Alternative Funds 2019

Last Updated September 05, 2019

France

Law and Practice

Authors



Lacourte Raquin Tatar has more than 54 qualified lawyers and legal practitioners, of whom 16 are partners. The firm is organised around three major areas of expertise: mergers and acquisitions, real property transactions, and tax, assisted by recognised experts in the field of financing, regulatory, public business law and litigation. The partners’ strong involvement, in-depth knowledge of the clients and their business sector, as well as the ability to address the most complex issues are the guarantees of high-added value support. Year after year, the firm's success has been measured by the loyalty and development of its client base, which primarily consists of major groups and professionals with the highest expectations. Lacourte Raquin Tatar advises on domestic and international deals for French and foreign clients.

France benefits from a full legal and regulatory framework that applies to any French alternative investment funds (AIFs) and portfolio management companies.

AIFs are subject to general common requirements from the European directive No 2011/61/EU on alternative investment funds managers (the AIFMD) which was implemented into French law on 28 July 2013.

Before that, France already had its own legal and regulatory framework on investment funds. For instance, the first French law on investment companies was adopted on 2 November 1945. However, the French portfolio management industry has substantially developed during the last 30 years. Nowadays, France is one of the leaders of the European portfolio management industry.

French law instituted various legal forms of specific investment funds, such as the investment company with variable capital (SICAV), the mutual fund (FCP) and the special limited partnership (SLP). SICAV and SLP are both commercial companies, with a legal personality, with a variable capital which benefits from a high flexibility in terms of functioning rules, governances rules, shares issuance, etc.

FCPs are investment funds with a contractual form and which do not have any legal personality. An FCP is characterised as a co-ownership of assets.

FCP and SICAV may either qualify as a UCITS (if requirements from the UCITS directive are met) or an AIF.

Moreover, French portfolio management companies (investment funds managers) must be authorised by the French financial market authority (the AMF) and are subject to various regulatory requirements in terms of internal governance, human resources and technical means, prudential rules, etc.

In 2019, the key data on French portfolio management industry are the following:

  • as at January 2019, there are 633 French portfolio management companies, four of which are in the top 25 global ranking but the large majority of which (around 450 portfolio management companies) is composed of entrepreneurial groups – the predominance of such entrepreneurial groups constitutes a key distinctive element of the French portfolio management market;
  • there are EUR1,813 billion of assets under management in French funds, including EUR1,029 billion in French AIFs;
  • of nearly 11,000 investment funds located in France, 70% are AIFs;
  • EUR500 billion are managed for non-resident investors.

(Source: AFG).

The French Monetary and Financial Code (the MFC) distinguishes between two main categories of alternative investment funds (AIFs): AIFs de jure and AIFs de facto (Autres FIA).

AIFs De Jure

French AIFs de jure are collective investment vehicles listed by the MFC and therefore are each subject to a specific legal and regulatory framework in terms of investment rules, governance, functioning rules, etc.

The MFC distinguishes between four sub-categories of AIFs de jure, depending on the type of assets they may invest in and the type of eligible investors.

  • French AIF de jure open to both retail and professional investors, namely:
    1. generic investment funds (fonds d’investissement à vocation générale – FIVG);
    2. private equity investment funds (fonds de capital investissement – FCPR, FCPI or FIP);
    3. real estate investment funds (organismes de placement collectif immobilier – OPCI);
    4. closed-ended investment companies with fixed share capital (sociétés d’investissement à capital fixe – SICAF); and
    5. alternative funds of funds (fonds de fonds alternatifs – FFA).
  • French AIF de jure open to professional investors, namely:
    1. generic professional investment funds (fonds professionnels à vocation générale – FPVG);
    2. professional real estate investment funds (organismes professionnels de placement collectif immobilier – OPPCI);
    3. professional private equity investment funds (fonds professionnels de capital investissement – FPCI);
    4. professional specialised investment funds (fonds professionnels spécialisés – FPS); and
  • special limited partnerships (sociétés de libre partenariat – SLP).
  • French employee savings funds (fonds d’épargne salariale – FCPE and SICAVAS); and
  • French financing vehicles:
    1. securitisation vehicles (which may qualify as AIFs if they meet certain criteria); and
    2. specialised financing vehicles (organismes de financement spécialisé – OFS).

AIFs De Facto

A French AIF de facto is any entity which qualifies as an AIF pursuant to the definition of AIFs in the AIFMD. These AIFs are not subject to any authorisation or notification process with the AMF but they are submitted to general rules applicable to any AIF, as provided for in the AIFMD. The main qualification criterion is the economic analysis of the purpose of this vehicle: if this purpose is to raise capital from investors for investing it in accordance with a predefined investment policy, this investment vehicle may qualify as an AIF.

Two types of legal structure are generally used for French AIFs de jure.

Firstly, a mutual fund (FCP): an FCP is a co-ownership of assets and does not have any legal personality. Therefore, an FCP cannot be self-managed and must always be managed by an AIF manager which represents the FCP vis-à-vis third parties.

