Alternative Funds 2024 Comparisons

France benefits from a full legal and regulatory framework that applies to any French alternative investment funds (AIFs) and portfolio management companies (société de gestion de portefeuille, AIFM). AIFs are subject to general common requirements from European Union (EU) Directive No 2011/61/EU on alternative investment funds managers (AIFMD), which was implemented into French law on 28 July 2013.

Before that, France had its own legal and regulatory framework on investment funds, with the French portfolio management industry having developed substantially over the last 30 years. France being 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 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 EU Directive No 2009/65/EC (UCITS Directive) are met, or as AIFs.

Moreover, French AIFMs 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 2023, the key data on the French portfolio management industry is as follows (sources: AMF and Association française de la gestion financière (AFG)):

• at the end of 2023, there were 700 French AIFMs (including 23 new AIFMs authorised and 26 withdrawals of authorisation), four of which were ranked in the top 25 globally, but the large majority of which are composed of entrepreneurial groups which constitutes a key distinctive element of the French portfolio management market even if a recent trend of mergers between entrepreneurial companies and/or financial groups is observed;
• there are EUR2,279 billion of assets under management in French funds (+6% over a year), including EUR1,363 billion in French AIFs (+3% over a year); and
• of the 12,379 investment funds located in France, 74% are AIFs, with the number of AIFs located in France (9,203) increasing in 2023 (+3% over a year).

In France, the alternative funds industry is undergoing significant regulatory changes, reflecting broader European trends. These developments revolve around the following three main themes.

Opening Private Investment Markets to Retail Investors

The regulatory landscape in Europe and France is evolving to make alternative investment funds more accessible to retail investors. This shift aims to democratise investment opportunities, thereby expanding the investor base and boosting capital flow into the sector.

Key legislative changes include (i) at European level, the entry into force on 10 January 2024 of EU Regulation No 2023/606 (ELTIF 2 Regulation) amending EU Regulation No 2015/760 (the “ELTIF Regulation”), and (ii) at national level, the enactment of French Law No 2023-973 of 23 October 2023 (Green Industry Act).

ELTIF is a European label granted to EU-based AIFs that comply with requirements of ELTIF Regulation and which invest in assets that favour the financing of long-term investments in the real economy.

Recent changes include simplifying the marketing of ELTIFs to retail investors, allowing more flexible fund structures, and expanding eligible asset classes. These regulatory updates also reduce barriers to entry for retail investors by eliminating minimum investment thresholds and enabling investments through life insurance products. Additionally, the revised ELTIF regime allows the creation of open-ended funds with redemption options, providing investors with more flexibility. For fund managers, the new regulations offer more lenient investment rules and broader access to a European retail passport, making ELTIFs a standardised and attractive investment vehicle. This enhanced framework is expected to represent new opportunities for fund managers and significantly increase investment in long-term projects across Europe.

Emphasis on Sustainable Finance and ESG Investments

Sustainable finance continues to gain importance in the alternative funds sector in France, particularly in the context of EU Regulation No 2019/2088 (SFDR), and ESG (Environmental, Social, and Governance) factors are becoming central to investment strategies, with French fund managers leading Europe in terms of managing SFDR-compliant funds.

Recent regulatory measures address issues like “greenwashing” and emphasise better investor protection. These include:

• publication by the European Securities and Markets Authority (ESMA) of guidelines on funds’ names using ESG or sustainability-related terms (ESMA34 472 440);
• publication by the AMF in 2024 of two series of thematic inspections focused on sustainable finance which covered: (i) integration of sustainability risks and related disclosures by AIFMs, and (ii) promotional materials for French and foreign collective investment schemes marketed by distributors with a specific focus on the ESG aspect; and
• the entry into force of new EU regulations (EU delegated regulations No 2023/2485 and No 2023/2486), effective from January 2024, which further require fund managers to report their alignment with the EU taxonomy on climate objectives and eligibility for the taxonomy for four new environmental objectives of the EU taxonomy.

