Alternative Funds 2020

Last Updated October 13, 2020

France

Law and Practice

Authors



Lacourte Raquin Tatar has more than 57 qualified lawyers and legal practitioners, of whom 17 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 their 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 (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). SICAVs and SLPs are both commercial companies, with a legal personality, with a variable capital which benefits from high flexibility in terms of functioning rules, governance rules, shares issuance, etc.

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

Both FCPs and SICAVs may either qualify as Undertakings for Collective Investments in Transferable Securities (UCITS), if requirements from the UCITS Directive are met, or as AIFs.

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

In 2020, the key data on French portfolio management industry is as follows:

  • at the end of 2019, there were 657 French portfolio management companies, four of which were in the top 25 global ranking but the large majority of which (around 450 portfolio management companies) are composed of entrepreneurial groups – the predominance of such entrepreneurial groups constitutes a key distinctive element of the French portfolio management market;
  • there are EUR1,960 billion of assets under management in French funds (+7.6% over a year), including EUR1,137 billion in French AIFs (+9.5% over a year);
  • of nearly 11,350 investment funds located in France, 72% are AIFs; and
  • EUR550 billion are managed for non-resident investors (through funds or through management mandates).

(Sources: AMF and Association française de la gestion financière or AFG).

The French Monetary and Financial Code (MFC) distinguishes between two main categories of 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 each is therefore subject to a specific legal and regulatory framework in terms of investment rules, governance, functioning rules, etc.

The MFC distinguishes between four subcategories 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:

  • generic investment funds (fonds d’investissement à vocation générale or FIVG);
  • private equity investment funds (fonds de capital investissement or FCPR or FCPI or FIP);
  • real estate investment funds (organismes de placement collectif immobilier or OPCI);
  • real estate investment civil companies (sociétés civiles de placement immobilier or SCPI);
  • forest savings companies (sociétés d'épargne forestière ou groupements forestiers d'investissement or SEF or GFI);
  • closed-end investment companies with fixed share capital (sociétés d’investissement à capital fixe or SICAF); and
  • alternative funds of funds (fonds de fonds alternatifs or FFA).

French AIF de jure open to professional investors, namely:

  • generic professional investment funds (fonds professionnels à vocation générale or FPVG);
  • professional real estate investment funds (organismes professionnels de placement collectif immobilier or OPPCI);
  • professional private equity investment funds (fonds professionnels de capital investissement or FPCI);
  • professional specialised investment funds (fonds professionnels spécialisés or FPS); and
  • special limited partnerships (sociétés de libre partenariat or SLP).

French employee savings funds (fonds d’épargne salariale or FCPE and SICAVAS); and

French financing vehicles:

  • securitisation vehicles (organismes de titrisation or OT), which may be subject to the AIFMD if they meet certain criteria; and
  • specialised financing vehicles (organismes de financement spécialisé or 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 in order to invest it in accordance with a predefined investment policy, this investment vehicle may qualify as an AIF.

AIFs de jure

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

Firstly, an FCP: this 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 (AIFM) which represents the FCP vis-à-vis third parties.

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

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

Additionally, a French professional specialised investment fund may also be set up in the form of an SLP.

AIFs de facto

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 through French Ordinance No 2013-676 of 25 July 2013, common requirements provided for in the AIFMD and EU Regulation No 231/2013 (AIFM Regulation) apply to any French AIF. These include:

  • rules concerning the marketing of AIFs;
  • rules on the obligation to appoint a custodian which is responsible for;
    1. safeguarding the assets of the AIF; and
    2. ensuring the compliance of management decisions;
  • rules on the obligation to appoint an AIFM and concerning their remuneration;
  • rules concerning 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; and
  • limits on certain operations such as the use of financial derivatives, cash borrowings, guarantees, etc.

