Navigating U.S. Investment In Macron’s France; RealClear Markets

In a RealClear Markets article written by Duggan Flanakin, Rimon Partner, Olivia Le Horovitz explains France’s 2030 green investment plan and how it changes EU Regulations and US investments.

The full article is below.

A full year before the Biden Administration enacted the Inflation Reduction Act, French President Emmanuel Macron  unveiled his France 2030 green investment plan that commits 30 billion euros (about US$35 billion) to reducing carbon dioxide emissions while also revitalizing France’s industrial sector.

This, on top of the 100-billion-euro allocation for pandemic recovery approved earlier, much of which was dedicated to developing green energy, is enhancing France’s reputation as a top destination for foreign direct investment (FDI). But the forgotten driver of the French renaissance is likely the nation’s generous research tax credit (CIR) system.

The CIR is Europe’s most generous tax incentive in support of innovation, and the most generous of the 30 OECD countries with similar tax incentives, according to journalist Frederique Perrotin. More than 20,000 companies benefit from the R&D tax credit every year, saving about 7 billion euros in combined taxes. This, says Perrotin, makes France “the country with the highest relative weighting of all private research grants in relation to GDP.”

The CIR is available to all companies doing research and development in France regardless of size, industry, and nationality. The credit covers 30 percent of all R&D expenses up to 100 million euros as well as 5 percent of spending above that threshold. The credit is applied to all R&D operating costs at a rate of 50 percent and to investments in R&D operations at 75 percent.

It also fully covers research salaries and is applied to junior final-year doctoral and post-doctoral research staff salaries at a rate of 200 percent for 2 years for those on their first personal contract. Small to medium-sized enterprises working on innovative technologies can also apply for an additional innovation tax credit, applied at a rate of 30 percent for amounts up to 100,000 euros, then 5 percent for expenses between 100,000 and 400,000 euros, per year.

As a result, France in 2018 was the world’s leading destination for international research and development projects, with 144 international companies entering France to do R&D. That was over twice the number as in the United Kingdom and Germany combined. Historically, Germany has by far been the European nation selling to the U.S., with the UK a distant second, Italy third, and France fourth. In 2022, Italy sold more to the U.S. than the UK (and bought far less).

The France 2030 plan called for supporting excellence in the French economy in the automotive, aerospace, digital, green industry, biotechnology, culture, and healthcare sectors. A quarter of the funding was designated for the energy sector, with a trifold focus of aiding in the development of innovative, small-scale nuclear reactors; green hydrogen; and achieving a 35 percent reduction in greenhouse gas emissions by 35 percent from 2015 levels.

Another 4 billion euros is earmarked for future transport – electric and hybrid vehicles and the first low-carbon aircraft. Other initiatives include investing in a healthy, sustainable diet; production of 20 biopharmaceuticals against cancer and chronic diseases; investment in new space adventures and sea beds; and restoring France’s place at the head of cultural and creative content production.

Just days ago, France 2030 sponsors announced that the energy future of France rests on the substitution of fossil fuels by the massive production of carbon-free renewable and nuclear electricity. The revival of nuclear power (reversing a previous trend of decreasing nuclear generation) involves diversification of uses, reduction of volumes and radioactivity of nuclear waste, increasing strategic autonomy by multi-recycling of nuclear materials, and improving nuclear safety and security.

France intends now to maintain its existing nuclear fleet as long as facilities meet safety requirements while also constructing new electron paramagnetic resonance (EPR2) reactors. The French sector, buoyed by its R&D tax credit (CIR), will focus on new small modular reactors that are hoped to replace thermal power plants. The nuclear revival also includes a proposed 500-million-euro investment to support “nuclear startups” in the fields of fission and nuclear fusion.

Also in June, the Macron government presented a plan to relocate health product production to France to address shortages of imported medicines – in particular, 300 “essential” medicines. The “Health Innovation 2030” plan commits more than 7.5 billion euros to support 15 projects to study emerging infectious diseases and chemical, biological, radiological, and nuclear threats; biotherapies and bioproduction; digital health, and innovative medical devices.

A third recently touted tentacle of the France 2030 plan is the Great Image Factory initiative aimed at bolstering French excellence in animation and visual effects. One industry executive said, “Thanks to France 2030, we’ll be able to work with teams that can be located anywhere on the planet.” The government is also committed to an initiative to support development of high-power charging stations for electric vehicles as part of the France 2030 clean transport sector.

The eagerness of the French economy for foreign direct investment is attracting newcomers to French-based R&D. Yet despite the opportunities, there are hurdles that must be carefully negotiated, says Olivia Lê Horovitz, who oversees the Paris office of Rimon Law.

Lê Horovitz, with decades of experience in mergers and acquisitions and private equity, points to the 2019 European Union Regulation that established a European screening mechanism for foreign direct investment. The EU Regulation promotes cooperation, information sharing, and a minimum level of transparency regarding FDI control between the European Commission and member states.

The pillars of the EU FDI framework include a legal framework for FDI screening by member states on grounds of a risk to security or the public order; a cooperation mechanism between member states; and new competencies for the Commission to screen FDI and issue non-binding advisory opinions to member states.

Lê Horovitz explains that a major reason for the EU Regulation was that Chinese companies had been aggressively acquiring sensitive technology companies. Working with attorneys who understand the intricacies of the EU, EU member states, and French legal structures is vital, she said, because there are very high penalties, even criminal sanctions, for those who fail to follow procedures.

Penalties can reach 200 percent of the value of a transaction as well as cancellation of the transaction for not submitting the transaction to prior authorization from the Ministry of Economy. In multijurisdictional transactions, for example, a FDI authorization may be required in one country but not in another (even another EU member state). And each country’s FDI regulations are unique.

Moreover, some countries have fixed delays; in France it is 30 working days from the receipt of a complete file, but in other countries it can be much longer. Even in France, any application requiring additional analysis can be subjected to an additional 45-day delay.

According to Lê Horovitz, now that the United Kingdom is no longer part of the EU, France has become an even more attractive destination for foreign direct investment. The R&D tax credit makes France, in her view, the most attractive destination for startups. One more significant factor, she said, is the high quality of French engineering schools and engineering professionals.

Lê Horovitz cites an Ernst & Young study that found that, “France [was] the first destination for foreign investments in 2022 for the fourth consecutive year with 1,259 projects (including the American company Eastman) far ahead of the UK (with 929 projects) and Germany (with 832 projects).  This represents an increase of 3 percent per year when the total foreign investment in Europe has only progressed by 1 percent.”

With Germany in decline due to self-imposed energy shortfalls, France is well positioned as a destination for increasing its trade with the U.S. and for increasing its reputation as a leading innovative society. Navigating the EU and French regulatory schemes is a small price to pay for the opportunity to access the fabled French R&D tax credit system and the government funding available for startups and industry leaders via the France 2030 initiatives.