The AMF is also pushing for establishing minimum criteria for categorising financial products under Article 8 and Article 9 of SFDR and advocating for clearer definitions of “sustainable investment”.

Sustainable finance remains part of the AMF’s priorities for action and supervision for 2024, in particular through (i) the promotion of a review of SFDR, (ii) the participation in ESMA’s joint supervisory action (CSA) on sustainability preferences, and (iii) the conduct of targeted thematic controls on sustainable finance issues.

Strengthening Digital Operational Resilience for the Financial Sector

The Digital Operational Resilience Act (the “DORA Regulation”) is set to come into force in January 2025, aiming to harmonise IT risk management and cybersecurity standards across the EU financial sector. DORA’s scope includes alternative investment fund managers, requiring them to implement robust information and communication technology (ICT) risk management frameworks, report major incidents, conduct resilience tests and manage the risk associated with the use of third-party ICT service providers. The AMF has been actively involved in preparing for DORA’s implementation in France and has urged financial entities to start compliance efforts early. Additionally, the AMF has conducted inspections to assess cybersecurity measures of management companies, sharing best practices to enhance the industry’s overall digital resilience.

Types of Alternative Funds

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.

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.

• French AIFs de jure open to both retail and professional investors:
1. generic investment funds (fonds d’investissement à vocation générale – FIVG);
2. private equity investment funds (fonds de capital investissement – FCPR, FCPI or FIP);
3. real estate investment funds (organismes de placement collectif immobilier – OPCI);
4. real estate investment civil companies (sociétés civiles de placement immobilier – SCPI);
5. forest savings companies (sociétés d’épargne forestière or groupements forestiers d’investissement – SEF or GFI);
6. closed-ended investment companies with fixed share capital (sociétés d’investissement à capital fixe – SICAF); and
7. alternative funds of funds (fonds de fonds alternatifs – FFA).
• French AIFs de jure open to professional investors (or other investors under conditions – see 4.3 Marketing of Alternative Funds to Investors):
1. generic professional investment funds (fonds professionnels à vocation générale – FPVG);
2. professional real estate investment funds (organismes professionnels de placement collectif immobilier – OPPCI);
3. professional private equity investment funds (fonds professionnels de capital investissement – FPCI);
4. professional specialised investment funds (fonds professionnels spécialisés – FPS);
5. limited partnerships (sociétés de libre partenariat – SLP); and
6. special limited partnerships (société de libre partenariat spéciale – SLPS).
• French employee savings funds (fonds d’épargne salariale – ie, fonds commun de placement d’entreprise (FCPE) and société d’investissement à capital variable d’actionnariat salarié (SICAVAS)).
• French financing vehicles:
1. securitisation vehicles (organismes de titrisation – OT), which may be subject to the AIFMD if they meet certain criteria; and
2. specialised financing vehicles (organismes de financement spécialisé – OFS).

AIFs de facto

A French AIF de facto is any entity 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.

Fund Structures

AIFs de jure

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

• an FCP, which is a co-ownership of assets and does not have any legal personality, so cannot be self-managed and must always be managed by an AIFM, which represents the FCP vis-à-vis third parties; or
• a SICAV, in the form of either a simplified limited company (société par actions simplifiée – SAS) or a public limited company (société anonyme – 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 AIFM.

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

A French professional specialised investment fund may also be set up in the form of an SLP or SLPS.

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 rules on:

• marketing of AIFs;
• the obligation to appoint a custodian responsible for:
1. safeguarding the assets of the AIF; and
2. ensuring the compliance of management decisions;
• the obligation to appoint an AIFM and concerning their remuneration;
• public disclosure; and
• 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, concerning the following:

• investment quotas and ratios regarding certain types of assets;
• risk-spreading ratios, counterparty risk ratios and control ratios;
• rules and criteria on asset 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.

Thus, specialised professional investment funds (FPS, SLP and SLPS) 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 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 (GRAMF) 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 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.