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

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

In particular, the specialised professional investment fund (FPS and SLP) and specialised financing vehicle (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 prêts 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 European Union (EU). In particular, the ELTIF label implies compliance with several rules on:

  • investment strategy and assets eligibility; and
  • 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 (FPCIs), professional specialised investment funds (FPSs) and specialised financing bodies (OFSs).

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, the FPS, OFS, FPCI and OT.

In this context, special rules apply:

  • loans have to meet certain conditions in terms of duration;
  • redemption of shares or units of the AIF must be strictly limited;
  • leverage must be limited; and
  • the AIF may use financial derivatives only in limited situations.

Moreover, the AIFM of such AIFs must have specific authorisation from the AMF and must implement specific internal human and technical resources related to the loans origination activity.

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 the Growth and Transformation of Businesses), the only category of investment vehicle likely to invest in cryptocurrencies was the AIF de facto.

The PACTE now enables certain professional AIFs de jure (FPSs, SLPs, OFSs and FPCIs) 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.

Before this, FPSs 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 FPSs is still conditional upon the capability to reliably evaluate such crypto-assets. The AIFM 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 FPCIs 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 an AIF's creation: the authorisation process or the notification process.

In principle, creation and 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 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 open to both retail and professional investors:

  • FIVG;
  • FCPR, FCPI and FIP;
  • OPCI; and
  • FFA.

French AIFs open to professional investors:

  • FPVG; and
  • 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 AIFM 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 acknowledgement of receipt which mentions the authorisation deadline (one month – ie, 23 business days, from the issuance of the acknowledgement 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 acknowledgement of receipt. Such process is available for:

  • AIFs which are similar to another AIF or UCITS that has previously been authorised pursuant to the standard process (referred to as “analogy procedure”); and
  • AIFs which are dedicated to a certain number of investors (maximum 20) or to a predetermined category of investor (eg, subsidiaries of a group).

Notification Process with the AMF

The notification process covers the following categories of French AIFs:

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

The creation and 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 acknowledgement of receipt within eight business days.

AIFM

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

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 AIFM 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 AIFM is located in a third country, it needs to apply for 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 AIFMs; appointment of a legal representative in France; the existence of a bilateral or multilateral tax agreement entered into between its home country and France; the existence of an appropriate co-operation agreement between its local regulator and the AMF, etc.

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

Delegation of Financial Management

Any French AIFM may use the delegation route with respect to the financial management of French AIFs (see 3.6 Outsourcing of Investment Functions/Business Operations).

In this context, the delegate 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 the portfolio (or a portion of the portfolio) of French AIFs through the financial management delegation route:

  • portfolio management companies authorised in France or other AIFMs duly authorised in the EEA;
  • any other entities authorised pursuant to the EU Directive on markets in financial instruments (MiFID), which are specifically authorised to provide the service of portfolio management on behalf of third parties; or
  • any other entities in a third country authorised by their local regulator for “portfolio management purposes”, subject to the AMF and the relevant local regulator having entered into a co-operation agreement.

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

However, some French requirements apply to French AIFMs regarding their local substance (see 3.7 Local Substance Requirements).        

In accordance with the AIFMD, the custodian must 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 or in the member state of reference of the AIFM.

Non-local Administrators

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

However, for some specific 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.

For instance, 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 that is party to the agreement on the EEA; or
  • an intermediary authorised within a state that is party to the EEA to carry out centralisation tasks within the meaning of Article 422–43 of the General Regulation of the AMF.

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

Non-local Custodians

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

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

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

Corporations

Corporations are subject to corporate income tax (CIT) under standard rules. However, certain provisions of the French Tax Code (FTC) provide that certain forms of investment funds may benefit from a CIT exemption 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 existing as partnerships or co-ownerships of assets (mutual funds) are tax transparent. As a result, profits and gains they realise are not taxed at their own level but at the level of unit-holders (see 4.7 Tax Regime). This concerns FCPs, FCPRs and FPCIs, SLPs (SLPs enjoy the same tax regime as FCPRs), FCPIs and FIPs (FCPIs and FIPs are specific types of FCPRs), FCTs (securitisation vehicles), and OFSs (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 benefit from 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 treaty clauses with respect to French-source income (eg, dividends or interest) originating from FCPs or SICAVs, on the condition that they provide the necessary justifications to the depositary of the fund. This tolerance does not apply to sums paid to non-resident investors located in a non-co-operative state or territory within the meaning of Article 238-0 A of the FTC.

