thresholds for statutory audits, i.e.:

        4 million Euro in gross assets (at the close of the financial year)

        8 million Euro in turnover (at the close of the financial year)

        50 employees (average number of employees during the financial year)

    2/ The adoption of thresholds that trigger the requirement to appoint a statutory auditor for commercial companies that control or are controlled by other companies

    For any parent company, within the meaning of Article L. 233-3 of the French Commercial Code, the obligation to appoint a statutory auditor is stipulated when the group it forms with the company or companies it controls exceeds the thresholds set forth in the reform applicable to all commercial companies (see 1, above).

    For subsidiaries held directly or indirectly by one of the companies mentioned above, the obligation to appoint a statutory auditor is required for any “significant” subsidiary, i.e., one that exceeds thresholds that will be set by decree on the basis of three criteria: gross assets, turnover excluding tax or average number of employees employed during the financial year.

    3/ The reform comes into effect beginning in 2019

    The National Assembly rejected the three-year transitional period put forward by the Senate and stipulated that the measure would become effective as from the first financial year following the publication of the forthcoming decree on increased audit thresholds and by September 1, 2019 at the latest.

    With regard to the statutory auditors’ terms of office which expire after the Annual Shareholders’ Meeting or the relevant body approving the financial statements for the sixth financial year, for financial years ending on or after 31 December 2018, companies will be exempt from the obligation to appoint a statutory auditor provided that:

    – the sixth financial year closed no more than six months before the decree on thresholds became effective;
    – at the time of the current financial year-end, the company has not exceeded two of the three future thresholds;
    – the Shareholder Meeting and appointment of a statutory auditor will not have taken place before Article 20 comes into effect (on or before 1 September 2019).

    An exception has been granted to overseas departments where the effective date of the reform has been postponed until 2021.

    If the current terms of office of the statutory auditors are not immediately affected by the reform and continue until they expire – with the exception of early resignations – companies that approve the term of office of their statutory auditors after the entry into force of Article 20 of the PACTE Law and the decree on thresholds may apply the new thresholds in order to determine whether or not they should renew or appoint a statutory auditor.

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    After examining a taxpayer’s personal tax situation, the tax administration considered that the transfer of securities at a derisory price, made between members of the same family, constituted a disguised gift.

    For that purpose, the Court implemented proceedings for abuse of process in order for the transfers disguised as gifts to be reclassified and to apply the transfer tax on gifts and the corresponding penalties.

    For the Committee on tax law abuse, called on for the case, the operation revealed, contrary to what the tax administration claimed, an indirect gift and not a disguised gift.

    In a March 18, 2019 decision, the Paris Court of Appeal ended up following the reasoning of the tax administration by qualifying the operation at issue as a disguised gift.

    First of all, the Court indicated that “a disguised gift is one that is done under the guise of a contract in return for payment. Although from a legal point of view, the operation is legitimate, the administration has the right to establish the genuine nature of the deed. Among the circumstances making it possible to characterize a disguised gift is the stipulation of a derisory price.

    The Court then considered that “evaluating the securities at a symbolic value, unrelated to the real value of the property, which actually corresponds to a sale at an unusually low price, establishes the gratuitous nature of the agreements and the absence of any counterpart to the deed.

    Although, in this instance, it was an exaggerated case of abuse of process, given the fictional nature of the deed, this legal precedent and the creation of a “mini abuse of tax law” by the most recent Finance law remind taxpayers of the special attention paid by the tax administration to operations of asset restructuring, as well as the necessity for those taxpayers to seek tax advice prior to any restructuring, allowing them to structure their operations as best as possible.

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    To prevent potential conflicts of interest, the regulated agreements procedure currently provided for in the French Commercial Code for public limited companies (sociétés anonymes) subjects agreements entered into between the company and one of its directors or main shareholders to prior authorisation from the Board of Directors, then to approval by the shareholders. The agreements for which one of those parties is indirectly concerned are subject to the same procedure (Article L. 225-38 of the French Commercial Code).

    Article L. 225-40 of the French Commercial Code provides that the “person interested” by the agreement cannot participate in the vote, without however indicating whether that interest can be indirect.

    Whereas the aim of this procedure is to comprehend agreements that do not reveal organic links between the contracting parties but that are nevertheless representatives of a conflict of interest hidden by contractual or company arrangements.

    Article 66 of the PACTE law intends to remove the ambiguity, by explicitly targeting both the person directly concerned and the one indirectly concerned. No definition of indirect interest is provided although the concept remains difficult to grasp.

    The article also proposes that the shares held by the person concerned, directly or indirectly, be taken into account for calculating the quorum when the general assembly’s decision is made dealing with the approval of the agreement in order to, in particular, facilitate making that decision.

    The same article plans to re-establish the right (eliminated in 2011) for any shareholder to request a list of current agreements concluded by the company under normal conditions (Article L. 225-39 of the French Commercial Code).

    Lastly, certain provisions are foreseen solely for listed companies:

    – The company governance report must mention the agreements concluded between the company representatives of the public limited company (SA) or limited partnership with shares (SCA) and any controlled company within the meaning of Article L. 233-3 of the French Commercial Code (modification of Article L. 225-37-4 of the French Commercial Code).

    – The company website must include the publication of certain information (list to be determined by order in French Council of State) concerning the regulated agreements at the latest at the time the said agreements are entered into (creation of Article L. 225-40-2 of the French Commercial Code).

    Although the changes foreseen have commendable objectives aimed at reinforcing control and transparency within companies and meeting the need of transposing Directive 2017/828/EU “Shareholders Rights II”, care should be taken not to overly complicate interactions used in the business world, where legal security and rapidity are essential.

    The Pacte law is currently under examination. We will inform you of the conditions for the effective implementation of these new provisions with a direct impact on the regulated agreements procedure currently provided for in the French Commercial Code.

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    In principle, partnerships such as general partnerships (société en nom collectif), limited partnerships (société en commandite simple), civil partnerships or limited liability companies whose single member is an individual (EURL) are not subject to Corporate Income Tax (CIT).

    Nevertheless, the abovementioned companies may opt for payment of the CIT.

    To be valid, the option must be filed with the tax authorities no later than the end of the 3rd month of the financial year for which the company wishes to be subject to the CIT for the 1st time.

    Such option, once exercised, was, until now, irrevocable.

    For the company financial years ending as of December 31, 2018, the 2019 Finance Law creates an exception to this principle of irrevocability.

    From now on, companies having opted for CIT liability will have the right to revoke that liability at the latest in the 5th financial year following the year during which the option was exercised.

    To be deemed valid, the revocation must be filed with the tax authorities before the end of the month preceding the payment deadline for the first instalment of the corporate tax for the fifth financial year.

    If no revocation is filed within that time period, the option for the CIT shall then become irrevocable.

    The aim sought by lawmakers is to allow companies, which realize in retrospect that the regime is not the one best suited to their needs, not to be penalized by giving them the right to reconsider their decision.

    In terms of taxes, revoking the option for CIT is considered as a cessation of business, which, in principle, leads to the immediate taxation of operating profits and tax-deferred profits made and not taxed, as well as any provisions or capital gains for which taxation had been deferred.

    However, in the absence of a new legal entity being created, the consequences of the cessation of business are expected to be attenuated, if no change has been made to the book values of the assets and if taxation remains possible within the framework of the new tax regime to which the company is subject.

    Make sure to ask us for advice before making such a decision.

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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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    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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    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.

© Schmidt Brunet Litzler