France Enacts Significant Tax Reforms to Address Needs of International Business; Tax Breaks and...

NEW YORK -- In an aggressive move to leverage recent signs of economic momentum, the French government has implemented a new series of corporate tax-relief measures designed in part to appeal to the needs of international companies looking to establish operations in Europe. Part of France's

"France is listening to world business leaders in an effort to create an even more competitive business environment in the global economy," said Clara Gaymard, French Ambassador, Special Representative for International Investment and President, Invest in France Agency, the investment arm of the French government. "By easing the tax burden on companies and high-level executives, France is working to create an even more attractive opportunity for foreign businesses to succeed here."

The most significant new tax reforms include:

Far-reaching reform of the fixed asset tax (taxe professionnelle)

--As of January 1, 2006, all new capital investments will receive exemptions from the fixed asset tax for a period of three years: 100% in the first year, 66% in the second and 33% in the third.

--Starting in 2007, all fixed asset tax contributions will be capped at 3.5% of value added, replacing the three existing ceilings (3.5%, 3.8% and 4%) currently levied according to company sales. This reform helps foreign businesses in two ways: not only will their contributions most likely fall, but the tax will be considerably simplified and more predictable. Simulations indicate all contributions should go down.

More aggressive research and development incentives

--France has improved what was already arguably Europe's most aggressive R&D tax credit system:

--The portion of total R&D expenditures covered by the new system has been increased from 5% to 10% while the portion of the year-to-year R&D spending increase covered by the tax credit systems is 40%.

--The overall R&D tax credit ceiling has been raised from EUR 6 million to EUR 10 million.

--Expenses incurred to recruit new PhDs may be booked at twice their actual amount (resulting in a 100% reimbursement of real out-of-pocket expenses).

--The ceiling for work outsourced within Europe to non-group entities has been raised from EUR 2 million to EUR 10 million.

--The ceiling for expenses incurred defending patents has been raised from EUR 60,000 to EUR 120,000.

Tax breaks for high earners and impatriate workers

--The income tax has changed in two ways to enhance transparency:

--A new tax shield: the total amount of tax paid by individuals, including income, wealth and local taxes, must not exceed 60% of their income.

--Major overhaul of the income tax scale and the earned income tax credit (prime pour l'emploi), which is going to be increased by 50% over two years and paid monthly by bank transfer as of January 2006.

--The special tax system for impatriate executives now makes it even more attractive for skilled foreign executives to work in France:

--The length of residence outside France required to be eligible for this special status was cut from ten to five years; this measure affects all foreign employees who came to France from January 2005 onwards.

--Impatriate executives get a 20% exemption on compensation received in connection with duties performed outside France before they came to France.

France - A Leader in Attracting Corporate Investment

The most recent new tax measures come on the heels of more than 85 legal reforms passed by the French government over the past two years to improve the country's economic environment, including relaxing the 35-hour work week and providing additional corporate tax benefits. As a result, over the past three years, France has welcomed more foreign direct investment than all but three countries: the U.K., the United States and China. The United States is the leading foreign investor in France, with corporate investments valued at $171 billion supporting almost 550,000 French jobs while France is the second largest investor in the United States with corporate investments valued at $43.9 billion supporting almost 600,000 American jobs.

In summer 2005, the French government announced a new system of 55 industrial clusters, identifying and ensuring financial support for centers of excellence where industries could create a global technological edge by working more closely with top universities and public research bodies. The French government has pledged $1.8 billion over three years to help develop these clusters while focusing on the top 15 to attract international partners. These sectors range from aerospace and automotive to nanotechnology and telecommunications.

The Invest in France Agency (IFA) is the French national governmental body responsible for promoting, prospecting and facilitating international investment in France. The IFA network operates worldwide, with offices in France at both the national and local level. It draws on the expertise of specialists in a range of disciplines based at its head office in Paris, as well as in its 22 offices in North America, Europe and Asia. In France, IFA works in partnership with regional development agencies to offer international investors the best possible business opportunities and customized services. More information is available at www.investinfrance.org.