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

From a legal and regulatory perspective, the use of subsidiaries may enable the AIF to benefit from 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, the USA, UK, Canada, China, UAE, etc) – there is no clear trend in this matter.        

There is no clear trend regarding 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. Thus, at the end of 2019 more than EUR550 billion were managed for non-resident investors (through funds or management mandates).

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

At the end of 2019, the value of assets under management in funds amounted to EUR1,960 billion (an increase of +7.6% after -5.8% in 2018), including EUR1,137 billion in French AIFs.

Increase in Portfolio Management Companies

At the level of the French portfolio management industry, the number of portfolio management companies jumped to 657 at the end of 2019, due to the creation of 45 portfolio management companies in 2019 (against 24 in 2018). This can be explained, among other things, by the establishment in France of a significant number of management companies in anticipation of Brexit. Of the 45 new portfolio management companies, ten are directly related to the consequences of Brexit.

(Source: AMF)

Convergence of Portfolio Management Companies

At the same time, there is a trend of convergence of portfolio management companies (mergers or aggregation) in order to face an increase in competition and a decrease in margins.

Assets Under Management

In terms of assets under management, France ranks second, with a market share of 18%, behind the United Kingdom (26%) and ahead of Germany (15%). In terms of fund domiciliation, France currently has the second highest number of AIFs in Europe (including the UK).

(Source: AFG)

COVID-19

The shock associated with the COVID-19 crisis hit the French asset management industry quite hard. However, for funds governed by French law, which suffered from the market downturns in March/April, the redemptions remained very limited for equity and diversified funds, which is reassuring in terms of the risk of a vicious circle between the outflow and negative fund performance. The crisis is also creating investment opportunities for private equity funds, which have very significant investment capacities (eg, new evergreen private equity funds).

(Source: AMF)

Regulatory Development

The French AIF industry is also benefiting from a favourable trend in terms of regulatory development. New French laws and regulations have enabled the creation of new types of investment funds and provided incentives to develop the French AIF industry (such as the new law PACTE in 2019 which enables professional investment funds to invest in crypto-assets or to be invested in the context of unit-linked life insurance contracts; the French ordinance in 2017 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).       

Regarding the OFS, a decree at the end of 2019 and AMF instruction in 2020 supplemented its regulatory regime. The AMF instruction specifies the notification process with the AMF and provides for an AMF template of its prospectus.

Finally, the AMF published a recommendation (No 2020/03) in 2020 detailing the information to be provided to retail investors who invest in AIFs which take into account environmental, social and governance criteria (ESG Criteria).

AIFMs are subject to several disclosures and reporting requirements. Such requirements were initially set out in 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 must make the information provided in the General Regulation of the AMF, as well as any material changes regarding such information, available to investors before they invest in the AIF. Article 23 of the AIFMD details the content of the information to be provided (see 4.6 Disclosure Requirements).

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 is detailed in Annex 4 of the AIFM Regulation. In addition, the European Securities and Markets Authority (ESMA) issued its guidelines on reporting requirements under the AIFMD (ESMA/2014/869). Such guidelines are totally implemented by 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:

  • the amount of assets under the management of the AIFM; and
  • the use of leverage (whether on a substantial basis or not).

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

In addition, AIFMs 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.