Secondly, an investment company with a variable capital (SICAV), either in the form of a simplified limited company (société par actions simplifiée – SAS) or in the form of a public limited company (société anonyme – SA). As it has a legal personality, an investment company may be self-managed. In such case, it has to comply with any requirement applicable to French portfolio management companies.

In addition, French real estate investment funds (OPCI and OPPCI) may be set up as a corporate entity, the SPPICAV, or as an FCP (called an FPI)

Additionally, a French professional specialised investment fund may also be set up in the form of special limited partnerships (SLP).

French AIFs de facto may take the form of any type of legal structure (trust, civil or commercial company, etc).

As the AIFMD was implemented into French Law via the French ordinance No 2013-676 of 25 July 2013, common requirements provided for in the AIFMD and the EU Regulation No 231/2013 (the AIFM Regulation) apply to any French AIF. That includes:

  • rules concerning the marketing of AIFs;
  • rules on the obligation to appoint a depositary which is responsible for (i) safeguarding the assets of the AIF, and (ii) ensuring the compliance of management decisions;
  • rules on the obligation to appoint a management portfolio company and concerning their remuneration;
  • rules concerning the public disclosure; and
  • rules on the obligations of reporting and valuation of AIF assets.

In addition to common requirements, AIFs de jure are individually subject to specific investment rules provided for in the MFC. Such rules concern in particular:

  • investment quotas and ratios regarding certain types of assets;
  • risk-spreading ratios, counterparty risk ratio and control ratio;
  • rules and criteria on assets eligibility; 
  • limits on certain operations such as use of financial derivatives, cash borrowings, guarantees, etc.

In particular, generic investment funds, private equity funds opened to retail investors or real estate investment funds are subject to strict investment constraints.

AIFs opened to professional investors are subject to more flexible investment rules.

In particular, specialised professional investment funds (FPS and SLP) and specialised financing vehicles (OFS) are not subject to any constraints in terms of diversification, risk-spreading ratios and leverage or borrowings, unless they benefit from the European Long-Term Investment Fund (ELTIF) label or the economy financing fund label (fonds de prêt à l'économie).

Some categories of AIFs de jure may benefit from an exemption to the French rules on banking monopoly and then originate loans.

In that context, loan origination by a French AIF is allowed pursuant to two different legal regimes, as detailed below.

The ELTIF Regime

Certain types of professional AIFs which benefit from the ELTIF label may grant loans in France and other member states of the EU. In particular, the ELTIF label implies compliance with several rules on (i) investment strategy and assets eligibility, and (ii) diversification and other investment ratios, that are provided for in the EU Regulation on ELTIF (EU Regulation No 2015/760).

Any AIF wishing to get the ELTIF label must be authorised as such by the AMF.

In France, the ELTIF label is only available to certain categories of professional AIFs de jure: professional private equity investment funds (FPCI), professional specialised investment funds (FPS) and specialised financing bodies (OFS).

Alternative Regime

Some categories of AIFs may grant loans to non-financial companies, pursuant to specific legal provisions that only apply to such categories of AIFs – ie, FPS, OFS, FPCI and French securitisation vehicles (OT).

In that context, special rules apply: loans have meet certain conditions in terms of duration, redemption of shares or units of the AIF must be strictly limited, leverage must be limited, and AIF may use financial derivatives only in limited situations.

Moreover, the portfolio management company which manages AIFs which are able to grant loans must have a specific authorisation from the AMF.

AIFs de facto are not authorised to originate loans in France.

Before the publication of French law No 2019-486 of 22 May 2019 on the growth and transformation of companies, the so-called "PACTE" (Plan d'Action pour la Croissance et la Transformation des Entreprises – Action Plan for Business Growth and Transformation), the only category of investment vehicles likely to invest in cryptocurrencies was the AIF de facto.

The PACTE now enables certain professional AIFs de jure (FPS, SLP, OFS and FPCI) to invest directly in crypto-assets.

This new investment possibility is available to French professional specialised investment funds (FPS). Pursuant to the PACTE, such funds will now be entitled to invest in assets whose ownership rights are based on a distributed ledger technology.

Until then, FPS were able to hold any types of assets or goods, provided that their ownership right was based on a "registration, a notarial deed or a private deed". The PACTE, by formally recognising that the ownership right may also be registered via a blockchain technology, is undoubtedly a huge step for the development of the French market for crypto-assets.

However, the new investment possibility available to FPS is still conditional upon the capability to reliably evaluate such crypto-assets. Portfolio management companies will then have to control that a valuation of crypto-assets is performed on a regular basis – for instance, with the help of independent tokens valuators.

It should be noted that the PACTE provides that FPCI may also hold cryptocurrencies and utility tokens up to a limit of 20% of their assets.

Depending on the type of AIFs, two kinds of procedure with the AMF may apply in connection with the AIF's creation: the authorisation process or the notification process.

In principle, creation or material amendments of French AIFs de jure are subject to the prior authorisation of the AMF. However, certain French AIFs de jure reserved to professional investors are not subject to the AMF prior approval but their creation, modification or termination are subject to a notification process with the AMF.

