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France cuts taxes for small businesses to shrink unemployment

Berenice Sylvain runs a one-woman catering business in Paris thanks to France’s drive to encourage entrepreneurship.

Les Diners de Berenice SARL received a tax break and technical assistance to start delivering veal, fresh vegetables, chanterelles and macaroons to doctors, lawyers and other professionals too busy to shop for their own dinners. „Without tax cuts, I never would have been able to make it happen,” said Sylvain, 33. „I’ve wanted to do this for years, and I’m not a big risk-taker.” France is streamlining rules and reducing taxes that have stifled small businesses as it tries to shrink an 18% youth unemployment rate.

6000 laws were introduced or modified from 2003 to 2005, including measures to relax bankruptcy rules and defer labor taxes for companies started by people who were formerly jobless. It also earmarked €65 billion ($84 billion) to help businesses. The changes have helped create a million small businesses since 2002, almost 30% more than in the previous half-decade, according to government figures.

The climate is still far from ideal, said Raymond Torres, head of employment analysis at the Organization for Economic Cooperation and Development. „It’s more the taxes and the regulations rather than a lack of entrepreneurship that hold France down,” he said. While France jumped 12 spots in the World Bank’s 2007 „Doing Business” rankings, it is still ranked as the 35th-best place in the world to start a company. „The charges for small, new entrepreneurs are much higher in France than in Singapore, the US, more than in the UK,” Torres said.


A French company must pay about 40% of an employee’s salary in labor taxes, one of the highest rates among OECD countries, he said. In the UK it’s about 20%, and in the US, 10%. „That makes it difficult for entrepreneurs to hire,” Torres said. While France is working on making things more conducive to business creation, it needs to do more, he said. „It’s true that it may be easier to set up your own business in the US, but it isn’t that difficult in France anymore - it has changed,” Andre Marcon, who heads the French Trade Chambers’ business support network, said in January. Minister for Small Businesses Renaud Dutreil said a 2005 labor law that eased firing rules for companies with fewer than 20 employees created about 720,000 jobs. Companies were more disposed to hire without the fear of legal battles if they had to reduce staff, he said.


Companies create jobs first through the employment of the founder and then by adding workers, said Mathieu Kaiser, an economist with BNP Paribas SA in Paris. „The measures by the government have created an incentive effect,” he said. „Now the challenge is to see these jobs last.” Among the changes, France no longer requires a company to show that it has €7,600 of capital before it starts operating. An individual’s home no longer can be seized if his business fails.

Documents needed to start a new business can be scanned and posted on an Internet portal instead of being sent to three different agencies. Marc Rochet, 56, who was CEO of defunct AOM-Air Liberte, started a new airline called L’Avion, which offers business-class-only trips between Paris and New York. He collected €25 million from investors and hired 50 employees. „I could have based my airline in the UK, where it would have been so much easier,” he told about 4,000 people at the Entrepreneurs’ Fair on February 1 in Paris. „The burden of red tape is still huge, but it’s worth it. The French market is dynamic.”


A survey by Paris-based pollster Ifop for the Trade Chambers and the Entrepreneurs Fair showed that 21% of French people want to start their own companies. Almost half of those ages 18 to 24 said they planned to do so. Almost 40% of new businesses in France fail in their first three years, figures provided by the Ministry for Small Businesses show. „French people start to understand that failure of a business in no longer shameful,” said Philippe Marthot, who heads the government’s Agency for Business Creation. „You start one, you change, you stop, but you do it.”

Sylvain, who used to work as a marketing manager for a unit of Schneider Electric SA before going out on her own, said she is worried that her company may not survive. She has two clients a day and needs at least four to make the business viable and pay back her €30,000 bank loan. This fiscal year, her first in business, she is benefiting from deferred labor taxes. Next year, she will pay as much as 68% in income taxes, far more than the 46% rate in the US or 35% in the UK „Ideally, I would like to hire one person in the coming months, but I need to expand a bit more and I will have to think twice with the taxes,” she said. (Bloomberg)