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

AIFMs of AIFs de jure that are open to retail investors must send the prospectus and key information documents (KIDs) of such AIFs to the AMF, and any amendments made to such documents. The KID has replaced the key investor information document (KIID) since 1 January 2023. From this date, any AIF opened to non-professional clients is required to prepare and publish a KID (in accordance with EU Regulation No 1286/2014 (PRIIPs Regulation)). As a matter of principle, the KIDs 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 SFDR must specify to what extent their investment strategy takes into account extra-financial criteria. Given this context, the AMF clarified its requirements in AMF Position No 2020-03, which notably impacts information to be provided in the AIFs’ legal documents.

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 and 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 currently allowed pursuant to two different legal regimes.

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 ELTIF Regulation on:

• investment strategy and asset eligibility; and
• diversification and other investment ratios.

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 ELTIF 2 Regulation. This new regime has been applicable since 10 January 2024 and sets more flexible rules regarding the following:

• investment strategy and assets eligibility rules that apply to ELTIF funds;
• diversification and other investment ratios of ELTIF funds; and
• marketing to retail investors.

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:

• loans have to meet certain conditions in terms of duration;
• the 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 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).

In addition, EU Directive No 2024/927 amending AIFMD (AIFMD 2) recognises that the management of AIFs can also comprise the activities of originating loans on behalf of an AIF and the right of AIFs to originate loans subject to compliance with certain conditions. All EU member states will have to align their regulations in accordance with AIFMD 2. However, the provisions of AIFMD 2 do not prevent member states from laying down national product frameworks that define certain categories of AIFs with more restrictive rules.

Investment in Digital Assets

French Law No 2019-486 of 22 May 2019 on the growth and transformation of companies (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.

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

AIFs de facto can invest in any non-traditional assets (except for investments in loans, which are covered by the French banking monopoly – see 2.5 Loan Origination).

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 ownership right on the good is based on a registration, a notarial deed or a private deed – such condition is also fulfilled for goods that are registered via blockchain technology.

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.

Requirement for Local Investment Managers

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:

• authorised and regulated by the AMF as a French AIFM authorised to manage AIFs, if it is located in France; or
• authorised and regulated by its local regulator as an AIFM and comply with the “passport” notification procedure pursuant to AIFMD, if it is located in another EU member state.

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 GRAMF and the relevant AMF instructions including:

• compliance with all provisions applicable to French AIFMs;
• the appointment of a legal representative in France;
• the existence of a bilateral or multilateral tax agreement entered into between its home country and France; and
• 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 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:

• AIFMs 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) to provide the service of portfolio management on behalf of third parties; or
• any other entities in a third country that are 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.

AIFMD 2 provides additional obligations regarding delegation arrangements for AIFMs which will apply from 16 April 2026. Between now and then, member states must transpose AIFMD 2’s provisions into their national law. In this respect, French regulations already cover most of the additional provisions set out in AIFMD 2.

Other Local Requirements

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 AIFMD, the custodian must be established in the following jurisdictions:

• EU AIFs:
1. the home member state of the AIF; and
• non-EU AIFs:
1. the third country where the AIF is established;
2. the home member state of the AIFM; or
3. the member state of reference of the AIFM.

At the EU level, it is intended to amend the following directives or regulations.

• Retail investment strategy – the European Commission submitted its proposal for a retail investment package on 24 May 2023. The package includes two legislative proposals: (i) for an omnibus directive (the “Omnibus Directive”), and (ii) for a regulation amending PRIIPs Regulation (PRIIPs 2). The European Parliament agreed on PRIIPs 2 on 11 April 2024 and on the Omnibus Directive on 23 April 2024. These agreements pave the way to starting inter-institutional negotiation. If adopted, the Omnibus Directive will amend several regimes including the AIFM Regulation. The proposed amendments cover, inter alia, the modernisation of disclosure rules adapted to investors’ sustainability preferences, the development of benchmarks, the regulation of marketing practices via digital channels and influencers, and the improvement of investor categorisation by reforming the eligibility criteria for professional investors.
• The EU Delegated Regulation supplementing ELTIF Regulation is in the course of adoption and will notably cover (i) the use of derivatives for hedging risks inherent to other investments of ELTIFs, (ii) redemption policy and liquidity management tools, (iii) transfer requests of units or shares, (iv) disposal of ELTIF assets, and (v) costs disclosure. At a French level, Law No 2024-537 of 13 June 2024 (the Attractivité Law) includes a number of measures relating to undertakings for collective investment (UCIs) which will come into force from 1 January 2025 and/or will have to be specified by decree (in particular with regard to the lock-up period for FCPR unitholders (from ten to 15 years), pre-liquidation of FCPRs and investment rules for FCPEs)).

