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 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 developed substantially during the last 30 years, and France is now one of the leaders of the European portfolio management industry.
French law has 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 and variable capital, which benefit 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 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 fund managers) must be authorised by the French Financial Markets Authority (Autorité des marchés financiers – AMF) and are subject to various regulatory requirements in terms of internal governance, human resources and technical means, prudential rules, etc.
In 2022, the key data on the French portfolio management industry is as follows (source:Association française de la gestion financière (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 are 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 in which they may invest and the type of eligible investors, as follows.
AIFs de Facto
A French AIF de facto is any entity that 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 are subject to the general rules applicable to any AIF, as provided for in the AIFMD, and are still supervised by the AMF. The main qualification criterion is the economic analysis of the purpose of this vehicle: if its purpose is to raise capital from investors in order to invest it in accordance with a predefined investment policy, an investment vehicle may qualify as an AIF.
AIFs de Jure
Two types of legal structure are generally used for French AIFs de jure:
French real estate investment funds (OPCI and OPPCI) may be set up as a corporate entity (SPPICAV) or as an FCP (called an FPI).
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 adopt 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:
In addition to common requirements, AIFs de jure are individually subject to specific investment rules provided for in the MFC, concerning the following:
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.
Thus, 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 prêts à l’économie).
AIFMs are subject to several disclosure and reporting requirements, initially set out in the AIFMD, which enforced some transparency requirements intended to protect investors through the annual report, pre-contractual information and reporting obligations to the AMF.
Annual Report
An AIFM must publish an annual report 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 available to investors before they invest in the AIF, as well as any material changes regarding such information. Article 23 of the AIFMD details the content of the information to be provided.
Offering Documents
There are many local requirements that apply to marketing materials, which are set out in AMF Position No 2011-24 and, at the EU level, in the guidelines on marketing communications issued by the European Securities and Markets Authority (ESMA) (ESMA34-45-1244). Moreover, the AMF is entitled to request any marketing materials related to any AIF marketed in France prior to their publication.
Reporting to the AMF
French AIFMs are required to report information to the AMF on a regular basis; such information is detailed in Annex 4 to the AIFM Regulation. In addition, ESMA issued guidelines on reporting requirements under the AIFMD (ESMA/2014/869), which are totally implemented by the AMF doctrine, via 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, an 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.
Publicly Available Information
Portfolio management companies of AIFs de jure that are open to retail investors must send the prospectus and key investor information documents (KIIDs) of such AIFs to the AMF, and any amendments made to such documents. As a matter of principle, the KIIDs and prospectuses of such AIFs are publicly available in the GECO database (a database monitored by the AMF).
Such disclosure requirement does not apply to other types of AIFs, such as AIFs that are open to professional investors or AIFs de facto.
Since 2019, new transparency requirements regarding extra-financial criteria taken into account in AIFs’ investment strategies have become a key issue. New EU regulations now require AIFMs to publish specific information for AIFs implementing extra-financial criteria in their investment strategy. Hence, offering documents of AIFs categorised as “Article 8” or “Article 9” within the meaning of the Sustainable Finance Disclosure Regulation (SFDR) must specify to what extent their investment strategy takes into account extra-financial criteria. Given this context, the AMF clarified its requirements in its Position Doc No 2020-03, which notably impacts information to be provided in the AIFs’ legal documents (last updated August 2023).
AIFs can be created as corporations (eg, SICAVs), partnerships or 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 (SICAVs, venture capital companies (SCRs) and SPPICAVs) 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. 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 4.6 Tax Regime for Investors). This concerns FCPs, FCPRs and FPCIs, SLPs (SLPs enjoy the same tax regime as FPCIs), FCPIs and FIPs (which are specific types of FCPRs), FCTs (securitisation vehicles) and OFSs (if incorporated as mutual funds).
