France is one of Europe’s largest and most developed investment funds markets, with a strong presence in both retail and alternative investment funds (AIFs).

Governed by French regulator the Autorité des marchés financiers (AMF), the market benefits from stringent regulations aligned with EU Directives, such as UCITS (the Undertakings for the Collective Investment in Transferable Securities Directive) and the AIFMD (the Alternative Investment Fund Managers Directive).

The market is dominated by institutional fund managers and global asset management firms, supported by a robust network of banks and independent advisers.

Retail funds include equity, fixed income and balanced funds, while AIFs cover hedge funds, private equity, real estate and infrastructure funds.

Despite global economic uncertainties, the French funds market has remained active, driven by the growing demand for sustainable and ESG-aligned investment products.

For retail funds, there is a continued interest in UCITS-compliant funds, with inflows supported by household savings and tax-advantaged structures such as life insurance (assurance vie).

AIFs have seen increased activity in private equity and real estate, benefiting from France’s attractiveness as a hub for innovation and green investments, especially with policies such as the Loi Industrie Verte encouraging ESG-focused strategies.

In fact, according to France Invest (the major French professional association promoting the private equity industry), 2023 was a more dynamic year for private equity in France than the global trend would suggest (the third best year in terms of fundraising since 2009, with EUR23.8 billion raised). This stable level of activity continued into H1 2024 (EUR9.5 billion raised) at a level comparable to H1 2023 (EUR8.6 billion raised) (see France Invest & Grant Thornton, Activité du capital-investissement français au 1er semestre 2024 and Activité du capital-investissement français en 2023).

Operational requirements of French AIFs, including the requirement for a custodian, are described in 2.1.1 Fund Structures, 2.3.1 Regulatory Regime and 2.3.2 Requirements for Non-Local Service Providers. Borrowing restrictions are described in 2.5 Fund Finance.

Details on how an AIF’s assets are valued must be described in the AIF’s legal documentation. Valuation rules depend on the nature of the underlying assets. International standards such as the IPEV valuation guidelines are commonly used in French private equity finds. The fund manager retains responsibility for valuing the AIF’s assets.

AIFs investing in listed assets must comply with rules governing insider trading, market abuse and short-selling.

Lastly, French fund managers are required to perform know-your-client/anti-money laundering checks.

Other AIFs are not subject to any borrowing restrictions.

Per se AIFs could be subject to borrowing restrictions depending on their legal form. For example, FCPR and FPCI cannot incur direct cash borrowing in excess of 30% of their net assets, whereas such cash borrowing is not restricted for FPS, SLP and OFS (unless these vehicles are structured to originate loans, in which case their maximum leverage is capped at 30% of their net assets).

In general, borrowing restrictions (if any) are dealt with contractually among fund managers and AIFs investors.  The various borrowing schemes and structuring depend on whether the AIF is to be considered a leveraged fund or an unleveraged fund. For leveraged funds, borrowing is incurred at the level of special purpose vehicles (SPVs) controlled by the AIF, and lenders are granted pledges and securities on the assets of such SPVs and/or on the interests held by the AIF in such SPVs. Leveraged funds are often used in real estate transactions.

For unleveraged funds, borrowings are often used to bridge capital calls. Cash is borrowed by the AIF from a lender, mainly in anticipation of a capital call. This type of borrowing takes the form of a revolving credit facility to be reimbursed within a maximum period of 364 days through capital calls made by the AIF’s investors. Lenders are generally granted pledges on the AIF’s bank account and investors’ undrawn commitments.

Other alternative fund financing structures have been developed in recent years, such as NAV financing secured with the AIF’s underlying assets or the issuance of unsecured preferred equity. Entering into such type of financing requires amendments to the AIF’s legal documentation in order to waive any indebtedness (if feasible for AIFs that are not subject to a legal indebtedness restriction). For AIFs that are dedicated to retail investors, such amendments require the prior approval of the AMF, which could prove difficult to obtain for such type of borrowing scheme.

In most cases, French AIFs are not subject to taxation in France as they either benefit from a French corporate income tax (CIT) exemption or are not subject to CIT, depending on their legal and regulatory status. There are, however, a few exceptions.

Taxation (if any) generally occurs at the investors’ level on income received from the AIFs (ordinary income and/or gain derived from investments) based on their own tax regime.

French AIFs Exempt From CIT (“French Exempt AIFs”)

Scope of CIT exemption

These French Exempt AIFs are set up as corporate entities and are, in principle, liable to CIT but benefit from an exemption because of their regulatory status or their corporate purpose (notably FPS set up as SICAV and OPCI/OPPCI incorporated as SPPICAV).