Authorisation Process with the AMF

The following categories of French AIFs are covered by the authorisation process with the AMF:

  • French AIFs opened both to retail and professional investors:
    1. FIVG;
    2. FCPR, FCPI and FIP;
    3. OPCI; and
    4. FFA.
  • French AIFs opened to professional investors:
    1. FPVG; and
    2. OPPCI.
  • Employee savings funds (FCPE and SICAVAS).

In order to issue an approval for the creation of these products, the AMF verifies in particular (i) the compliance of the AIF with the applicable regulations, and (ii) that the investors are properly informed.

The AMF authorises and monitors French AIFs by checking the information provided in (i) the regulatory documentation: the key investor information document (KIID) (relevant for AIFs distributed to retail investors) and the prospectus, to which are attached the rules for an FCP or the articles of association for a SICAV, and (ii) the marketing materials.

In practice, if the portfolio management company is regulated by the AMF, the authorisation file is sent to the AMF through the online platform GECO.

Once a complete file is received by the AMF, the latter issues an acknowledgment of receipt which mentions the authorisation deadline (one month – ie, 23 business days – from the issuance of the acknowledgment of receipt).

In addition, a fast-track authorisation process enables a relevant AIF to be authorised within eight business days from the issuance of the acknowledgment of receipt. Such process is available for: (i) AIFs which are similar to another AIF that has been previously authorised pursuant to the standard process (referred to as “analogy procedure”); and (ii) AIFs which are dedicated to a certain number of investors (maximum 20) or to a predetermined category of investors (subsidiaries of a group, for example).

Notification Process with the AMF

The notification process covers the following categories of French AIFs:

  • FPCI;
  • FPS;
  • SLP; and
  • OFS.

Constitution or material amendments of such AIFs must be notified to the AMF within one month following the date of their constitution or material amendments, through a notification file.

Once a complete file has been received by the AMF, the latter issues an acknowledgment of receipt within eight business days.

AIF Manager

The AIFMD created a European passport regime in order to enable the access to the European market for AIF managers located in EU member states. The passport procedure allows any AIF manager, duly authorised by the regulator of its home country, to operate throughout the EU or in a state party to the agreement on the European Economic Area (EEA).

As mentioned above, in order to be able to manage French AIFs, any manager must either:

  • be authorised and regulated by the AMF as a French portfolio management company authorised to manage AIFs, if it is located in France; or
  • be authorised and regulated by its local regulator as an AIF manager and comply with the "passport" notification procedure pursuant to the AIFMD if it is located outside France but in an EU member state.

However, if the AIF manager is located in a third country, it needs to apply for a specific approval from the AMF in order to manage French AIFs. In such case, it has to comply with stringent requirements as set out in the MFC, the General Regulation of the AMF and the relevant AMF instructions. The following requirements are of particular importance: compliance with all provisions applicable to French portfolio management companies; appointment of a legal representative in France; existence of bilateral or multilateral tax agreement entered into between its home country and France; existence of an appropriate co-operation agreement between its local regulator and the AMF, etc).

Therefore, there is no requirement to have a local AIF manager as a condition for managing a French AIF. Any foreign AIF manager located in the EU may benefit from the passport regime pursuant to the AIFMD and then be able to manage any French AIF.

Delegation of Financial Management

Please note that any French portfolio management company may use the delegation route with respect to the financial management of French AIFs.

In that context, the investment manager must be authorised by its local regulator "for portfolio management purposes". Therefore, it is not required that the delegate investment manager is located in France or in another EU member state.

As such, the following entities may manage French AIFs through the delegation of management:

  • portfolio management companies approved in France or other investment managers duly authorised in the EEA;
  • any other MiFID entities authorised to provide the service of portfolio management on behalf of third parties; or
  • any other entity of a third country authorised by its local regulator for purposes of asset management, subject that the AMF and the relevant local regulator entered into a co-operation agreement.

There are no other local requirements rules regarding local substance of AIFs.

However, some French requirements apply to French portfolio management companies regarding their local substance (see 3.7 Local Substance Requirements, below).

In accordance with the AIFMD, the custodian shall be established in one of the following locations:

  • for EU AIFs, in the home member state of the AIF; or
  • for non-EU AIFs, in the third country where the AIF is established or in the home member state of the AIFM managing the AIF or in the member state of reference of the AIFM managing the AIF.

In addition, the Compliance and Internal Control Officer (RCCI) must be located in France.

French portfolio management companies and local branches of foreign investment managers must appoint a money-laundering reporting officer (déclarant/correspondant). Due to the fact such person is the key contact for the French financial intelligence unit (TRACFIN), it is recommended that such person is permanently located in France.

Non-local Administrators

In accordance with Annex 1 of the AIFMD, the administration function is a function that an AIF manager may perform on an ancillary basis in the context of the AIF management functions.

Some administrative functions (eg, legal services, client enquiries) may be delegated to entities that do not have specific approvals and therefore do not necessarily have local representation in France.