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 that benefit from the ELTIF label may grant loans in France and other EU member states. In particular, the ELTIF label implies compliance with several rules provided for in the EU Regulation on ELTIF (EU Regulation No 2015/760) on:
Any AIF wishing to obtain 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.
The ELTIF Regulation was amended by the EU Regulation No 2023/606 on 15 March 2023. This new regime entered into force on 27 March 2023 and will be applicable on 10 January 2024. The new ELTIF regime sets more flexible rules regarding the following:
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, the following conditions apply:
Moreover, the AIFM of such AIFs must have specific authorisation from the AMF and must implement specific internal human and technical resources related to loan origination activity.
AIFs de facto are not authorised to grant loans in France (except in specific cases that constitute exemptions to the French banking monopoly).
Investment in Digital Assets
Before the publication of French Law No 2019-486 of 22 May 2019 on the growth and transformation of companies (the PACTE law: 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 law enables certain professional AIFs de jure (FPSs, SLPs, OFSs and FPCIs) to invest directly in crypto-assets. For instance, this investment possibility is available to French FPSs, which are entitled to invest in assets whose ownership rights are based on a distributed ledger technology.
Previously, 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”. By formally recognising that the ownership right may also be registered via a blockchain technology, the PACTE law is undoubtedly a huge step for the development of the French crypto-asset market.
However, this investment possibility for FPSs is still conditional upon the reliable evaluation of such crypto-assets. The AIFM will have to ensure that such valuation is performed on a regular basis – for instance, with the help of independent crypto-asset valuators.
It should be noted that the PACTE law also enables FPCIs to invest in cryptocurrencies and utility tokens up to a limit of 20% of their assets.
Investment in Other Non-traditional Assets
As mentioned above, French law does not limit the ability of any AIF de facto to invest in non-traditional assets (except for investments in loans, which are covered by the French banking monopoly – see 2.6 Loan Origination). Therefore, AIFs de facto could invest in any non-traditional assets, provided that the general requirements on valuation are complied with.
FPSs, SLPs and OFSs may also invest in any type of goods, including non-traditional assets such as digital assets, litigation funding, cannabis-related investments, or any other type of goods that may constitute an investment opportunity, as long as the following general legal conditions are met:
In April 2021, the AMF published a press release on investments in non-traditional assets (precious metals, forests, wine, cannabis, etc). Regarding investments in the cannabis sector, the AMF noted that the legalisation of therapeutic or recreational cannabis in some countries or states (Canada, California, etc) has contributed to an increase in proposals to invest in the cannabis sector. According to the AMF, such investments can take different forms: equity, exchange-traded funds (ETFs), funds or purchase of cannabis plants/plantation plots for a monthly fee. However, the AMF reiterates that French law prohibits the marketing and consumption of cannabis on French territory.
Regarding litigation funding (or third-party funding), all the costs linked to a dispute are financed by a financing company or a fund, which is a third party to the dispute and is remunerated by taking a percentage of the sums recovered at the end of the dispute in the event of success and bears the costs and risks of the financed party in the event of failure.
On that subject, the National Council of Bars (Conseil National des Barreaux – CNB) recommends a regulation that would include a framework for the conditions of terminating financing contracts, the introduction of a reinsurance obligation for financing companies/investment funds and the protection of the rights of the financed party by respecting professional secrecy and the latter’s freedom to choose their lawyer.
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 an AIF to benefit from leverage at the level of its subsidiaries. Such investment pattern also enables the “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, and bear the liability of construction works or other types of operations on the assets indirectly held by the AIF.
Alternative Investment Fund Managers
The AIFMD created a European passport regime in order to enable access to the European market for AIFMs located in EU member states. The passport procedure allows any AIFM that is 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 be:
However, if the AIFM 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 cases, the AIFM has to comply with stringent requirements set out in the MFC, the General Regulation of the AMF and the relevant AMF instructions. The following requirements are of particular importance:
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 3.7 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, the delegate investment manager is not required to be 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:
There are no other local requirements regarding the local substance of AIFs. However, there are some local substance requirements for French AIFMs (see 3.8 Local Substance Requirements).