The CIT exemption regime may be subject to conditions: in particular, SPPICAVs must comply with annual dividend distribution requirements.

As this category of French AIFs is considered opaque for tax purposes, the investors will be deemed to receive French-source dividends. CIT-exempt AIFs set up as SICAV do, however, have the possibility to “ventilate” (so-called couponnage) their profits and gain so that they keep their underlying nature (real dividends, interest, capital gains) and their source (French or foreign source) when distributed to investors.

Individual investors resident in France

Fund investors are taxed on proceeds generated by the French Exempt AIF on the date of their effective redistribution, not on the date the income is received by the French Exempt AIF. 

Dividends distributed by the French Exempt AIF are subject to a 12.8% French flat tax (prélèvement forfaitaire unique – PFU) and to social security contributions at the current overall rate of 17.2%, resulting in a total taxation of 30% (up to 34% for investors with a significant annual taxable income).

A French Exempt AIF that ventilates its income can also distribute interest/capital gains to its investors. The taxation rate is the same, however.

If more favourable, investors may elect to tax their investment income (dividends, interest, capital gains) according to the progressive scale of individual income tax. This election is global and annual.

Foreign-source income distributed to investors (in situations where a SICAV is ventilating its income) may also be subject to tax in France. The investor should, however, be able to deduct all or part of the tax credits attached to the income/gains redistributed by the fund.

Capital gains resulting from the sale of redemption of the French Exempt AIFs’ shares are also subject to the PFU, unless the investor has elected to apply the progressive scale of individual income tax.

Legal entities’ investors resident in France

French companies’ investors subject to CIT are required to retain a “mark to market” approach for shares held in French Exempt AIFs (the “Mark-to-Market Rule”). As a consequence, unrealised gains or losses must be taken into account on a fiscal year basis for CIT computation purposes. CIT applies at a 25% rate (increased to 25.825% when the social contribution of 3.3% applies).

The Mark-to-Market Rule does not apply to:

• French companies whose main activity is life insurance or capitalisation insurance, and to non-profit organisation; and
• stakes held in French Exempt AIFs investing more than 90% of their commitments in companies located in the EU and subject to corporate income tax.

Note: a specific exemption exists for certain tax-transparent funds meeting specific investment criteria. Please see French AIFs Outside the Scope of CIT (“French Transparent AIFs”) below.

Dividends distributed to investors are subject to CIT under standard conditions in respect of the fiscal year in which such income is distributed. The French parent-subsidiary regime is not applicable to these distributions.

Corporate investors should be able to deduct tax credits attached to non-French source income generated by the French AIF (only if this AIF is entitled to ventilate its income).

Capital gain realised upon the sale of a French AIF’s shares is also subject to CIT at the standard rate. Corporate investors cannot benefit from a favourable tax regime (such as the long-term capital gain regime implemented in France). 

Non-resident investors

In principle, dividends distributed by French AIFs are subject in France to a withholding tax of 25%, upon their distribution to investors. Different applicable rates may, however, apply:

• 12.8% when the beneficiary is a non-resident individual;
• 15% when the beneficiary is a non-profit organisation (subject to certain conditions);
• 75% if the dividends are paid in a non-cooperative state or territory (the French tax authorities have published a list of these states/territories, which is updated from time to time); and
• 0% when the beneficiary is a foreign investment fund deemed to be “comparable” to a French fund, by having similar regulatory and legal characteristics.

When a fund is ventilating its distributions (SICAV), the applicable tax regime will depend on the nature and source of the underlying income, as follows.

Non-French-source income should not be subject to any taxation in France, as such income is not considered as having its source in France.

French-source dividends (dividends deriving from French subsidiaries of the fund) follow the same tax regime as the one explained above for dividends.                                                                                               

French-source interest should not be subject to any withholding tax in France unless such interest is wired in a bank account located in a non-cooperative state or territory.

French-source capital gains are, in principle, exempt from French taxation unless the investor holds, directly or indirectly, an equity stake exceeding 25% over the five-year period preceding the disposal of the French company by the French Exempt AIF. Otherwise, a taxation would apply (12.8% for a foreign individual, 25% for a foreign corporate investor). Specific rules may apply when the investor is a foreign investment fund (exemptions under certain conditions) or when the capital gain derives from the sale of a French real estate rich company.

Capital gain deriving from the sale of the French AIF’s shares

In principle, capital gains are exempt. As an exception, any investor holding more than 25% of the French AIF’s shares might be subject to taxation in France under the same rules as those explained above for French-source capital gains distributed by the fund. 

