France gives startups tax breaks. And now plans to take them back.

So, that whole fiasco this summer was pretty embarrassing for France. But hey, at least the local entrepreneurs got the last laugh. Still, I would’ve thought France would be a little more careful about puting its foot in its mouth, but maybe not. And this time there’s unfortunately nothing particularly funny about the situation.

Back in 2004, France introduced a special tax scheme, called the Jeune Entreprise Innovante (JEI), granting tax breaks for startups meeting a certain criteria (less than 8 years in age, 250 people maximum…) and investing no less than 15% of their turnover in R&D. In a country where it doesn’t exactly rain VC funding, this definitely had a very positive impact and kept companies hiring at home. Employers became responsible for only half of gross wages for employees involved in R&D, making engineers and whatnot all the more affordable. Plus, it wasn’t a BS VIP status either; a vast majority of startups have qualified and been able to benefit. In all honesty, I don’t think I know many French startups that haven’t taken advantage of the JEI.

But now, in order to save some 57 million euros annually, the French State is getting ready to take most of it back – starting in 2011. Which seems like a fantastic way to discourage innovation and economic development in a country that is currently being told it needs to work longer and harder. Sad, but true. But just to add fuel to the fire, the French government is also planning to allocate some 75 million euros over the next 3 years to help kids pay for legally downloaded music. It definitely sounds like the French State has got its priorities in order.

The so-called reform will introduce a €103,000 cap on tax breaks per company, limited only to social security contributions for salaries less than 4 times the minimum wage. I guess that means France doesn’t want to give French startups the hopes of hiring any ex-Googlers any time soon. Plus, with the new “reformed” system in place, there’ll be a progressive reduction of tax exemptions starting from the 4th year.

The topic officially opens for discussion at the French National Assembly tomorrow, but French entrepreneurs have already started speaking out against the absurd reform. France Biotech, an association of life sciences entrepreneurs has officially requested that the Parliament abandon the reforms – and even asked that it considers extending the JEI so that it would cover the first 12 years of a startup rather than the first 8. Wishful thinking?

Some 600+ French entrepreneurs have created a Facebook group dedicated to saving the JEI and are planning to take additional action for the cause. One of them, Gilles Babinet, a French serial entrepreneur from the age of 22 – most famous for Musiwave (which he sold to Microsoft in 2007 for $130 million) revealed that the JEI has enabled 2 of the startups he’s currently working (Eyeka and MXP4) with to afford engineers, patents, etc.

And Pierre Chappaz, the famous French face behind Kelkoo (bought by Yahoo for $670 million in 2004 – and later resold in 2008) and Wikio, published a terrific blog post in French titled “How is one supposed to build a successful startup in France if the fiscal laws change all the time?” …uh, no kidding.

But all of this is kind of paradoxical. I mean, it was only 3 years ago that France introduced a special tax break for individuals paying wealth tax if they made an investment in a startup. It may not be the most ideal way to turn your average Pierre into a business angel, but a number of companies have managed to benefit.

I’m not sure what exactly French startups did to deserve all this but all I’m going to say is that hopefully the JEI reform won’t go through. But if it does, Leetchi-founder Céline Lazorthes may be right when she says that French companies will turn to offshoring and setting-up elsewhere in the future. Which ironically brings us right back to why the JEI was introduced in the first place.

For anyone who’s interested, here’s the full text (in French) for the 2011 reforms to be put into place (article 78 concerns the JEI).