The Attractivité Law also enables the French government to issue ordinances before 13 March 2025 to reform the framework applicable to UCIs.

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: SAS or SA.

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 (société de gestion de portefeuille).

As regulated entities, French AIFM are subject to a complete legal and regulatory framework and must comply with many requirements, including obligations in terms of (i) internal governance, conducting officers, human and technical resources, etc; (ii) own funds; (iii) remuneration in the context of AIF management; (iv) good conduct rules; (v) delegation and outsourcing of functions or activities (see 3.7 Outsourcing of Investment Functions/Business Operations); (vi) detection and management of conflicts of interests; and (vii) anti-money laundering and countering the financing of terrorism (AML/CFT).

Fees invoiced by AIFM (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 AIFM 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 AIFM 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 unitholders under certain conditions (these conditions concern both the shareholders or unitholders and the carried interest shares or units).

This tax regime applies to carried interest shares or units issued by (i) FCPRs or FPCIs; and (ii) by SCRs and SLPs.

Under this regime, distributions paid by such funds and gains realised on sales of carried interest shares or units by carried interest shareholders or unitholders 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 AIFMD:

• 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”, and must always be cognisant of the activities carried out by the AIFM. AIFMs 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 in the GRAMF. 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, nor to any other entity with a conflict of interest; and
• be granted only to entities that 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 2.8 Local Presence Requirements for Funds).

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 (i) is qualified and capable of undertaking the relevant delegated tasks; (ii) was selected with all due care; and (iii) is able to effectively monitor the delegated activity at any time, 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 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, when investment decisions are taken collectively by a decision-making body (such as an investment committee or management committee), more than half of the financial managers involved in investment decisions must be resident or physically present in France or in a branch of the AIFM established in another member state of the European Union or party to the EEA. Further, the person responsible for compliance and internal control (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:

• 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 an RCCI; and
• comply with the own funds requirements in EU Regulation No 575/2013.

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 AIFM must be notified to the AMF when one of the following conditions is met:

• the fraction of capital or voting rights held by such individual exceeds or falls below one tenth, one fifth, one third, or one half;
• the AIFM becomes or ceases to be a subsidiary of such individual; or
• the operation has the effect of conferring or withdrawing significant influence over the management of the AIFM from such individuals.

The change of control (direct or indirect) of a French AIFM is subject to the prior authorisation of the AMF which 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.

Although there is no specific regulatory requirement or limitation under French law, this is an area to which the AMF will be paying close attention in the years ahead, and it has made it one of its priorities for action and supervision for 2024, in particular as part of the ongoing work on artificial intelligence (AI) and its participation in the implementation of the European regulations on AI.

At the European level, ESMA issued a statement on 30 May 2024, providing initial guidance to firms using AI technologies when they provide investment services to retail clients. ESMA reiterated that such firms need to comply with relevant MiFID requirements in terms of organisational aspects, conduct of business and regulatory obligations to act in the best interest of clients. ESMA also identified various risks linked to the use of AI by firms (eg, algorithmic biases and data quality issues, opaque decision-making, overreliance on AI for decision-making, privacy and security concerns).

Further, in June 2024, the European Commission launched two initiatives aiming in particular to assess market developments and AI-related risks in order to prepare the implementation of the European regulations on AI within the financial sector.

At EU level, it is intended to amend and publish the following directives or regulations that may impact AIFMs.