French AIFs Outside the Scope of CIT (“French Transparent AIFs”)

Scope of tax transparency

These AIFs are not subject to CIT (and are therefore considered “tax-transparent”):

• because of their legal status – most of these funds have no legal personality (FPS set up as FCP, FPCI, SLPS, etc); or
• because of a specific tax provision – SLP have a legal personality (contrary to SLPS) but French tax rules provide that their tax regime is identical to the one applicable to FPCI (which are tax-transparent funds).

French Tax Regime Applicable to Investors of French Transparent AIFs

Preliminary comments

Because of their tax transparency, income distributed by French Transparent AIFs keep their nature (dividends, interest, capital gain) and their source (French/non-French).

French tax residents of certain French Transparent AIFs (FCPR, FCPI, FIP, FPCI, SLP, SLPS) can benefit from a tax-favourable regime provided that these funds comply with a tax investment quota (the “Tax Quota”), when at least 50% of their assets correspond to shares issued by companies that:

• are located in the EU or the European Economic Area (EEA);
• carry out a commercial/industrial activity; and
• are liable for corporate income tax in their country of establishment.

Individual investors residents in France

When the French Transparent AIF does not meet the Tax Quota criteria, the following applies.

For distribution of dividends, interest and capital gains, French individual investors are subject to a 30% overall taxation (up to 34% for high-income investors) unless they elect to apply the progressive scale of individual income tax. Investors should benefit from any tax credits attached to non-French-source income.

By way of exception, capital gains are taxable upon their realisation by the fund (even if they are not distributed to individual investors) if at least one individual investor owns at least 10% of the fund’s securities.

For allocation of assets (répartitions d’actifs), some French Transparent AIFs (eg, SLP, SLPS, FPCI, FCPR) are entitled to distribute a portion of their assets in cash (they correspond to the sale price of the shares held in the French Transparent AIF) or in securities.

Asset allocations to French individual investors are non-taxable up to the amount of the investors’ contributions into the fund. The portion exceeding the contribution made by the investor to the fund (or the acquisition price of its shares) is treated as capital gain subject to the same tax regime as the one mentioned above for distribution of capital gains by the fund.

Capital gain generated upon the sale/redemption of the French Transparent AIF’s securities follows the same tax regime as the one applicable to distribution of capital gains.

When the French Transparent AIF meets the Tax Quota criteria, the following applies.

French individual investors can benefit from a favourable tax regime if they comply with these conditions:

• subscribing the fund’s shares (and not acquiring existing shares) and undertaking to hold such shares for at least five years from the subscription date;
• the amounts allocated by the fund to an individual investor during this five-year period must be immediately reinvested by this investor in the fund; and
• investors must not hold, directly or indirectly, alone or with their spouse, ascendents and descendants, an equity stake of more than 25% in companies invested by the fund (and at any time in the five years preceding the subscription date).

If so, French individual investors are exempt from French individual income tax on:

• income/capital gains distributed by the French Transparent AIF; and
• capital gains deriving from the sale/redemption of the AIF’s securities.

However, 17.2% security contributions remain due.

Legal entities’ investors resident in France

When the French Transparent AIF does not meet the Tax Quota criteria, the following applies.

French corporate investors must apply the Mark-to-Market Rule unless one of the exemptions applies.

CIT is applicable at standard rates to all distributions of the fund (dividends, interest, capital gains, allocations of assets; note that tax credit attached to these distributions can be deducted) and to capital gains generated upon the sale/redemption of the French Transparent AIF’s securities.

When the French Transparent AIF meets the Tax Quota Criteria, the following applies, and French corporate investors may benefit from a tax-favourable regime.

An exemption from the Mark-to-Market Rule is available, provided that investors undertake to keep the French Transparent AIF’s securities for at least five years from the subscription/acquisition date.

Asset allocations are deemed to be in priority and a non-taxable repayment of capital contributions. The amount exceeding such repayment is treated as long-term capital gain for tax purposes when the French Transparent AIF’s securities held by the investor were issued by the fund for more than two years on the date of the distribution.

If so, the capital gain may benefit from a full CIT exemption when the asset allocation derives from the sale of companies in which the fund held at least 5% of the share capital for at least two years. However, this exemption is not applicable in certain cases (notably when the fund sold real estate-rich companies); instead, a 15% reduced rate may apply.

The capital gain generated upon the sale/redemption of the fund’s securities can benefit from the long-term capital gain regime when the investor holds these securities for at least five years. If so, the capital gain is:

• exempt from CIT in proportion to the fund assets corresponding to securities of companies in which the fund has held at least 5% of the capital for at least two years; and
• subject to a 15% CIT for the remaining amount.

Note: dividends and interest distributed by the fund still remain subject to CIT at the investors’ level.

