French tech sector comes out fighting as criticism mounts over the country’s planned tax regime.
“The European capital of the digital world is Paris and not London,” claimed Paris’ deputy mayor, Monsier Jean-Louis Missika, at Open World Forum (OWF) in Paris earlier this month. The event has developed over the past five years into one of Europe’s premier open source events.
There was plenty of Gallic fighting spirit in evidence as Missika attacked Boris Johnson for being confused and misguided. “We are happy to meet the English in either the rugby or in technology,” he taunted. “And your mother smells of Elderberries.” [Is this right? Ed.]
While Johnson cites 1,200 start-ups emerging from London’s buoyant technology sector, Missika claimed Paris has over 1,800. As he put it: “Currently, we are creating one ‘Tech City’ every 12 months.” Missika cited Paris’s 420,000 technology workers, with over 20,000 of them in research and development, sneering at the London Mayor’s claims of a mere 100,000.
Deputy minister Fleur Pellerin, responsible for the country’s “productive recovery”, was also on hand to wheel out a barrage of clichés, describing the socialist government’s “digital ambition” and plans to “take advantage of unprecedented synergies in the technical age”. More concretely, she also announced new national plans to build a series of digital campuses to house start-ups around the country.
Missika welcomed the new national initiative, but was quick to highlight the need for his central government colleague to give more careful consideration to the potential effects of planned tax reforms on start-up and investment activity. “London is beating us in terms of private investment and venture capital,” he admitted.
Ruffled, Pellerin returned to the stage to highlight that the government was currently reconsidering elements of the planned tax system and its effects on innovation and investment. She claimed that the government was “listening to entrepreneurs” and planned an “open and constructive approach”.
But it is exactly these sorts of platitudes and the government’s indecision that is raising the climate of fear and risk amongst investors in the country. And with rumoured plans of a 64 per cent effective exit tax for investors, there is due cause for alarm.
The French government has always been more keen to take a tax and spend, interventionist role in the country’s high-tech economy. The country has 77 regional technology clusters, or “Poles du Competitivité”. The clusters work to foster cooperation between their members, which include start-ups, SMEs, large enterprises, research centres and academic institutions. From this they look to help members to develop projects that can qualify for further national and regional state funding.
According to Stefane Fermigier, president of the open source software workgroup at the Paris “Systematic cluster, these organisations are not a state alternative to venture capital investment but, rather, focus on earlier stage investment and the nurturing of research.
“Funded projects have to focus on research and prototyping and are not allowed to look at bringing products to market,” explains Fermigier, himself the owner of a successful open source start-up. “However, many of the projects are then subsequently transformed into businesses once the state funding period is over.”
Strangely, given this outlawing of any direct commercial focus, projects are also required to raise private match-funding in order to qualify for regional and state investment. Nonetheless, Fermigier seems adamant that the system works and can be particularly effective for first time entrepreneurs who would find it difficult to raise private capital.
Looking at the figures, he seems to have a point: Sytematic has raised more than €1.4 billion in funding with over a tenth of this going into projects focused on free and open source software in the past five years.
Asked about the likely effect of new government’s tax plans, Fermigier seems strangely relaxed. “The new tax regime is not in the right direction for entrepreneurs,” he comments. “But at this point it is still up for discussion.”
Fermigier is positive about the tax system’s long-termist approach with significantly lower exit taxes for investments held for over 8 years. He also cites tax breaks, credits and government funding opportunities available to start-ups and French companies investing in research and development. Surprisingly, with all this funding available, there are no regulations to keep heavily state-funded start-ups in France once they reach profitability.
“I have no experience of companies in our community moving to other countries for tax reasons,” Ferminger claims.
Patrice Bertrand, president of the Open World Forum event, is more outspoken, voicing his fear that the new tax system may have a negative effect on the French economy, particularly on private investment. Also the founder and chief executive of Smile, one of Europe’s largest open source-focused systems integrators, Bertrand is particularly critical of the French government’s wavering and inconsistent approach.
“One of the less reported facts of the French tax system is that fiscal laws in France are retrospective,” he explains. “There is little security.”
According to Bertrand, changes to the tax system can be applied to the current earnings of a company or an individual, leaving investors with a large unquantifiable risk on French investments. Together with the massive over-complexity of both the current and planned system, it is, he claims, a massive disincentive to investors.
“The previous government made a very similar mistake,” Bertrand continues. He gives the example of France’s staggered capital gains tax. The previous government had put in place a system which dramatically reduced percentages for investments held for over six years, and gave tax free earnings on investments held for over eight years. “With entrepreneurs and investors having planned around this, the whole system was cancelled just before it came into effect in the sixth year.”
Once the bravado of over-defensive French government officials had died down, OWF returned to its usual elegance. The event combines business, open source and free culture in that black polo necked, intellectual way that the Parisians do so well.
As such, it continues to grow year-on-year, attracting a refreshingly eclectic mix of open source and free software luminaries, European industry giants, academics and entrepreneurs. One group notably thinner on the ground this year, though, were the investors.