On the other hand, for some administrative functions such as securities administration (ie, account management and centralisation), it is necessary that the entity to which this function is delegated be regulated. Indeed, the General Regulation of the AMF provides that the centraliser may entrust the performance of centralisation tasks to:

  • one of the persons mentioned in Article L 214-24-46 of the MFC and to an investment service provider located in a state party to the agreement on the EEA; or
  • an intermediary authorised within a State party to the EEA to carry out centralisation tasks within the meaning of Article 422-43 of the General Regulation of the AMF.

In principle, it is not required that such functions are carried out locally. However, in practice, administration functions are also performed by the AIF's custodian, which is submitted to local requirements (see below).

Non-local Custodians

Any French AIF must appoint a custodian located in France, which is listed in a French decree.

However, the custodian may delegate its depositary functions to a non-local custodian, in certain conditions.

AIFs can either be created as corporations, as partnerships or as co-ownerships (FCPs). Their tax regime broadly depends on the legal form they opt for.

Corporations

Corporations are subject to corporate income tax (CIT) under standard rules. However, certain provisions of the French Tax Code provide for a CIT exemption for certain forms of investment funds with respect to profits and capital gains derived from the operations they realise in accordance with their corporate purpose. This concerns SICAVs, venture capital companies (SCRs) and SPPICAVs. Conversely, French AIFs de facto or OFS funds are subject to CIT under standard rules when they exist as corporations.

Partnerships or Co-ownerships

In contrast, AIFs taking the form of partnerships or co-ownerships of assets are tax transparent. As a result, profits and gains they realise are not taxed at the level of the fund but at the level of partners/unit-holders (see 4.7 Tax Regime, below). This mainly concerns FCPs, FCPRs and FPCIs, SLPs (SLPs enjoy the exact same tax regime as FCPRs), FCPIs and FIPs (FCPIs and FIPs are specific types of FCPRs), FCTs (securitisation vehicles), and OFS (if incorporated as mutual funds).

As a general rule, entities must be subject to CIT in France in order to be entitled to double-tax treaties benefits.

As a consequence, but subject to certain exceptions, AIFs are generally not eligible to double-tax treaties. This holds true notably for FCPs or FCPRs (which are not subject to CIT in France on profits and gains they realised) and also for SICAVs or SPPICAVs (which are expressly exempt from CIT in France with respect to profits and capital gains derived from the operations they realise in accordance with their corporate purpose). Notwithstanding the above, note that the French Tax Authorities consider that non-resident investors may benefit from double tax treaties clauses with respect to French-source income originating from FCPs or SICAVs.

For certain types of investments (mostly private equity and real estate), it is quite common to use subsidiaries for investment purposes.

On a legal and regulatory perspective, the use of subsidiaries may enable the AIF to benefit from a leverage at the level of its subsidiaries. Such investment pattern also enables "blocking" of any liability and legal actions related to the relevant investment at the level of the subsidiary only. In practice, the subsidiary may then directly raise loans, grant securities or guarantees, bear the liability of construction works or other types of operations on the assets indirectly held by the AIF.

Sponsors of French AIFs may come from any country (eg, USA, UK, Canada, China, UAE, etc) – there is no clear trend on this matter.

There is no clear trend on the country of origin of investors in French AIFs, even though, due to the impact of Brexit and the perceived stability of the current political situation in France, there appear to be more opportunities to invest in France. However, it is estimated that more than the half of the assets under management in French AIFs comes from foreign investors (source: AFG).

There is no clear trend on this matter. The destination of investment made by French AIFs mostly depends on the investment strategy implemented by each AIF.

In terms of assets under management, there were a decreased amount of assets under management, due to global negative performances of the markets in 2018, transfer of location of AIFs managed in France and negative net inflows.

At the level of the French portfolio management industry, the number of new portfolio management companies seems to remain stable over the last five years, although there is a trend of convergence of portfolio management companies (mergers or aggregation) in order to face an increasing competition and the decrease of margins. However, the AMF noticed that as of the second half of 2018, there was a significant increase in the number of authorisation requests – more than 60 authorisation requests were filed in 2018 (source: AMF). The AMF explains that such increase is mainly related to the market dynamism of entrepreneurial projects and the current international and European political and economic context. For instance, the Paris financial centre benefitted in 2018 and 2019 from Brexit, which has so far led to partial or total relocation of activities of some British investment firms and British investment managers.

Consequently, the AMF estimates that the 2010 historic record of new French portfolio management companies (set at 53) will be exceeded in 2019.

France currently has the second highest number of AIFs in Europe (including the UK).

The French AIF industry also benefits from a favourable trend in terms of regulatory development. New French laws and regulations enable the creation of new types of investment funds and provide incentives to develop the French AIFs industry (such as the new PACTE law in 2019 which enables professional investment funds to invest in crypto-assets or to be invested in the context of unit-linked insurance policies, the French ordinance which created the OFS, the "Macron law" in 2015 which created the SLP, etc).

Such a trend is also supplemented at the EU level, as recent EU regulations in favour of the creation of new types of investment funds were recently adopted (EU Regulation No 2019/1238 on the creation of a pan-European Personal Pension Product (PEPP), the ELTIF Regulation, EuVECa and EuSEF Regulations, etc).

AIFM are subject to several disclosure and reporting requirements. Such requirements were initially set out by the AIFMD.

