Alternative Funds 2023 Comparisons

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)):

• at the end of 2022, there were 702 French portfolio management companies, four of which were ranked in the top 25 globally but the large majority of which (more than 450 portfolio management companies) are composed of entrepreneurial groups – the predominance of such entrepreneurial groups constitutes a key distinctive element of the French portfolio management market even if a recent trend of mergers between entrepreneurial companies and/or financial groups is observed;
• there are EUR2,096 billion of assets under management in French funds (−7,5% over a year), including EUR1,260 billion in French AIFs (−4,1% over a year);
• of the nearly 11,000 investment funds located in France, 70% are AIFs, with the number of AIFs located in France (7,900) increasing in 2022; and
• France ranks in second place in continental Europe in terms of funds’ domiciliation.

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.

• 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); and
5. special limited partnerships (sociétés de libre partenariat – SLP).
• French employee savings funds (fonds d’épargne salariale – ie, FCPE and 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.

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 AIF manager (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 portfolio management companies.

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:

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

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

• 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 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:

• 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).

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:

• 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;
• the good is not backed by any security other than that granted for realising the AIF’s investment objective;
• the good is sufficiently liquid so that the AIF is able to fulfil its obligations vis-à-vis its investors in terms of redemption; and
• the good is subject to a reliable valuation.

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:

• authorised and regulated by the AMF as a French portfolio management company 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 the AIFMD, if it is located outside France but in an EU member state.

However, if the AIFM is located in a third country, it needs to apply for 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:

• 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;
• the existence of an appropriate co-operation agreement between its local regulator and the AMF, etc.

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

Delegation of Financial Management

Any French AIFM may use the delegation route with respect to the financial management of French AIFs (see 3.7 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:

• portfolio management companies authorised in France or other AIFMs duly authorised in the EEA;
• any other entities authorised pursuant to the EU Directive on markets in financial instruments (MiFID) 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.

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:

• EU AIFs:
1. the home member state of the AIF;
• 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.

• The AIFMD: a proposal for a new directive amending the AIFMD was issued by the European Commission on 25 November 2021. Pursuant to this, the European Council proposed a new version of the text on 21 June 2022 followed by a political agreement from the Parliament’s Committee on Economic and Monetary Affairs on 24 January 2023 after months of discussion. The final version of the text is still under discussion at the EU level. The proposed amendments cover, inter alia, delegation arrangements, liquidity management tools with mandatory reporting to investors and specific requirements on loan origination activities.
• Retail Investment Strategy: in May 2021, the European Commission launched a public consultation related to a “Retail Investment Strategy for Europe”. The proposal aimed at improving the participation of retail investors in EU capital markets. The final text of the Directive was adopted in May 2023 and will be submitted to the European Parliament and European Council for discussion before adoption. If adopted, this Directive will amend several regimes including the AIFM Regulations. The proposed amendments cover, inter alia, the modernisation of disclosure rules adapted to investor’s 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 ELTIF regime was amended (see 2.6. Loan Origination) and will be completed by regulatory technical standards published by the European Supervision Market Authority.

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:

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

As regulated entities, portfolio management companies are subject to a complete legal and regulatory framework so must comply with many requirements, including:

• obligations that apply to their internal governance, conducting officers, human and technical resources, etc;
• obligations in terms of own funds;
• obligations in terms of remuneration in the context of AIF management;
• good conduct rules (eg, any AIFM must act in the sole interest of the AIF shareholders or unit-holders);
• conditions and criteria that apply to the delegation and outsourcing of functions or activities (see 3.7 Outsourcing of Investment Functions/Business Operations);
• requirements on the detection and management of conflicts of interests; and
• rules on anti-money laundering and countering the financing of terrorism (AML/CFT).

Fees invoiced by portfolio management companies (ie, management fees and commissions related to 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:

• carried interest shares or units issued by FCPRs or FPCIs; and
• carried interest shares issued 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 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:

• 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”, 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:

• 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 2.9 Requirement for Local Investment Managers).

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

• the delegate is qualified and capable of undertaking the relevant delegated tasks;
• the delegate was selected with all due care; and
• it 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, 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:

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

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 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) 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.

• Retail Investment Strategy: see above (2.12 Anticipated Changes). This Directive will impact AIFMs in their marketing activities of AIFs to retail investors.
• The AIFMD: as mentioned above (see 2.12 Anticipated Changes), a proposal for a new directive amending the AIFMD is under discussion at EU level. Regarding AIFMs, the proposal will trigger some changes in their internal organisation and activities.

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:

• AIFs that target professional investors (AIFs de jure eligible to professional investors – ie, FPVGs, OPPCIs, FPCIs, FPSs and SLPs); 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 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 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.

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.

• They can be registered with the ORIAS register as a French financial investment adviser (conseiller en investissements financiers) and be affiliated with one of the professional associations authorised by the AMF.
• 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 investment service provider (either a credit institution or an investment firm), authorised to provide investment advice.
• If they are located outside France but in another EU member state, they can be authorised by its local regulatory authority as:
1. an investment service provider and comply with the passporting notification procedure in accordance with the MiFID; or
2. a UCITS manager or an AIF manager authorised to provide investment advice and comply with the passporting notification procedure in accordance with either the UCITS Directive or the AIFMD.
• They can be portfolio management companies authorised and regulated by the AMF, authorised to provide investment advice in France, as long as this activity is conducted on an ancillary basis.
• They can be registered with the ORIAS register as a tied agent acting on behalf of an investment services provider.

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:

• 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%) 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:

• 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 may not be distributed in a noncooperative 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 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:

• 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.

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 organisation and governance of the cybersecurity framework;
• an oversight of sensitive IT service providers;
• incident management related to cyber threats; and
• the supervision of remote access processes to the information system.

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.

• AMF plans to regulate the information provided in terms of sustainability, which is an important matter of consideration for investors. To that extent, the AMF intends to control disclosed information on “Article 8” and “Article 9” funds (within the meaning of SFDR) and to also regulate extra-financial data providers. A particular attention to non-financial reporting will also be put in place for AIFMs.

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.

• In 2022, the AMF performed several inspections on French investment advisers (CIF) which led to the identification of breaches of applicable regulations (eg, marketing of foreign AIFs in France to retail investors, which is prohibited unless such AIFs are authorised to be marketed in France). Therefore, the AMF has initiated improvement measures in order to safeguard investors. Supervision of cross-border activities was a major point of attention for the AMF in 2022.

At EU level, the following changes are anticipated.

• Retail Investment Strategy: see above (see 2.12 Anticipated Changes).