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Is it urgent to set up a business in France before Brexit ?

Following the legislative election and the victory of the Conservative Party, Brexit has become an inevitable reality. Indeed, Boris Johnson, the new British Prime Minister, announced the ratification of the Withdrawal Agreement Bill by the House of Commons in the nearest future and making sure that the UK leaves the European Union (UE) by January 31, 2020 at the latest. This milestone for Brexit negotiations brings back to the table the unresolved questions concerning the future legal grounds for UK – UE relations.

Following the legislative election and the victory of the Conservative Party, Brexit has become an inevitable reality. Indeed, Boris Johnson, the new British Prime Minister, announced the ratification of the Withdrawal Agreement Bill by the House of Commons in the nearest future and making sure that the UK leaves the European Union (UE) by January 31, 2020 at the latest.

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Following the legislative election and the victory of the Conservative Party, Brexit has become an inevitable reality. Indeed, Boris Johnson, the new British Prime Minister, announced the ratification of the Withdrawal Agreement Bill by the House of Commons in the nearest future and making sure that the UK leaves the European Union (UE) by January 31, 2020 at the latest. This milestone for Brexit negotiations brings back to the table the unresolved questions concerning the future legal grounds for UK – UE relations.

Officially, the trade deal with the EU is promised by the UK politicians by the end of 2020. The feasibility of such promise is however questioned by the UE officials. In the meantime, both British and foreign companies ask themselves what the consequences of Brexit on business exchanges will be.
As a matter of fact, after Brexit, UK will likely lose the benefit, partly or totally, of four fundamental freedoms: the free movement of capital, goods, persons and services. Therefore:

Is it worth keeping a foot in the European Union
by setting up a business in France before Brexit ?

Enforcement of the customs duties and non-customs costs on goods and services

If a hard border UK – EU was to be imposed, companies that once traded freely with the European markets would see their goods exposed to new costs each time they cross the Channel.
These costs could appear as both tariff and non-tariff barriers.
In such case, the UK seller to the EU clients would be certainly subject to customs duties. Additionally, hidden expenditure, in the form of non-tariff taxes, could may appear costly to business. The cost of trading with the UK-based company could also raise as a consequence of introduction of new compliance paperwork and other administrative requirements. Indeed, in a worst-case scenario, the UK would have to comply with the import procedures presently applied by the EU to all third countries.
Despite of the direct impact of the non-tariff measures, a much wider range of additional costs could emerge as companies would have to cope with divergences in technical standards and other regulations existing within the EU system.

Competitivity of the UK goods and services

At the moment, British and other UE companies can import and export within the EU, without the customers having to pay additional taxes. The EU has also free trade agreements with third countries such as Norway, Switzerland, South Africa and South Korea. Once outside the EU, the UK will have to negotiate new trade deals both with the EU and the third countries.

As a result, UK goods and services may become less competitive. This would be a direct consequence of beforementioned tariffs that would have to be added to the base price of products /services. None of those tariffs will be applicable to the remaining 27 countries.

Extension of the shipping schedules

As it is always the case with international shipping, border control and customs can pose a threat to the speed of the goods delivery.

Brexit can bring back the days of red tape and arduous documentation. This goes against the dynamic of international trade relations, which fluidity cannot accept undue stops or checks on the goods traded.

A more complex process of setting up of a business in France to the UK nationals

Up to now, UK nationals benefit from the same conditions as French ones when it comes to establishing an independent business structure in France.

In fact, if a UK citizen wish to start a business activity in France but does not intend to reside there, no specific formality is required compared to a French national. The British businessman is subject to no specific authorizations, except those applying also to the French professionals in regulated professions where some specific qualifications or diplomas are required (i.e. doctors, real estate agents, lawyers).

Equally, if a UK national wishes to reside in France, i.e. stay in France more than three months to incorporate et run his business, he is no subject to obtaining a resident permit or any additional documents. In theory, he has to declare it at the City Hall. Actually, neither company registered office, nor tax or social administration, demand the accomplishment of this formality.