In accordance with the AIFMD, the custodian must be established in the following jurisdictions:
At the EU level, it is intended to amend the following directives or regulations.
Sponsors of French AIFs may come from any country (the USA, UK, Canada, China, UAE, etc); there is no clear trend in this matter.
French AIFMs typically use the following legal structures:
AIFMs are responsible for the 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 so must comply with many requirements, including:
Fees invoiced by portfolio management companies (ie, management fees and commissions related to the issuance or placement of shares/units) to AIFs are generally fully subject to CIT under standard rules, but are generally exempt from VAT. This holds true when they are invoiced to AIFs that are 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 operate 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), regardless of 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 received 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:
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, and benefit from a flat taxation rate of 30% (see 4.6 Tax Regime for Investors).
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 investment functions and business operations, including all functions linked with AIF management as listed in Annex I to the AIFMD:
However, the delegation of AIF management functions should not lead to the AIFM essentially becoming a “mailbox entity”, so must always be cognisant 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 outsourced or delegated activities. Subsequently, an AIFM may not delegate both the portfolio management and the risk management of its AIFs.
Any outsourcing of essential or important operational tasks or functions and delegation of AIF management functions must meet some general conditions as required by the AMF and detailed by Articles 318-58 to 318-61 (outsourcing of essential or important operational tasks or functions) and Article 318-62 (delegation of management functions) of the General Regulation of the AMF. In particular:
In addition, when the delegation concerns portfolio management, such delegation must in particular:
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:
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:
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). As this person is the key contact for the French financial intelligence unit (TRACFIN), it is recommended that they are permanently located in France.
French AIFMs must in particular:
Any operation allowing an individual, acting alone or with others, to acquire, expand, reduce, or cease to hold, directly or indirectly, a qualified stake within a French portfolio management company must be notified to the AMF when one of the following conditions is met:
The change of control (direct or indirect) on a French portfolio management company is subject to the prior authorisation of the AMF. The latter must be informed as soon as the decision has been made to proceed with the operation.
Transactions carried out between companies linked by capital ties under the effective control of the same entity are solely disclosed to the AMF and do not need a prior authorisation.
At EU level, it is intended to amend and publish the following directives or regulations that may impact AIFMs.
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 FPS, SLP and OPPCI) are invested mostly by institutional investors (pension funds, credit institutions, insurance companies, large corporate entities, etc).
Side letters are allowed but are subject to some regulatory constraints, which apply to any preferential treatment granted to some investors. If a side letter confers preferential rights to a particular investor or a group of investors (eg, enhanced information rights, political rights, etc), such rights may be considered as granting a preferential treatment. Any preferential treatment granted to one or more investors must not result in an overall disadvantage to other investors and must be disclosed to other investors.
Information on preferential treatment and the potential use of side letters must be provided in the AIF’s documentation. If a side letter is entered into with an investor or a group of investors, other investors in the AIF must be informed of the preferential treatment granted through such side letter (such information must include a description of the preferential treatment, the type of investors which benefit from that preferential treatment and, where relevant, the economic or legal links with the AIF or the AIFM).
Depending on the type, AIFs may be marketed either to retail and professional investors or just to professional investors. The main distinction is as follows:
For AIFs de jure open to professional investors (or other investors under conditions), an eligible investor is one of the following:
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 following.
The use of placement agents is common in France. In such a case, an AIFM outsources the marketing of one or more AIFs it manages to an external placement agent. From a French regulatory perspective, as placement agents are likely to provide regulated services (such as investment advice and/or the investment service of reception and transmission of orders) while marketing shares of AIFs, it is recommended that placement agents have regulated status as one of the following.
AIFM’s personnel can be compensated for sales efforts, in compliance with conditions set out by AIFMD that apply to remuneration policy within an AIFM. Similar requirements also apply to AIFM’s personnel which are likely to provide investment advice, pursuant to the regulatory framework that applies to investment service providers.
