Subsidiary, branch or liaison office creation in France: the mistake to avoid

What may occur when creating a liaison office, a branch or a subsidiary in France..

Whatever the legal form chosen (subsidiairy, branch or liaison office) to carry out business in France, sometime foreign companies hire one or several employees before creating a legal and official entity in France. This exposes the new entity to three risks. See the following explanations.

Computerization has tightened regulation, even  in the case of a subsidiary a branch or a liaison office creation in France.

Foreign company must keep at mind two things when they set up their business in France: first of all, the welfare fiscal regulations and commercial regulations are rigorous. Additionally an increase in the French administration computerization makes impossible common practices accepted 3-4 years ago. For instance, a few years ago it was possible to file various declarations on paper after the deadline without any penalty. This is not possible anymore.

And now the risks you are exposed to if you do not abide by the current rules.

Hiring workers before the creation of the legal body exposes the entity in France to the three following risks: firstly, it can be sued for concealed work. Is considered, among others, as concealed work declaring to welfare organisms the recruitment of a worker after its actual recruitment. Indeed, the creation of an entity in France leads to the issue of a registration number called SIRET, which is required to be identified among welfare organisms and to issue declarations. Therefore, the document indicating to welfare organisms the recruitment of a worker (called DUE) cannot be issued before the registration date and it is absolutely impossible to backdate it. Admittedly, the risk to be sued is low from the moment that the legal entity in France did not have the will to escape from labor law. The sentence for concealed work can go up to a maximum 225 000€ fine.

The second risk is to declare welfare contributions a year late. Indeed, every paid salary during the fiscal year must be declared to social welfare organisms before January the 31st of the following year. Therefore, salaries that have not been declared the current year can only be declared the year after. The company then exposes itself to surcharge for late payment in the case of a control by welfare organisms. As for the employees, they risk (1) not validating welfare quarters, reducing their retirement, (2) an increase in their income tax basis the year the revenues are declared. (Income tax in France is a progressive tax).

Lastly, if the French entity has to contribute to welfare, the activation of this coverage cannot be done before the date of registration. In effect, if the employee suffers from an accident whatever the reason between the date of recruitment and the beginning of the coverage, the French entity will have to pay the daily allowance instead of the welfare organization.

To sum up, the establishment in France has to be properly anticipated for regulatory purposes. It is essential to manage at once the creation of the French entity and the recruitment of future employees. It is the best way not to end up in the situation above mentioned.

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