This situation would likely change once UK becomes a third country which is in principle scheduled from January 31, 2020.

From then on, a resident permit may be required from any entrepreneurs wishing to open a branch or a subsidiary in France. Obtaining such a permit would involve following a complex procedure and numerous formalities. The main one would be receiving a long-stay visa which is subject to providing the administration with many documents such as the proof of residency, of income etc. Anyway, it is grated only in the cases provided by law and on the base of legal requirements to comply.

Moreover, to incorporate the most popular companies as French limited liability company (SARL) or a simplified joint-stock company (SAS), the subscribed share capital shall be paid on a particular bank account opened by shareholders on the name of the company. Currently, the process is quite complex for the UE citizen. Therefore, it will be drastically more demanding and rigorous facing a non-Community national once Brexit is effective.

Establishing a company in France as a way to maintain your business attractivity

Having a commercial partner or a direct representative entity close to your French and European clients could be a message attesting your anticipation of the transitional period. This would make you avoid the consequences of the confusion and unclarity resulting from unknown rules applicable to the UK-UE trade relations.

An even safer alternative would be setting up a subsidiary in France.

The choice of such structure would eliminate the risk of additional costs of planning and management of stocks and elongated shipping schedules that have already discussed above.

Also, having a subsidiary on the French territory would make it easier to adapt your products/services to the constantly evolutive EU standards and regulations.

Such an effective presence supported by a legal entity in France, close to your French customers, and in the heart of the European territory, would allow you to better understand their demands and centralize the activity of within the whole EU zone.

For those and other reasons a French subsidiary may give to your company a real competitive edge.

Ewa Kaluzinska                                                                           Nicolas Renault
Verne Legal, Partner                                                                  Verne Legal, Lawyer

Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.

France commits to improving tax certainty by becoming a member of the ICAP 2.0 Programme

On September 16, 2019, French minister Gérald Darmanin
announced that France will join eighteen other countries
participating in the tax risk assessment program ICAP 2.0.

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On September 16, 2019, French minister Gérald Darmanin, responsible for developing the budget and country’s transformation policy, announced that France will join eighteen other countries, including Poland, participating in the tax risk assessment program ICAP 2.0, run as part of the OECD cooperation. This program aims among others at combatting more effectively tax avoidance and tax fraud practiced by multinational corporations.

The purpose of France participation is to contribute to the improvement of France’s relations with foreign companies present on the international arena and is yet another proof of France implementing policies favoring the development of foreign trade in this country. The program consists of a series of discussions between large corporations and tax administration about tax stability and transparency. During the March meeting in Santiago, Chile, the OECD Forum no Tax Administration (FTA) decided to move to the second stage of the program – Scoping. The companies participating in the program, such as Shell International BV or Barilla, The, assess the results that have been achieved so far as very positive.

Source: OECD (2019), International Compliance Assurance Program Pilot Handbook 2.0, OECD, Paris.

Since taking up his position in 2017, Minister Darmanin has been intensively working on improving relations between taxpayers and the tax administration. He undertook to implement seven programs, including the creation of an International Tax Office whose aim would be to advise French companies developing their activities abroad on tax systems of other countries. In addition, he plans introducing simplifications for foreign companies operating in France in the tax settlement process, and the systematic publication of instructions to facilitate their understanding of this process.

A lot is being said as well about the intention of France to introduce a special tax concerning IT companies, as it has been already done in Greece, England or Italy. These changes are in line with the work of the European Union on new tax rules for e-commerce companies, which will enter into force in January 2021.

More information on the ICAP 2.0 program: OECD (2019), International Compliance Assurance Program Pilot Handbook 2.0, OECD, Paris. www.oecd.org/www.oecd.org/tax/forum-on-tax-administration/publications-and-products/international- compliance-assurance-program-pilot-handbook-2.0.htm

Iga Kurowska
Verne Legal
i.kurowska@vernelegal.com

Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.