• Retail investment strategy – see above (2.10 Anticipated Changes). The Omnibus Directive and PRIIPs 2 will impact AIFMs in their marketing activities of AIFs to retail investors.
• AIFMD 2, which will apply from 16 April 2026, will trigger some changes in AIFM’s internal organisation and activities in relation to, inter alia, delegation arrangements, liquidity management tools and specific requirements on loan origination activities.

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:

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

For AIFs de jure open to professional investors (or other investors under conditions), an eligible investor is one of the following:

• a professional investor within the meaning of MiFID;
• any investor with an initial investment equal to at least 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 ELTIF EU Regulation; 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 equal to at least EUR30,000.

Rules that apply to firms marketing AIFs in France are provided in the MFC, the GRAMF 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 AMF adopts a definition of marketing that is wider than the definition provided for in the AIFMD and the MFC – even so, the AMF lists some situations that are not considered as “marketing”, including the “pre-marketing” route. Note that the French regulatory framework on pre-marketing was substantially amended in 2021 via the implementation of EU Directive No 2019/1160 into French law by French Ordinance No 2021-1009 of 31 July 2021.
• The marketing of AIFs in France is subject to either a notification process with the AMF or prior approval by the AMF.
• There are many local requirements that apply to marketing materials, which are set out in AMF Position No 2011-24 and in ESMA’s guidelines on marketing communications (ESMA34-45-1244). Moreover, the AMF is entitled to request any marketing materials related to any AIF marketed in France prior to their publication.

In France, it is common for AIFMs to outsource the marketing of AIFs they manage to external placement agents. From a French regulatory perspective, as placement agents are likely to provide regulated services (such as investment advice and/or reception and transmission of orders) while marketing shares of AIFs, it is recommended that they hold a regulated status.

• They can be registered with ORIAS as either (i) a French financial investment adviser (conseiller en investissements financiers) and be affiliated with one of the professional associations authorised by the AMF, or (ii) a tied agent acting on behalf of an investment services provider (ISP).
• They can be authorised and regulated in France by the French prudential control and resolution authority (Autorité de contrôle prudentiel et de résolution – ACPR) as an ISP (either a credit institution or an investment firm), authorised to provide investment advice.
• If located in another EU member state, they can be authorised by their local regulator as: (i) an ISP, or (ii) a UCITS or AIF manager authorised to provide investment advice, and comply with the passporting notification procedure in accordance with respectively (i) MiFID, or (ii) either UCITS Directive or AIFMD.
• They can be AIFMs authorised and regulated by the AMF, authorised to provide investment advice in France on an ancillary basis.

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 who are likely to provide investment advice, pursuant to the regulatory framework that applies to ISP.

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, 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, 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, the 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:

• they retain their shares or units for at least five years and 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 subscriptions 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 de jure are subject to CIT under standard rules (25.83%) 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 (25.83%) 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:

• 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 25% WHT when they are distributed to other investors (to be applicable, such income should not be distributed in a non-cooperative 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 (although 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 4.7 Double Tax Treaties);
• distributions reflecting interest income received by AIFs from French companies are generally not subject to WHT in France; and
• 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, their 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, 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:

• 25% for corporate investors; or
• 19% for individual investors (increased by social contributions in certain cases).

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 non-cooperative 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.

French AIFMs are subject to the French legal and regulatory framework on AML and 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:

•       identify the client and its beneficial owners;

•       verify their identity via official documents or other certified means;

•       determine the purpose of the relationship;

•       identify potential politically exposed persons; and

•       identify the origin of the funds.

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.

French AIFMs are subject to the requirements of the General Data Protection Regulation (GDPR) when they process personal data and 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.

Given the increasing proliferation and sophistication of attacks observed by the AMF, cybersecurity must remain a priority for AIFMs.

French AIFMs will also be subject to the provisions of the (i) DORA Regulation (see 1.2 Key Trends) and (ii) Financial Data Access regulation, after their entry into force.

At an EU level, the retail investment strategy is anticipated (see 2.10 Anticipated Changes).