Non-resident investors

Their tax regime is similar to the one applicable to non-resident investors of French Exempt AIFs that ventilate their income.

Regarding French-source income distributed by the funds, it is worth mentioning that tax treaties concluded between France and the investor’s state of residence would likely limit the amount of withholding tax applied in France, since the investor is deemed to have directly received the income.

French AIFs Subject to CIT

Other French AIFs can be set up as French companies subject to CIT under standard rules (notably, a French société par actions simplifiée – SAS). These funds are therefore subject to tax at a 25% standard rate (increasing to 25.83% if the additional CIT contribution applies).

Investors of French Other AIFs set up as companies subject to CIT are taxable when the Other AIF distributes dividends. Please refer to above discussion of French Exempt AIFs, which are subject to certain differences – in particular, as follows.

• French corporate investors can benefit from the parent-subsidiary regime, provided that they hold at least 5% of the French Other AIF’s shares for two years. Dividends are therefore exempt from CIT at their level, apart from a lump sum equal to 5% of the dividends.
• Foreign corporate investors may rely on the provision of the EU Parent-Subsidiary Directive to obtain a full withholding tax exemption.

French OFS set up as corporate entities are also subject to CIT. However, special adjustment rules apply for the computation of their taxable income.

Other AIFs Dedicated to Real Estate Investment

A few AIFs can be set up as partnerships (sociétés de personnes), such as real estate investment companies (SCPI or Other FIAs set up as SCI). SCPI and SCI are pass-through entities not subject to CIT per se. The taxable income is computed at their level but automatically taxed in the hands of their investors (even if the income is not effectively distributed) based on the rules applicable to real estate income. Accordingly, the following applies.

French individual investors are generally subject to the progressive scale of income tax (increase by a 4% contribution for high-income investors). Social security contributions are also applicable at a 17.2% rate.

French corporate investors are subject to CIT under standard conditions.

Foreign investors should also be subject to tax in France on real estate income deriving from real estate assets located in France (based on the same rules applicable to French investors, depending on whether they are individual or corporate investors), subject to the provisions of applicable double tax treaties.

A French real estate fund can be set up as a fonds commun de placement immobilier – FPI. FPI are outside the scope of CIT, provided that they comply with mandatory income distributions. Investors are taxable on the date of their effective redistribution based on the rules applicable to real estate income (which are described above).

See 2.4 Operational Requirements.

See 2.5 Fund Finance.

There are no differences between the tax treatment of retail investors and professional investors. When investing in French Exempt AIFs and French Transparent AIFs (notably those that can comply with the Tax Quota), retail investors are subject to the same tax regime as the one explained for professional investors in 2.6 Tax Regime.

However, the following tax incentives may be especially relevant for French individual retail investors:

• securities of certain retail funds may be invested through a personal equity savings plan (plan d’épargne en actions) or a life insurance contract – the income received through these schemes can benefit from a favourable tax regime, under certain conditions; and
• the subscription to securities of certain retail funds (notably FIP and FCPI) may, under certain conditions, grant individual investors an income tax reduction.

2024 saw a number of improvements in the French asset management industry, aimed at making certain French fund vehicles more attractive. The following is a brief overview of some of the main developments, by AIF type.

FCPR

Increase in the market capitalisation threshold for companies in the EEA, whose equity securities may be held by FCPR, from EUR150 million to EUR500 million, with such investments being included in the 50% of unlisted investment quotas (Loi Attractivité No 2024-537 du 13/6/2024). The calculation of the 50% FCPR investment quota has been amended to permit the taking-into-account of not only direct investments in eligible assets made by certain entities in which an FCPR invests but also indirect investments of such entities in such eligible assets (Ordonnance du 3 juillet 2024 portant modernisation du régime des fonds d'investissement alternatifs).

SLP

Creation of an unincorporated form of SLP having a limited liability company, the société de libre partenariat spéciale (SLPS). The SLPS does not have legal personality (Ordonnance du 3 juillet 2024 portant modernisation du régime des fonds d'investissement alternatifs).

FPS, SLP and OFS

Amendment to the legal regime for FPS, SLP and OFS to allow these funds to issue tracking shares and bonds. Tracking shares and bonds “track” and reflect the economic performance of a given asset or category of assets in the fund’s portfolio (Ordonnance du 3 juillet 2024 portant modernisation du régime des fonds d'investissement alternatifs).

FPCI

Deletion of the 10% limit on the holding of receivables by an FPCI to facilitate its recognition as an ELTIF 2.0 (Ordonnance du 3 juillet 2024 portant modernisation du régime des fonds d'investissement alternatifs).