Thus, the AIFMD enforced some transparency requirements intended to protect investors through the annual report, pre-contractual information and some reporting obligation to the AMF.

Annual Report

The AIFM must publish an annual report per financial year for each EU AIF it manages and for each AIF it markets in the EU. The content of this report is provided for in an AMF instruction. The report shall, in principle, be published no later than six months after the end of the financial year.

Pre-contractual Information

When the AIF is managed or marketed in the EU, the AIF or its AIFM shall make available to investors, the information provided for in the General Regulation of the AMF before they invest in the AIF, as well as any material changes concerning such information. Article 23 of the AIFMD details the content of the information to be provided (see 4.6 Disclosure Requirements, below).

Reporting to the AMF

French AIFMs are required to report information to the AMF on a regular basis. Information to be provided by the AIFMs are detailed in Annex 4 of the AIFM Regulation. In addition, the ESMA issued its guidelines on reporting requirements under the AIFMD (ESMA/2014/869). Such guidelines were totally incorporated into the AMF doctrine, via the AMF Position No 2014-09 (methods for meeting requirements to report to the AMF under the AIFMD).

The frequency of such reports mostly depends on (i) the amount of assets under management of the AIFM, and (ii) the use of leverage (whether on a substantial basis or not).

For example, the AIFM regularly reports to the AMF on the main markets on which it operates, the main instruments it trades, its main exposures and its most significant concentrations.

In addition, AIFM of AIFs de facto have an obligation to register them with the AMF.

At the EU level the EU directive 2019/1160 of 20 June 2019 amending the AIFMD includes a new definition of pre-marketing. The main objective of this directive is to harmonise the rules on marketing of AIFs. A two-year national implementation period began on 2 August 2019 for the Directive to be fully transposed from 2 August 2021.

At the French law level, the PACTE contains many provisions favourable to investment funds, particularly (i) the eligibility of professional AIFs for units account of life-insurance contract and (ii) the ability for certain professional AIFs de jure (FPS, SLP, OFS and FPCI) to invest directly in crypto-assets (as developed above).

At the AMF level:

  • the General Regulations of the AMF was amended in order to include new provisions on OFS – a future AMF instruction will supplement these new provisions; and
  • AMF is currently updating its doctrine (instructions, positions and recommendations) in order to take into account the implementation of MiFID into French law (which occurred as of January 2018).

French AIFMs typically use the following legal structures:

  • a simplified limited company (SAS); or
  • a public limited company (SA).

AIFMs are responsible for the portfolio management and the risk management of AIFs.

Under French law, AIFMs must be authorised by the AMF as portfolio management companies.

As regulated entities, portfolio management companies are subject to a complete legal and regulatory framework. Thus, any portfolio management company must comply with many requirements, in particular:

  • obligations that apply to their internal governance, conducting officer, human and technical resources, etc;
  • obligations in terms of own funds;
  • obligations in terms of remuneration in the context of the management of AIFs;
  • good conduct rules (eg, any AIFM must act in the sole interest of the AIF shareholders or unit-holders);
  • conditions and criteria that apply to delegation and outsourcing of functions or activities (see 3.6 Outsourcing of Investment Functions/Business Operations, below);
  • requirements on detection and management of conflicts of interests;
  • rules on anti-money laundering and countering the financing of terrorism (AML/CFT);

Fees invoiced by portfolio management companies (ie, management fees, commissions related to issuance or placement of shares/units) are generally fully subject to CIT under standard rules. Subject to certain exceptions, such fees are generally exempt from VAT.

As a general rule, companies must be operated in France in order to be subject to CIT in France on profits they realise.

In this respect, in a ruling dated 21 September 2012, the French Tax Authorities have indicated that the fact of a French portfolio management company managing a foreign AIF should not, per se, create a French permanent establishment in France of such AIF. Pursuant to this ruling, the profits and gains realised by such foreign AIF are not subject to CIT in France. This rule applies to any type of AIFs (ie, funds taking the form of corporations or partnerships or co-ownerships of assets), and whatever the jurisdiction in which they are established (EU member state or not). However, it is important to note that, in contrast, fees received by such portfolio management company with respect to the foreign AIFs are taxable in France.

A specific tax regime applies to distributions paid and gains realised on sales of carried interest shares or units by carried interest shareholders or unit-holders under certain conditions.

This tax regime applies to:

  • carried interest shares or units issued by FCPR or FPCIs; and
  • carried interest shares issued by SCRs.

Under this regime, distributions paid by such funds and gains realised on sales of carried interest shares or units by carried interest shareholders or unit-holders are treated as capital gains or income on securities for individual tax purposes. Under this regime they benefit from a flat taxation rate of 30% (see 4.7 FATCA/CRS Compliance Regime, below).

When the above regime is not applicable, distributions to which carried interest shares or units entitle and net capital gains on sale or redemption of carried interest shares or units are subject to individual income tax as salaries (at scaling rates up to 49%). They also are subject to social contributions.