Moreover, AIFs compelled to produce a KIID compliant with EU Regulation No 583/2010 will have to replace this with the key information document (KID) pursuant to EU Regulation No 1286/2014 (the PRIIPs Regulation) as of 31 December 2021. The obligation to produce a KID pursuant to the PRIIPs Regulation is already applicable to AIFs marketed to retail investors which are not subject to EU Regulation No 583/2010 (such as AIFs de facto or SCPIs).

At the French law level, the PACTE contains many provisions favourable to investment funds, particularly:

  • the eligibility of professional AIFs for units-linked life-insurance contracts; and
  • the ability for certain professional AIFs de jure (such as the FPS, SLP, OFS and FPCI) to invest directly in crypto-assets (see 2.5 Cryptocurrencies and Non-traditional Assets).

At the AMF level:

  • the 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). At the time of writing, this updating work was almost complete.
  • the AMF will certainly supplement the regulatory regime of the OT (which has become obsolete) with new provisions in the General Regulation of the AMF and by future instruction.

French AIFMs typically use the following legal structures:

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

AIFMs are responsible for portfolio management and 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 officers, human and technical resources, etc;
  • obligations in terms of own funds;
  • obligations in terms of remuneration in the context of AIF management;
  • 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);
  • requirements on detection and management of conflicts of interests; and
  • rules on anti-money laundering and countering the financing of terrorism (AML/CFT).

Fees invoiced by portfolio management companies (ie, management fees and commissions related to issuance or placement of shares/units) to AIFs are generally fully subject to CIT under standard rules. However, such fees are generally exempt from VAT. This holds true when they are invoiced notably to AIFs open to professional and non-professional investors, OFSs, SCRs, SPPICAVs or FPIs (the list of funds whose management is exempt from VAT is provided in Article 71 Annex III of the FTC).

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 indicated that the fact that a French portfolio management company manages a foreign AIF should not, per se, make such AIF a French permanent establishment in France. Pursuant to this ruling, the profits and gains realised by such foreign AIFs are not subject to CIT in France. This rule applies to any type of AIF (ie, funds taking the form of corporations or partnerships or co-ownerships of assets), no matter the jurisdiction in which they are established (EU member state or not). However, it is important to note that, by contrast, fees received by such portfolio management companies with respect to foreign AIFs and remunerations perceived by members of such companies, if located in France, 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 (these conditions concern both the shareholders or unit-holders and the carried interest shares or units).

This tax regime applies to:

  • carried interest shares or units issued by FCPRs 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 income tax purposes. Under this regime, they benefit from a flat taxation rate of 30% (see 4.7 Tax Regime).

Otherwise, distributions and gains are treated as salaries for individual income tax purposes (taxed at scaling rates up to 49%). They are also subject to a specific social contribution at a rate of 30%.

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, that is:

  • the portfolio management or risk management functions of the AIF; and
  • the ancillary functions that an AIFM may perform in the context of management of the AIF, namely, the administration of the AIF, the marketing of units and the activities related to the assets of the AIF.

However, the delegation of AIF management functions should not lead to the AIFM essentially becoming a “mailbox entity”. Therefore, such delegation must always be regardful of the activities carried out by the portfolio management company. Portfolio management companies are required to maintain adequate resources at all times and must retain added value in monitoring the risks linked with their 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 outsourcing arrangement has to be described in the AIFM's 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; and
  • the AIFM must enter 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 “portfolio management purposes” and subject to supervision or, where this condition cannot be fulfilled, only with the prior approval of the AMF (see 2.7 Requirement for Local Investment Managers).

Moreover, the delegate must have sufficient resources to perform 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; and
  • 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 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 have:

  • at least two conducting officers, including at least one conducting officer present on a full-time basis – the other conducting officer may be present on a part-time basis, but for at least 20% of its working time; and
  • more generally, at least three people present on a full-time basis, including at least two full-time portfolio managers, in order to ensure the continuity of its resources.

In addition, the compliance and internal control officer (RCCI) must be located in France.