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
Regardless of whether they invest in an AIF in the form of a corporation (eg, SICAV) or 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 and are subject to a flat tax rate of 30% (12.8% income tax plus 17.2% social levies) or, if such option is exercised, to a progressive scale of income tax.
When they invest in a mutual fund (eg, an FCP), individuals are deemed to directly derive the profits and gains derived by such fund in the year in which they are effectively distributed (however, please note that for FCPs, said non-taxation of the non-distributed profits carried out by the fund is subject to the condition that no individual investor holds more than 10% of the fund’s units). Therefore, individual investors in mutual funds generally enjoy a tax regime close to the one that applies to individual investors in funds taking the form of corporations, as 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:
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 de jure are subject to CIT under standard rules (25%) upon any change in the liquidation value of the shares/units they hold in the fund (the so-called “mark-to-market” rule). This holds true whatever the legal form of the AIF de jure (mutual fund or corporation) and whatever its location (ie, 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 covered by this mark-to-market rule. Corporate investors in such funds are instead taxed at standard CIT rates (25%) upon any redistribution of profits and gains realised by the AIFs.
As an exception, certain FCPRs, SCRs and SLPs that invest mostly 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.
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 (WHT) in France on the distributions paid by AIFs according to the rules applicable to each corresponding category of income they received.
Accordingly:
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, their 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 FPIs and in SPPICAVs, provided they hold 10% or more of their shares, are generally taxable in France (subject to double tax treaties) at the following rates:
As a general rule, entities must be subject to CIT in France in order to be entitled to double tax treaty benefits. Therefore, 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 realise) 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).
However, the French tax authorities consider that non-resident investors may benefit from double tax treaty clauses with respect to French-sourced 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 that are located in a noncooperative state or territory within the meaning of Article 238-0 A of the FTC.
FATCA
FATCA was enacted in 2010 by the US Congress to target non-compliance by US taxpayers using foreign accounts. It 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 in so far as France and the USA entered into an intergovernmental agreement regarding FATCA on 14 November 2013.
CRS
The CRS was developed in response to the G20 request and approved by the OECD Council on 15 July 2014 to improve the 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 regarding the obligations of financial institutions in relation to FATCA, the CRS and the European Directive on Administrative 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 also created new penalties for financial institutions and clients in the 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 of 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). These reporting obligations were amended again in 2021 and eventually in 2022 via a decree of 25 April 2022.
Amongst other institutions of the financial sector, AIFMs are submitted to the French legal and regulatory framework on AML. Thus, any French AIFMs are required to implement permanent internal control systems, ongoing monitoring, and procedures to comply with AML/CTF standards (see 3.3 Regulatory Regime for Managers).
As a result, before entering any relationship with any client, AIFMs must perform Know Your Customer (KYC) checks, which imply the need to:
Throughout the duration of their relationship with a client, AIFMs are required to perform ongoing due diligence checks over the business relationship and must report any suspicious transaction to the relevant financial intelligence unit (TRACFIN). To fulfil this obligation, AIFMs are also required to appoint a TRACFIN correspondent located in France (see 3.8 Local Substance Requirements). These KYC obligations also apply to branches of foreign AIFMs located in France.
The AML/CTF obligations are a significant concern for the AMF, which conducts thorough inspections to ensure compliance with these obligations by AIFMs.
As with any other companies located in France, French AIFMs are subject to the requirements of the General Data Protection Regulation (GDPR) when it processes personal data. Moreover, AIFMs are also bound by the provisions of French Law No 78-17 of 6 January 1978 relating to information, files and individual liberties.
AIFMs must also implement measures to ensure data security and business continuity in the event of a disaster.
As such, the AMF recently performed a series of thematic inspections focused on cybersecurity measures implemented by French AIFMs. The AMF inspections focused on:
The AMF insists on the gradual formalisation of a cybersecurity strategy from AIFM which remains incomplete. Furthermore, given the increasing proliferation and sophistication of attacks observed by the AMF, cybersecurity must remain priority for AIFMs.