AIFMs are authorised to outsource and/or delegate some of their investment functions or business operations. Thus, all functions linked with AIF management as listed in Annex I of the AIFMD might be delegated – ie, (i) the portfolio management or risk management functions of the AIF, and (ii) the ancillary functions that an AIFM may perform in the context of the AIF management, namely the administration of the AIF, the marketing of units and the activities related to the assets of an AIF.

However, the delegation of AIF management functions should not lead the AIFM to become essentially a "mailbox entity". Therefore, such delegation must always be partial with respect to the activities carried out by portfolio management company. Portfolio management companies are required to maintain adequate resources at all time and must retain added value in monitoring the risks linked with its activities. Subsequently, an AIFM may not delegate both the portfolio management and the risk management of its AIFs.

Any outsourcing and delegation must meet some general conditions as required by the AMF. Such conditions are detailed by Articles 318-58 to 318-61 (outsourcing) and Article 318-62 (delegation of financial management) of the General Regulation of the AMF. In particular:

  • such delegation or outsourced scenario has to be described in its programme of operations;
  • the AIFM and its senior managers remain fully responsible for fulfilling their professional obligations;
  • any outsourced or delegated tasks or functions must be adequately monitored by the AIFM;
  • the AIFM entered into a written agreement with its delegate with respect to the delegated or outsourced tasks or functions.

In addition, when the delegation concerns portfolio management such delegation must in particular:

  • not be granted to the custodian or its delegate or to any other entity in a situation of conflict of interest; and
  • be granted only to entities which are authorised for the purposes of asset management and subject to supervision or, where this condition cannot be fulfilled, only with the prior approval of the AMF.

Moreover, the delegate must have sufficient resources to accomplish its tasks and its managers must be of good reputation and have sufficient experience. Thus, the AIFM must be able to demonstrate that:

  • the delegate is qualified and capable of undertaking the relevant delegated tasks;
  • the delegate was selected with all due care;
  • the AIFM is able to effectively monitor at any time the delegated activity, to give instructions to the delegate and to withdraw the delegation with immediate effect.

In addition, the AIFM's liability (towards the investors and the AIFs) may not be affected by the delegation or the outsourcing.

Any AIFM must maintain sufficient financial, technical and human resources in line with the nature of its business, investment services and the complexity of its activities. As such, the AIFM must at least have, in particular:

  • two conducting officers, including at least a conducting officer present on a full-time basis – the other conducting may be present on a partial time basis, but at least at 20% of its working time;
  • in order to ensure the continuity of resources, the AIF manager must have at least three people for an equivalent of three full-time equivalents, including at least two full-time portfolio managers.

French AIFMs must in particular:

  • be authorised by the AMF in order to manage AIFs;
  • join a professional association;
  • establish its registered office in France;
  • have a minimum initial capital of EUR125,000, which must be fully paid up;
  • appoint a person responsible for compliance and internal control functions; and
  • comply with own funds requirements which derive from the EU Regulation No 575/2013 (the CRR).

EU AIFMs which manage French AIFs on a cross-border basis pursuant to the AIFMD passport regime are submitted to the supervision of the competent authority of their home member state. However, they must comply with some good conduct rules applicable in France – namely: rules applicable to marketing and information to investors or potential investors; rules on marketing materials; good conduct rules on financial solicitation ("démarchage") if relevant, etc.

Foreign managers located in a third country do not benefit from the AIFMD passport regime. Therefore, if they wish to manage French AIFs, they must in particular comply with the following requirements:

  • AMF’s prior approval;
  • compliance with all provisions applicable to French portfolio management companies which derived from the AIFMD;
  • appointment of a legal representative in France, acting as a local contact point;
  • appointment of one or more third-party service providers to act as depositary(ies) and notify the AMF of such appointment;
  • there must be appropriate co-operation arrangements in compliance with the AIFMD between the AIF manager’s home country regulator and the AMF for systemic risk oversight in line with international standards;
  • the AIF manager's home country must have entered into a bilateral or multilateral tax agreement with France; and
  • the home country must not appear in the list of risk countries as published by the Financial Action Task Force (FATF).

As French law provides for a wide range of investment funds implementing different types of investment strategies, the types of investors which are interested in investing in AIFs depend on the investment strategy implemented by the relevant AIF and the eventual tax regime that applies to investments in such investment funds.

For instance, French venture capital funds are mostly designed for retail investors, which are looking for a favourable tax regime related to such type of private equity investments.

Some AIFs opened to retail investors are also mostly used as unit accounts in life insurance contracts.

In addition, AIFs opened to professional investors (such as FPS, SLP and OPPCI for instance) are invested mostly by institutional investors (pension funds, credit institutions, insurance companies, large corporate entities, etc).

Depending on the type of AIFs, they may be marketed either to retail and professional investors or just to professional investors.

The main distinction is the following, (i) the AIFs that target professional investors (AIF de jure eligible to professional investor – ie, FPVG, OPPCI, FPCI, FPS, SLP) and (ii) the AIFs that market their shares both to retail and professional investors (ie, FIVG, FCPR, FCPI, OPCI, and SICAF), to which special rules apply.

