France's Entrepreneurs Condemn New Tax Proposals

Startups cry foul over a capital gains tax
President François Hollande is pictured as he inaugurates the French company Polytech's plant in Eyrein, France Photograph by Thierry Zoccolan/AFP/Getty Images

Campaigning for president of France earlier this year, François Hollande made no secret that he planned to raise taxes on large corporations. But he promised the taxman would go easy on startups and other small-to-midsized companies.

Now, though, entrepreneurs and investors are in an uproar after discovering that the new Socialist President plans a big increase in taxes on capital gains generated from the sale of businesses—to as much as 64 percent. “No country comparable to ours has such a punitive scheme,” the French Private Equity Association said in a statement after the plan was unveiled on Sept. 28 in Hollande’s 2013 budget proposal.

Opponents have wasted no time mobilizing. A group of business people calling themselves “les Pigeons”—which translates in French slang as “the Suckers”—has gathered more than 30,000 supporters on a  Facebook page that accuses the government of “crushing entrepreneurial spirits and exposing France to a big risk.” Leaders of the group include the founders of France’s three biggest Internet companies: Web retailer Vente Privée, online dating site Meetic (MEET:FP), and Internet-access and mobile-phone operator Iliad (ILD:FP).

“We should push entrepreneurs to create companies, products, services, jobs, rather than push them to protest,” Vente Privée founder Jacques-Antoine Granjon told Bloomberg News. “If you want economic growth, you need a stable backdrop and a just reward for risk and hard work.” His company, founded in 2001, now has annual revenues of €1.1 billion ($1.4 billion) and employs more than 1,500 people.

The Hollande budget would abolish an existing 30 percent capital gains tax rate—already higher than in most surrounding countries—and replace it with a scheme based on regular income tax rates. That would produce an effective rate as high as 64 percent, the private-equity association says, compared to an average rate of less than 25 percent elsewhere in Europe. Business owners who are retiring or who immediately reinvest their gains in another enterprise would be exempted from the tax.

Hollande’s budget plan is already under attack for a proposed new 75 percent tax rate on incomes over €1 million. Several French soccer organizations said last week that the tax would have a “disastrous effect” on their recruiting. Jean-Paul Agon, chief executive of Paris-based beauty group L’Oréal (OR:FP), has warned the tax would make it harder for French companies to attract and keep top talent.

Overall, Hollande’s budget plan calls for €20 billion in higher taxes and €10 billion in spending cuts. Opponents warn that heavier taxes harm France’s competitiveness and dampen growth at a time when the economy is stagnant and unemployment is at a 13-year high. The capital gains tax could be the coup de grace, Jean-David Chamboredon, who heads French investment fund ISAI, told Bloomberg News. “It’s going to push young entrepreneurs away, to London or elsewhere,” he said. “A 60 percent tax rate practically means your company is being nationalized.”

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