At national level, the following changes are anticipated.
It should be noted that the EU Commission launched a public consultation on the regime that applies to “Article 8” and “Article 9” funds, aiming to reform the current classification into new categories. This consultation is open until 15 December 2023.
At EU level, the following changes are anticipated.
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contact@lacourte.com www.lacourte.comRecent Trends in the French Alternative Investment Market
Despite facing a succession of major crises over the past three years (health crisis, invasion of Ukraine and the inflationary shock they engendered), global economic activity has shown resilience during 2022 and the first few months of 2023. If inflationary pressures persist, however, France has witnessed a 14% increase in private finance over 2022 as well as a growth in venture capital activity according to the French Financial Market Authority (AMF) (“Cartographie des marchés et des risques 2023”, p. 84, § 3.5.1).
According to a survey conducted by Preqin, 45% of institutional investors plan to increase their allocation to the private debt segment over the next 12 months. In infrastructure, the appeal remains strong, with 41% of investors announcing an increase in their commitments. This compares with only 23% in venture capital and 34% in other private equity segments. (Cited in AGEFI, “Non coté : les investisseurs privilégient la dette privée et les infrastructures”, 31 August 2023.)
The year 2023 has brought forth a myriad of trends and developments which are shaping the investment landscape in France. As investors seek diverse opportunities and regulatory changes continue to shape the industry, several key themes have emerged. With an extremely active community of professional retail investors in addition to a strong government support, the FrenchTech momentum persists. For instance, as the FrenchTech sector has raised more than EUR13.5 billion in 2022, a mobilisation of EUR7 billion will be brought to private funding, for the development of tomorrow’s technology companies. Known as “Phase 2 of Tibi initiative”, such initiative includes late-stage, early-stage and listed tech components to further nurture the primary pool of technology start-ups (“Initiative Tibi : un plan pour financer le développement des entreprises technologiques”, Direction générale du Trésor, Press Release, 15 June 2023, and “Lancement de la phase 2 de l’initiative Tibi”, Direction générale du Trésor, Press Release, 20 June 2023).
Regarding retail investors, the majority seek convenient and easy access and exist from their funds for numerous reasons. The long lock-up periods and the high investment thresholds required by private closed-ended funds present on the French market prevented retail investors from participating in many private market opportunities. However, a significant shift is now underway. In 2021, retail investors accounted for 12.6% of the total net asset value for the European Union Alternative Investment Fund (EU AIF) market (“Investment Funds: Summary findings, Retail AIF”, ESMA Market Report Costs and Performance of EU Retail Investment Products 2023, p. 25). This democratisation of private equity presents new opportunities and challenges. In France, Bpifrance was the pioneer of such movement three years ago, followed by a dozen other management companies.
According to the recent AMF report conducted on the French market in 2023 (cited above; p. 106), 19% of all private equity capital was raised from individuals and family offices in 2022. A strong growth in “evergreen” funds, open-ended and closed-ended private equity funds is observed in France. Regulatory developments and government policies in favour of long-term and sustainable investments, the genesis of ELTIF 2.0, are supporting the retailisation of the alternative investment industry.
Recent Trends in the French Regulatory Environment
ELTIF 2.0
ELTIF is a European label granted to EU-based private equity funds that conform to the requirements of the ELTIF Regulation (EU) 2015/760 (the “ELTIF Regulation”). One of the most interesting features of an ELTIF-labelled fund is the ability for the fund’s manager to market this fund in all EU member states to both professional and retail investors (whereas the marketing passport under the AIFM Directive 2011/61/EU is limited to professional investors only). Whilst the French market is one of the largest in Europe in terms of distribution for ELTIF funds, it was still primarily aimed at professional investors. As per an evaluation conducted by the European Commission in 2021 (Brussels, 25 November, SWD(2021)342, Final, p. 10, Table 1), the ELTIF market remains underdeveloped and the ELTIF regime has not achieved its full potential. Only 95 ELTIF funds were registered on ESMA’s register in July 2023. Thus, ELTIFs remain a fairly small specialised market when compared to the entire EU alternative investment funds size.