For AIFs de jure opened to professional investors, an eligible investor is either:

  • a professional investor within the meaning of MiFID;
  • any investor provided that the amount of its initial investment is at least equal to EUR100,000;
  • any investor provided that the subscription or acquisition of shares or units is performed in its name and on its behalf by an investment services provider acting in the context of the service of portfolio management;
  • as the case may be, any retail investors if the AIF benefits from the ELTIF label pursuant to the EU Regulation No 2015/760; or
  • for some professional AIFs (FPCI, FPS, SLP and OFS), any member of the management team or the management company or any person who assists the management company and whose initial investment is at least equal to EUR30,000.

Rules that apply to firms marketing AIFs in France are provided in:

  • the MFC;
  • the General Regulation of the AMF; and
  • the relevant AMF instructions and guidelines applicable to the content requirements of marketing materials.

The marketing of AIFs in France is subject to a complete regulatory framework, in particular:

  • the AMF adopts a definition of marketing that is wider than the definition provided for in the AIFMD – even so, the AMF listed some situations which are not considered as "marketing", including some situations which may constitute a "pre-marketing" activity;
  • marketing of AIFs in France is subject to either a notification process with the AMF or a prior approval by the AMF (see 4.5 Regulatory Regime, below);
  • there are many local requirements that apply to marketing materials, which are set out in AMF Position No 2011-24 – moreover, the AMF is entitled to ask to be provided with any marketing materials related to any AIF marketed in France prior to their publication.

Local investors may invest in AIFs established in France. However, such types of AIFs are opened only to professional investors or retail investors that invest at least EUR100,000. Some AIFs may also provide for additional restrictions or conditions.

Marketing AIFs in France is subject to:

  • a prior approval by the AMF if the relevant AIFs are intended to be marketed to retail investors; or
  • a notification process with the AMF if it is contemplated promoting the relevant AIFs to professional investors only (pursuant to the AIFMD).

In addition, please note that, at this stage, the AIFMD passport regime only applies for cross-border marketing to professional investors. Therefore, the approval process with the AMF applying to AIFs marketed to retail investors constitute a local regime that only applies in France.

These filings have to be made upwind of the marketing of AIFs.

In the event of a substantial change in any of the information communicated at the time of the application for authorisation or when notifying the AMF, the AIFM shall notify the AMF electronically at least one month before implementing the said change for any planned change, or immediately after an unexpected change.

Any AIFM located in another EU member state that manages one or more French AIFs must pay a contribution to the AMF (the amount due is linked to the amount of assets under management of the AIFM). The minimum amount due to the AMF by any AIFM is EUR1,500.

AIF managers shall, for each of the EU AIFs that they manage and for each of the AIFs that they market in the EU, make available to AIF investors – before any investment made by a potential investor – all information listed in Article 23 of the AIFMD. This should include, in particular: description of the investment strategy; the identity of the AIFM, the depositary, the auditor and any other service providers; the AIF's valuation procedure, the measure taken to manage the AIF's liquidity, etc.

In practice, such minimum information is included in the prospectus and/or any constitutive document (by-laws, rules, etc) of any AIF. For AIFs de jure, the AMF published templates of prospectus, rules and bylaws which include such minimum information.

In addition, the AIF or its portfolio management company shall provide the unit-holders or the shareholders with the following documents:

  • semi-annual report or quarterly report; and
  • semi-annual or quarterly asset composition.

Any French portfolio management company must also publish and/or make available to the investors information on:

  • its policy on complaints handling;
  • its voting policy;
  • the way it takes into account environmental, social and governance criteria in its management policies (on its website and/or in its annual report);
  • its internal remuneration policy (for instance, through an independent remuneration policy statement, a periodic disclosure in the annual report or any other form); and
  • its policy on execution of orders.

The applicable tax regime depends on the tax residence of the investor (ie, domestic or foreign investors).

French Tax Residents Investors

Individual investors

The tax regime applicable to French individual investors depends on the legal form of the AIF in which they invest.

When they invest in an AIF existing as a corporation (eg, a SICAV), individuals are generally subject to income tax on the distributions paid by such AIF. In respect of such distributions, individuals are treated as if they had directly derived the underlying profits (distributed capital gains are treated as capital gains and redistributed dividends are treated as dividends for tax purposes). At the level of the investors, both types of income are then treated in the same manner. They are subject to a flat tax at the rate of 30% (12.8% income tax plus 17.2% of social levies).

When they invest in funds existing as mutual funds (FCPs), individual are technically deemed to directly derive the income realised by such funds on the year in which they are effectively distributed (tax transparency regime). Notwithstanding the above, individuals may enjoy an individual income tax exemption on the dividends and gains derived from units or shares they hold in FCPRs, FCPIs, SCRs and SLPs, provided that:

  • they commit to retain their shares for at least five years and to reinvest in the fund the sums distributed during such a period;
  • they do not hold directly or indirectly more than 25% of the share capital of the companies in which the AIF has invested; and
  • the AIF respects certain investment ratios (notably to invest 50% of their assets in securities issued by certain non-listed European companies).