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

French AIFMs must in particular:

  • be authorised by the AMF to manage AIFs;
  • join a professional association;
  • establish a 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 (RCCI); and
  • comply with the own funds requirements in 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 also comply with some good conduct rules applicable in France – namely: rules applicable to marketing and supplying information to investors or potential investors; rules on marketing materials; good conduct rules on financial solicitation (démarchage) if relevant, etc.

Foreign AIFMs 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:

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

French law provides for a wide range of investment funds implementing different types of investment strategies. The type of investor interested in investing in a particular AIF depends on the investment strategy implemented by the relevant AIF and the eventual tax regime that applies to investments in such investment fund.

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

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

In addition, AIFs that are open to professional investors (such as the FPS, SLP and OPPCI) 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:

  • the AIFs that target professional investors (AIFs de jure eligible to professional investors, ie, FPVGs, OPPCIs, FPCIs, FPSs and SLPs); and
  • the AIFs that market their shares both to retail and professional investors (ie, FIVGs, FCPRs, FCPIs, OPCIs and SICAFs), to which special rules apply.

For AIFs de jure open to professional investors, an eligible investor is one of the following:

  • 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 EU Regulation No 2015/760; or
  • for some professional AIFs (FPCIs, FPSs and OFSs), 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 lists 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 prior approval by the AMF (see 4.5 Regulatory Regime); and
  • 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, some types of AIFs are open only to professional investors or retail investors that invest at least EUR100,000. Some AIFs may also provide additional restrictions or conditions.

Marketing AIFs in France is subject to:

  • prior approval by the AMF if the relevant AIFs are 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 for AIFs marketed to retail investors, constitutes 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 must notify the AMF electronically at least one month before implementing any planned change, or immediately after an unexpected change.

An annual contribution is also due to the AMF. For EU AIFs authorised for marketing in France, such contribution to the AMF amounts to EUR2,000.

AIFMs must, 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 is made by a potential investor – all the information listed in Article 23 of the AIFMD. This should include, in particular:

  • a description of the investment strategy;
  • the identity of the AIFM, the custodian, the auditor and any other service providers;
  • the AIF's valuation procedure; and
  • the measures 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 has published templates of its prospectus, rules and by-laws which include such minimum information.

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

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

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

  • its policy on handling complaints;
  • 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 (eg, 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, whether domestic or foreign) and on whether the investor is an individual or a company.

French Tax Residents

Individual investors

Irrespective of whether they invest in an AIF taking the form of a corporation (eg, SICAV) or in an AIF set up as a mutual fund (eg, FCP), individual investors are generally subject to income tax only when they effectively derive gains from such funds.

When they invest in an AIF created as a corporation (eg, a SICAV), individuals are generally subject to income tax on the distributions paid by this AIF. Such distributions are subject to the same tax regime as the underlying profits (ie, distributed capital gains are treated as capital gains and redistributed dividends are treated as dividends for tax purposes). As a result, at the level of the investors, both types of income are treated identically. They are subject to a flat tax at the rate of 30% (12.8% income tax plus 17.2% social levies).

When they invest in a mutual fund (eg, an FCP), individuals are deemed to directly derive the profits and gains derived by such fund on the year in which they are effectively distributed. Therefore, individual investors in mutual funds generally enjoy a tax regime which is close to the one that applies to individual investors in funds taking the form of corporations: distributions of capital gains and redistributed dividends are subject to the “flat tax" regime described above.

As an exception, individual investors in FCPRs, FCPIs, SCRs and SLPs may benefit from an individual income tax exemption regime (which does not apply to social security levies) on the dividends and gains derived from units or shares they hold in such funds, provided that the following conditions are met:

  • investors commit to retain their shares or units for at least five years and to reinvest in the fund the sums distributed during such period;
  • investors (alone or with their spouse and their relatives in the ascending and descending line) 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 its assets in securities issued by certain non-listed European companies).