Better aligned with market realities, ELTIF 2.0, the amended version of the ELTIF Regulation, which will be applicable as of 10 January 2024, emphasises more tailored investment opportunities for investors. Its framework should lead to an increase both in the number of ELTIF funds and in the number of investors. With ELTIF 2.0, fund managers should be able to create investment strategies that align with the risk profiles and preferences of investors. Being the sole non-sector specific product that can be marketed to retail investors in Europe under a specific cross-border regime, an ELTIF-labelled fund is aiming to be the preferred vehicle for distribution to non-professional investors. It will therefore arguably form a key tool in progressing the retailisation of private funds in Europe.
ELTIF 2.0 adopts a greater flexibility in terms of eligible assets and product design. The minimum quota invested in eligible assets is reduced from 70% to 55% and diversification ratios are more flexible than previously. It is now possible to structure ELTIFs as a fund of funds or as master-feeder. ELTIF 2.0 allows managers to market an ETLIF differently towards retail and institutional investors. It is an outstanding development that could boost the deployment of pan-European private equity funds. ELTIF 2.0 removes the minimum investment requirement of EUR10,000 per investor and the pre-verification procedure made to retail investors. Retail investors can now invest more than 10% of their financial instrument portfolio in ELTIF funds. ELTIFs will also permit managers to introduce liquidity windows, which will appeal to retail investors. Retail investors can subscribe with a simplified customer relationship entry procedure (in terms of “suitability assessment”) with a possibility of redemption before the end of the fund’s lifetime. Even though investor protection rules are more flexible, ELTIFs are allowed to take greater risks through higher leverage ratios. Funds marketed to retail investors will be able to borrow up to 50% of their net assets, a threshold that is raised to 100% of net assets for funds marketed to professional investors (previously, the limit was 30% of the fund’s capital, regardless of the targeted clients).
However, with such reform comes various challenges on the national and European level. On the French level, the French legislation is currently considering how to apply the revised ELTIF Regulation to multiple types of vehicles. Under French law, the fonds professionnels spécialisés and the organismes de financement spécialisés used to be the most compatible types of funds to match the EU regulatory requirements linked to the ELTIF label, due, in particular, to their flexibility and absence of legal local constraints. This is not the case for the other types of French funds such as the fonds communs de placement à risques (FCPR) which have more local constraints to comply with but which would be an interesting choice for an ELTIF label given that an FCPR is open to retail investors and could be more easily distributed through life insurance contracts by insurance companies. The French Parliament is currently reviewing a project of law amending certain FCPR local rules in order to allow such vehicle to be eligible for the ELTIF label.
On the European level, some new features of ELTIF 2.0 still need to be clarified, especially the new liquidity requirements. While institutional private equity investors typically do not need to withdraw funds before the fund term, retail investors may. The liquidity required by retail investors cannot always match up with the long-term underlying assets of an ELTIF. The liquidity management tools provided in ELTIF 2.0 have been subject to a consultation by ESMA, the purpose being to clarify these mechanisms and amend the ELTIF delegated regulation (EU) 2018/480 (“Consultation Paper – Draft regulatory technical standards under the revised ELTIF Regulation”, 23 May 2023, ESMA34-1300023242-124). The proposed amendments are expected to specify the framework within which redemptions may be made during the life of an ELTIF fund: in particular, the minimum holding periods, the maximum redemption frequency, the redemption notice period, as well the anti-dilution tools and gates.
ELTIF 2.0 and the implementing measures create a framework that is much more conducive to the marketing of ELTIF-labelled funds to the general public within the EU.
