Invest in France Agency international Office

IMD competitiveness index: a "more attractive" business environment in France, says IFA

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Tax Reductions In France

As the Forbes Misery Index notes, France has actively made considerable tax reductions--the second-highest improvement for reforms in Western Europe and the fifth-highest improvement in all the countries covered by the index.

Several key reforms that improve the attractiveness of France from a tax point of view continue to allow it to remain the third-largest recipient of foreign direct investment in the world.

The current French government is not resting complacent--it continues to strive to improve the environment for businesses with some of the most generous and innovative tax credits available. Reforms in early 2008 included a limitation on overall taxes for taxpayers, research and development tax credits for businesses and favorable tax credits for charitable contributions.

The 2008 tax credit for research and development that reimburses 50% of the R&D expenses for businesses in the first year has no equal in the world. It is particularly interesting in that it represents a direct credit to income tax, and if it is in excess of the income tax, it can even be refunded in cash.

The wealth tax credit, also increased in 2008, is driving investment into small and medium enterprises, public research institutes and charitable foundations by allowing households to deduct 75% from their wealth tax of qualifying investments or charitable contributions, up to a maximum credit of 50,000 euros per year.

Finally, for individuals the total amount of progressive and flat income taxes, wealth tax, property tax and mandatory contribution to social security is now capped at 50% of the taxpayer's total income. The progressive income tax is capped at 40%, equal to the top rate in the United Kingdom. For overtime work, employees are completely exempt from paying income tax and social security charges, and employers pay reduced social security charges, since Oct. 1, 2007.

Philippe Favre is the chairman and CEO of Invest in France Agency.

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Strong Euro May Hit Foreign Investment In France

The strong euro may create problems for U.S. companies willing to make productive investments in France, said Philippe Favre, head of the Invest In France Agency, or AFII.

"The level reached by the U.S. dollar vis-a-vis the euro is obviously an obstacle to U.S. investments in Europe," Favre told Dow Jones Newswires. "It's a problem."

The euro has risen 8% against the U.S. currency since the beginning of the year after jumping by 12% in 2007, which has sent the dollar to its lowest level ever against the euro.

After a record year in 2006, the number of jobs created by foreign direct investment in France -a good proxy of the amount of money invested by foreigners to produce goods and services in the euro zone's third-largest economy - declined last year, AFII said in February.

The proportion of jobs created by U.S. investors in France fell to 18.8% of the total in 2007 from 27.2% the previous year. The overall number of jobs created by foreign companies in the country was down 13.7% from 2006, AFII data show.

Close to 3,000 U.S. companies operate in France, employing 600,000 people.

Still, adding up mergers and acquisitions, financial flows and productive investment, France was the world's third-largest recipient of investment in 2007 after the U.S. and the U.K., according to Unctad data. The country posted a 52% gain on the previous year, receiving $123 billion.

Favre said that turmoil on the world's financial markets and the marked slowdown of the U.S. economy share responsibility for the expected decrease in investment.

"The financial crisis has led to a credit crunch, which is going to slow down the movement of FDI throughout the world," he said.

Economists agree.

"There's a risk that in the medium term FDI flows can be affected by the strength of the euro," said Sylvain Broyer, an economist at Natixis. "The strong euro can be a problem."

But Favre said the problem shouldn't be too severe because investment is a four- to five-year commitment that doesn't look at short-term foreign-exchange gyrations. "The effect of the exchange appreciation on investment is milder than it is for imports," Favre said.

To counterbalance the fall in U.S. investment, Favre looks at sovereign wealth funds set up by nations such as China, the United Arab Emirates and Singapore. Such funds are "welcome" to step in and fill the gap, he said.

"We're trying to have them come because they bring stable investment that makes companies more solid," Favre said. "We work with them." He added that the funds are subject to two conditions: transparency and reciprocity.