Right to VAT exemption even in the event of fraudulent acts of the buyer

In the light of European law, the concept of
‘supply of goods’ outside of the EU1, known
as exportation, is objective in nature.

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In the light of European law, the concept of ‘supply of goods’ outside of the EU[1], known as exportation, is objective in nature and it applies without regard to the purpose or results of the transactions concerned. Therefore, when the goods leave the territory of the European Union, the company is entitled to a tax rate of 0% instead of the ordinary national rate, as it is the case of domestic deliveries, even if certain formal conditions have not been met.

Such decision was made by the Court of Justice of the European Union (CJEU) on October 17, 2019, in a case brought by the Polish company Unitel (case number C-653/18). In fact, Unitel was required to pay a 23 percent VAT, i.e. the full rate, on the sale of mobiles telephones to a Ukrainian operator. It turned out that the company that actually bought the goods was not the one indicated on the invoice. The Polish tax authority, interpreting this fact as an attempt to fraud on both Polish and Ukrainian sides, concluded that this sale did not meet the requirements of Article 2 (8) of the Goods Tax Act regarding exports. Therefore, it required the payment of full VAT (at a rate of 23%), and thus not qualifying the operation as exportation eligible of VAT exemption. The Polish tax authority also observed that Unitel had drawn up its invoices “based on data submitted by entities whose mandates were not valid or which did not possess genuine business addresses or valid documents providing proof of VAT accounting.” The case was referred to the ECJ by the Polish Supreme Administrative Court in form of a request for a preliminary ruling.

The ECJ ruled in favour of the Polish company, stating that the exporter is not responsible for the buyer’s failure to pay VAT, if he was not aware of that fact. According to the CJEU, it would be disproportionate to hold a taxable person liable for the shortfall in tax caused by fraudulent acts of third parties over which he has no influence whatsoever (in this case, the Ukrainian contractor). However, according to the CJEU, the EU law requires an operator to act in good faith and to take every step which could reasonably be asked of him to satisfy himself that the transaction which he is carrying out does not result in his participation in tax evasion. For this reason, if it were concluded that the taxable person knew or ought to have known that the transaction was part of a fraud and has not taken every step to prevent that fraud, he would have to be refused the right to be exempted from the VAT zero-rate.

By ruling in this direction, the Court questioned the practice of the Polish tax authorities and the case law of national administrative courts. According to the ECJ, the tax authorities cannot automatically demand payment of 23% VAT, which would be equivalent to requalifying the transaction as domestic sales. According to the Court, the mere fact that goods leave the customs territory of the EU qualifies an operation of exportation and as laid down in Article 146(1)(b) of the VAT Directive, makes it eligible for the exemption.

This is an important ruling for all the exporters who need be aware that in order to retain the right to the VAT exemption they have to prove that they have exercised due diligence to ensure that lawfulness of the transaction.

In 2018, the ECJ took the same position in an intra-EU case, concerning the export of goods from Slovenia to Romania. The EU court decided, on October 25, 2018, in the case of Milan Božičevič Ježovnik (case number C-528/17) that “Automatically denying a taxable importer and supplier, without regard to his diligence, the right to the exemption from import VAT in the case of fraud committed by a customer in the context of the subsequent intra-Community supply would have the effect of breaking the link between the import exemption and the exemption of the subsequent intra-Community supply”. Therefore, analogically to the judgment of 17 October 2019, a European taxpayer may be deprived of the right to a refund or deduction of VAT only if he knew or should have known that the transaction which he was conducting was part of tax fraud or tax evasion. Consequently, the obligation of due diligence concerns not only the exporters to third countries, but also those selling products within the European Union.

Iga Kurowska
Verne Legal
i.kurowska@vernelegal.com

[1]Unlike the export of goods from the territory of Poland to the territory of another EU country which is called intra-Community supply of goods and which is also subject to a zero rate of value added tax (VAT) but based on other regulations and slightly different rules.

Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.