ESG Improvements Through SFDR
In the current context endorsed by the EU Sustainable Finance Disclosure Regulation 2019/2088 (SFDR), the sustainable economy is at the heart of economic concerns and shapes an integral part of geopolitical debates worldwide. SFDR is designed to make it easier for investors to distinguish and compare the many sustainable investment strategies currently available within the EU.
Unlike ELTIF, Article 6, 9 and 8 categories of SFDR are not labels, but transparency regimes. Nevertheless, the classifications displayed by the funds may have been put forward as a marketing argument to guide investors’ decisions.
According to a study published by the AMF in March 2023 (“État des lieux des classifications SFDR sur le marché des fonds français et exposition des portefeuilles aux secteurs fossiles à fin 2021”, p. 3, § 3), Article 9 funds accounted for 3% of the cumulative net assets value of French funds and Article 8 funds accounted for over 47% by the end of 2021. It is highly likely that the distribution of French funds in the various categories have changed significantly as the SFDR level 2 reporting technical standards come into force and also following the publication of the updated European Commission’s Q&As. The same trend is observed at European level: Morningstar estimated that the universe of Article 9 funds had contracted by 40% by the fourth quarter of 2022 (EUR−175 billion), due to the downgrading of 307 funds from Article 9 to Article 8 . However, this does not mean that investors have turned away from downgraded funds. (Morningstar, “ESG Fund Downgrade Accelerates”, 2 February 2023.)
The current Article 9 and Article 8 classification do not permit assessment of the degree of sustainability of a financial product and its investments. Indeed, “sustainability” is defined under SFDR in approximate terms, and its implementation by fund managers has given rise to very different conceptions of what sustainability is. SFDR has therefore created a gap between the reasonable expectations expressed by investors and the reality of practices, giving rise to a high risk of greenwashing.
The AMF issued a position paper in which it urges the European Commission to introduce minimum expectations that financial products would have to meet in order to be categorised as Article 9 or Article 8 under SFDR; such minimum requirements would be subject to national supervision. In particular, the AMF highlighted that the definition of “sustainable investment” must be clarified in order to become concrete and include objective requirements corresponding to a minimum alignment of funds with the EU taxonomy as well as the “assets in transition” (“Proposition de critères minimaux environnementaux pour les produits financiers des catégories Art.9 et Art.8 de SFDR”, Paper Position, 10 February 2023).
In parallel to SFDR, and in order to ensure that the information provided to investors is clear, accurate and not misleading, the AMF has published a policy designed to ensure that the extent to which ESG factors are taken into account in funds’ investment policies is proportionate to the information provided to investors (“Informations à fournir par les placements collectifs intégrant des approches extra-financières”, AMF Position Recommendation 2020-03). Funds wishing to include ESG as a central element in their financial communication must comply with the minimum standards specified in this AMF policy and, in particular, provide evidence of an approach based on significant commitments. Measurable objectives for taking into account ESG must be included in the funds’ legal documentation. These measurable objectives must be significant to ensure a real distinction between the various ESG approaches. For example, for “Best-in Class” approaches quantitative thresholds must be used as a benchmark. For “selectivity” approaches, there should be a commitment to reduce the percentage of lowest ESG rating in the investment universe. For other approaches, fund managers must be able to demonstrate how their ESG commitments are significant. This policy was applicable to French funds opened to retail investors and to foreign UCITS marketed in France. The AMF updated its policy in August 2023 in order to extend its scope to EU ELTIF marketed to retail clients in France. The purpose of this amendment is to ensure consistency in the ESG disclosures expectations for ELTIFs marketed to French retail clients, regardless of their legal status or domicile.
Upcoming EU Regulation
Fund managers are following closely any new EU regulation that may have an impact on their business activity. In addition to ELTIF 2.0 and SFDR, the Directive 2022/2464 (known as CSRD) and the AIFM Directive are among upcoming EU regulation that may have a strong impact on French fund managers.