Corporate investors (subject to CIT)

As a general rule, corporate investors that are subject to CIT (in full or in part) and that hold shares/units in an AIF are subject to CIT under standard rules (rate of 28% in 2020, reduced progressively to 26.5% from 2021 and 25% from 2022) upon any change in the liquidation value of the shares/units they hold in the fund (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 (ie, fund located inside or outside France). Furthermore, any distributions paid or capital gains distributed by the fund to investors are also subject to taxation at standard CIT rates (net of any mark-to-market taxation).

However, FCPRs, SCRs, SLPs, SPPICAVs, FPIs and certain SICAVs and FCPs investing at least 90% of their assets in shares (known as "fonds actions") are not concerned by this mark-to-market rule. Corporate investors of such funds are instead taxed at standard CIT rates upon any redistribution of profits and gains realised by the AIFs.

As an exception, certain FCPRs, SCRs and SLPs that mostly invest in non-listed companies are subject to a favourable tax regime under which their corporate investors may benefit from the French participation-exemption regime in respect of capital gains they distribute (ie, 88% CIT exemption on distributed capital gains). Application of this regime is conditional (one of the main conditions being that the investor must retain its units for at least five years).

Non-French Tax Residents

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

As a general rule, non-French tax resident investors are treated as if they have directly derived profits from the AIFs in respect of the distributions they receive. As a result, non-resident individuals and corporate investors are generally subject to a withholding tax in France (WHT) on the distributions paid by AIFs.

Accordingly:

  • distributions reflecting dividends received by AIFs from French companies are generally subject to 12.8% WHT when they are distributed to individual investors who are EEA tax residents, and to 28% WHT (reduced progressively to 26.5% from 2021 and 25% from 2022) when they are distributed to other investors (to be applicable, such income may not be distributed in a non-co-operative state or territory within the meaning of Article 238-0 A of the FTC). However, note that most double-tax treaties entered into by France provide for reduced WHT rates that vary from 0% to 15%, depending on the tax jurisdiction of the investor (however, investment funds do not generally 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);
  • distributions reflecting interest income received by AIFs from French companies are generally not subject to WHT in France;
  • distributions drawn out from capital gains realised by AIFs from the disposal of shares in a French company are generally not subject to taxation in France unless the investor, 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 (known as the "substantial participation regime").

Such rule does not apply to distributions of capital gains realised by FPIs or SPPICAVs (which are always subject to WHT in France).

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

Subject to the exceptions detailed below, notably regarding SPPICAVs and FPIs, capital gains derived from the disposal of units in an AIF are not generally subject to taxation in France, except in cases where 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 the fund’s portfolio (or in the fund).

As an exception, capital gains derived by non-French tax resident investors on the disposal of shares held in (i) SPPICAVs in which they hold directly or indirectly 10% or more of the shares, and (ii) FPIs, are generally taxable in France (subject to double-tax treaties):

  • at a rate of 28% for corporate investors (reduced to 26.5% from 2021 and 25% from 2022); or
  • at a rate of 19% for individual investors (increased by social contributions in certain cases).

FATCA

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by the 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.

CRS

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

Article 56 of France’s Amending Finance Bill for 2017 introduced provisions related to the obligations of financial institutions in relation to FATCA, the 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 diligence reports, as well as their supervision by the French financial regulator (in addition to the tax authority). Article 56 of 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 the CRS. A French decree dated 3 July 2018 (which came 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 refuse to communicate information about their tax residence (known as "the list of holders of defaulting financial accounts"). Finally, a French decree dated 10 February 2020 modified the reporting obligations of French financial institutions as regards automatic exchange of information concerning financial accounts. It notably updated (as of 1 January 2021) the list of financial accounts that do not have to be declared by French financial institutions (eg, building savings accounts).

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
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Lacourte Raquin Tatar has more than 57 qualified lawyers and legal practitioners, of whom 17 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 their 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.

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