Plus ça change? Reassessing the French investment opportunity

The UK remains the top European destination for foreign investments, and in 2016 it enjoyed the greatest number of FDI projects in a decade. However, the British are likely starting to hear French footsteps: France recently instituted significant measures to attract more foreign investments; the effect of those measures seems certain to be multiplied by what the 2017 A.T. Kearney report on the Foreign Direct Investment Confidence Index identified as growing investor pessimism towards the UK’s medium-term economic outlook.

According to the A.T. Kearney study, France now ranks as the seventh most attractive country – a remarkable jump from occupying the 12^th spot just five years ago. The jump constitutes strong evidence that despite the existence of foreign investment decrees in France which are often viewed as barriers to such investment, they have not had a significant negative impact. The study suggests France’s rise in the rankings may be due to recent reforms aimed at boosting economic growth and improving the French investment environment. 

New mindset

The actions of President Macron’s government following his election in May 2017 demonstrate a new willingness to attract investors whether national or foreign. Amid the persistent uncertainties around the consequences of Brexit, in June 2017 France’s finance minister Bruno Le Maire promised to establish an English-language court dedicated to resolving post-Brexit disputes arising involving financial contracts governed by English law. The court would serve to facilitate migration of financial service firms, in particular US banks, from the UK to France. 

Perhaps the most substantial French legislative change underway involves modifications to the French Labour Code. With French labour law long viewed as a significant disincentive to foreign investment in France, the changes aim at simplifying French labour law while also making it more transparent and flexible. While the draft orders, published on 31 August, remain, subject to modification prior to their approval by parliament in December, they reflect a new willingness for reform, particularly of dismissal procedures long seen as overly complex. The proposed changes aim to provide investors with greater transparency into employment terms, via an autonomous mechanism for collective voluntary departure plans, simplified conditions for instituting layoffs on economic grounds, and caps on severance pay awarded by local courts 

One measure specifically beneficial to foreign investors would eliminate consideration of a group’s global profits when assessing economic difficulties cited to justify layoffs. Instead, the geographic perimeter of the financial difficulties would be limited to the group’s situation in France. The measure should reassure both foreign groups weighing whether to create subsidies in France, as well as foreign investors considering other types of investment in the country.

Lower taxes

The draft finance bill for 2018, published on 27 September, also included significant legislative changes favourable to foreign investors. While subject to parliamentary amendment before its approval in December, the current version decreases the corporate tax for French companies from a 33.33% rate to a 25% rate by 2022, creates a flat 30% overall rate for taxes on investment income (including all investment income, revenues from life insurance, capital gains for the sale of assets and other capital gains), replaces the wealth tax with a less burdensome tax on real estate wealth, and lifts the ban on deductions of financial expenses related to the acquisition of certain shares.

These legislative changes dovetail with a marked recent increase in foreign investment in smaller-sized French companies. The number of foreign investments in French start-ups has increased by 118% over the last four years; the trend is likely to continue given the new legislative changes described above. “French Tech”, an inter-ministerial initiative launched in 2015 to promote the creation of French start-ups and to encourage investment, has succeeded in making tech companies increasingly attractive to domestic and foreign investors. 

A similar effort, named “French Fab” and launched by Mr Le Maire on 2 October, aims to lure investors to the French industrial sector. The initiative seeks to (re-)establish French industrial companies as key players on a global level by doubling the number of mid-cap companies with international ambitions. The programme includes strategic sectors with legal controls on foreign direct investments.

Taken together, the Macron government’s actions strike a new, investor-friendly balance, increasing the attractiveness of France to foreign direct investments, while retaining government oversight in select strategic sectors. As the new year approaches, investors would do well to look at opportunities in France with new eyes. 

Isabelle MacElhone is a partner in the Paris office of law firm Reed Smith LLP. Samantha Chavane de Dalmassy assisted with the piece.