CSRD
The CSRD provides for the creation of detailed sustainability reporting standards, known as ESRS (European Sustainability Reporting Standards), which will provide a framework and harmonise company publications. These standards, which will be progressively adopted by means of delegated acts, are of several types:
The European Commission has mandated EFRAG – the European Financial Reporting Advisory Group – to prepare these standards.
The obligation to publish sustainability reporting under the CSRD is being applied progressively. It is applicable to financial and non-financial companies within the following categories.
The delegated act containing the first batch of ESRS for large listed companies and other large European companies was published on 31 July 2023. This delegated act is due to come into force on 1 January 2024.
Strengthening corporate sustainability reporting requirements is a key element of the Green Pact for Europe and is the reason behind the adoption of the CSRD. This directive establishes the double materiality principle, ie, the financial materiality and the environmental and social materiality. The main idea is that a company’s impact on the climate can be financially material. Companies that are subject to CSRD must publish information on the impact of their activities on sustainability/ESG factors and how sustainability/ESG risks affect their activities. The CSRD’s objective is to harmonise sustainability reporting by companies-based ESRS, improve the quality of published information and facilitate access to this information, by digitalising it in a single electronic format (like financial information), and making it available on a single access point.
The issue of the quality of extra-financial data is crucial to ensure a better capital allocation. In this regard, the implementation of the CSRD and its detailed reporting standards for companies, should eventually not only improve the quality and comparability of extra-financial data, but also encourage the inclusion of climate issues at the centre of companies’ strategic thinking.
AIFM Directive revision
The European Commission has welcomed political agreement on revision of the Alternative Investment Fund Managers Directive 2011/61/EU (the “AIFM Directive”) in July 2023. Unlike the ELTIF Regulation, AIFMD has met its objectives in supervising risks generated by managers and providing high-level investor protection. Due to market evolutions, review of the AIFM Directive in specific areas was mandatory. The purpose of the reform is to better integrate the market for funds, improve access to additional sources of financing for the European economy and strengthen investor protection.
More particularly, the revised regime harmonises the rules governing liquidity management tools, in line with international recommendations to support financial stability. The objective is to ensure that fund managers are well equipped to deal with significant outflows in times of financial turbulence and to improve the resilience of investment funds. Open-ended funds will select at least one liquidity management tool and notify the supervisory authority of its activation.
It also increases transparency on “delegation rules”, by informing each supervisory authority about the extent to which fund managers rely on expertise from third parties. This will allow them to better access the finest resources from market professionals while maintaining market integrity. This transparency is extended to non-core services and introduces a notification mechanism when portfolio or risk management functions are substantially delegated to third-country entities in a significant way. It also establishes a harmonised framework for loan origination funds, offering new funding opportunities to the real economy. The proposed rules are supplemented by several requirements to alleviate risks to financial stability.
The reformed AIFM directive prioritises an investor-centric approach. Fund managers will be required to provide clearer and more comprehensive information to investors on fees, liquidity risk management and loan portfolios. It includes enhanced data-sharing and co-operation between authorities and new measures to identify undue costs that could be charged to funds, and hence their investors, as well as on preventing possible misleading fund names to better protect investors. Cross-border access of depositary services has been enabled which will allow the creation of AIFs in a few European markets where there is no depositaries service. This new provision, while reducing operation costs, may benefit ELTIF managers in smaller markets that may currently be underserviced by depositaries. This innovation not only diversifies the range of investment options available but also promotes healthy competition among market players.
Conclusion
Throughout 2023, the alternative investment landscape in France witnessed significant transformations. The ELTIF 2.0 Regulation, the reform to the AIFM Directive, SFDR regulations and CSRD regulations are shaping a more personalised, responsible and transparent investment ecosystem. These trends not only reflect the evolving preferences of investors per se but also highlight the financial industry’s commitment to sustainable growth and ethical investing. Navigating these trends will be crucial for both investors and fund managers to harness the full potential of alternative investments in the years ahead.
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