Corporate investors (subject to CIT)

As a general rule, corporate investors that hold shares/units in an AIF are subject to CIT under standard rules (rate of 31% in 2019, 28% from 2020, 26.5% from 2021 and 25% from 2022) upon any change in the liquidation value of the shares/units they hold (ie, the so-called “mark-to-market” rule). This holds true whatever the legal form of the AIF (mutual fund or corporation) and whatever its location. Furthermore, any distributions paid or capital gains distributed by the fund to investors are also subject to taxation at standard CIT rates (net to of any mark to market taxation).

However, FCPRs, SCRs, SLPs, SPPICAVs, FPIs and certain FCPs (investing at least 90% of their assets in shares) are not concerned by this mark-to-market rule. Corporate investors of such funds are rather taxed according to a tax transparency regime upon any redistribution of profits and gains realised by the AIFs. Corporate investors may notably benefit from the French participation-exemption regime in respect of capital gains distributed by FCPRs, SCRs and SLPs (ie, 88% CIT subject to the underlying shares being eligible to such participation-exemption regime).

Non-French Tax Residents

Taxation of income received by the fund and distributed to the investors

Distributions paid to European individuals or corporate investors are generally subject to a withholding tax at the rate of 12.8% for individual investors who are EEA tax residents or of 30% for any other investors (ie, 28% from 2020, 26.5% from 2021 and 25% from 2022) if the distribution reflects dividends received by the fund from French companies. However, most double tax treaties entered into by France provide for reduced withholding tax rates that vary from 0% to 15%, depending on the tax jurisdiction of the investor (being nonetheless specified that, generally, investment funds do not enjoy the benefits of all double tax treaties entered into by France – double tax treaty relief may instead be claimed by the investors themselves – see 2.12 Double-tax Treaties, above).

No withholding taxation generally applies in France on distributions reflecting interest income received by the fund from French companies.

Except when they are distributed by FPIs (for which they are subject to individual income tax on real estate properties) or SPPICAVs (for which they are fully subject to dividend withholding tax), no taxation generally applies in France on distributions drawn out from capital gains realised by the fund from the disposal of shares in a French company unless the shareholder/unit-holder, his/her spouse and their relatives in the ascending and descending line, hold, directly or indirectly, more than 25% of the rights in such underlying company.

Taxation of capital gains made upon disposal of the fund units or shares

Subject to the exceptions detailed below regarding SPPICAVs and FPIs and to other specific exceptions, no taxation generally applies in France in respect of capital gains derived from the disposal of a fund’s shares or units, unless the shareholder/unit-holder, his/her spouse and their relatives in the ascending and descending line, hold, directly or indirectly, more than 25% of the rights in one of the French companies of its portfolio (or in the fund). French regulations do not make a distinction between pension fund investors and other investors.

Notwithstanding the above, capital gains derived by non-residents from the disposal of shares in (i) SPPICAVs in which they hold directly or indirectly 10% or more of the shares, and (ii) FPIs are generally taxable in France:

  • at a rate of 31% for legal persons (ie, 28% from 2020, 26.5% from 2021 and 25% from 2022); or
  • at a rate of 19% for individuals (and social contributions).

Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by US Congress to target non-compliance by US taxpayers using foreign accounts. FATCA requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. FATCA has been implemented in France insofar as France and the USA entered into an intergovernmental agreement regarding FATCA on 14 November 2013.

The Common Reporting Standard (CRS) was developed in response to the G20 request and approved by the OECD Council in 15 July 2014 to improve transparency and automatic exchange of tax information. CRS requires from jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. France has signed the multilateral agreement for the automatic exchange of information relating to financial accounts on 29 October 2014.

Implementation of FATCA and CRS is still ongoing in France. For instance, Article 56 of France’s Amending Finance Bill for 2017 included provisions related to the obligations of financial institutions in relation to FATCA, CRS and the European Directive on Administration Cooperation in Taxation provisions related to financial accounts, notably regarding carrying and archiving the audit trail of their client due diligences, as well as their supervision by the French financial regulator (in addition to the tax authority). Article 56 France’s Amending Finance Bill for 2017 also created new penalties for financial institutions and clients in case of failure to meet certain requirements related to FATCA and CRS. A French decree dated 3 July 2018 (which entered into force on 1 November 2018) specified rules relating to the preparation and the procedure applicable to financial institutions for transmitting the list of clients who do not to communicate information about their tax residence.

Lacourte Raquin Tatar

36, rue Beaujon
75008 Paris
France

+33 1 58 54 40 00

+33 1 58 54 40 99

contact@lacourte.com www.lacourte.com
Author Business Card

Law and Practice

Authors



Lacourte Raquin Tatar has more than 54 qualified lawyers and legal practitioners, of whom 16 are partners. The firm is organised around three major areas of expertise: mergers and acquisitions, real property transactions, and tax, assisted by recognised experts in the field of financing, regulatory, public business law and litigation. The partners’ strong involvement, in-depth knowledge of the clients and their business sector, as well as the ability to address the most complex issues are the guarantees of high-added value support. Year after year, the firm's success has been measured by the loyalty and development of its client base, which primarily consists of major groups and professionals with the highest expectations. Lacourte Raquin Tatar advises on domestic and international deals for French and foreign clients.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.