Transactions Blog

The French Senate has adopted an amendment to the Draft Finance Act for 2009 (article 4bis of the DFA) for the purpose to address the tax treatment of carried interest shares granted to FCPR (Fonds Communs de Placement à Risque) and SCR (sociétés de capital à risque) managers.

Subject to any possible amendments, the proposed new tax regime for carried interest shares would apply to FCPRs and SCRs set up as from January 1st, 2009, and to shares/rights issued as from this date.

Current tax regime

Under a tax guideline released by the French Tax Authorities on March 28th, 2002, distributions and gain arising from “carried interest” shares benefit of the capital gain tax treatment (i.e. current rate of 29%), provided the following conditions are simultaneously met:

·         the carried interest shares are acquired or subscribed by all or some of the fund managers as a capital investment;

·         within the same FCPR or SCR, there is only one category of carried interest shares;

·         the fund managers holding carried interest shares do not own other shares in  the FCPR or SCR which are eligible to an income tax exemption;

·         the fund managers holding carried interest shares are allotted a fair salary.

New tax regime resulting from the amendment

In the future, the application of the French capital gains tax treatment to carried interest shares would further require that: 

·         the carried interest shares are acquired at a value broadly pertaining to a market value, and;

·         all carried interest shares issued by a FCPR or a SCR should meet the following conditions: 

1.  the carried interest shares must, in principle, represent at least 1% of the total subscriptions in the fund, and;
2. carried interest payments take place at least five years after the creation of the fund or the issue of the shares and, for FCPRs, after repayment of the contributions made by the other investors.

These conditions are obviously more restrictive but the good news is that the capital gain tax treatment would also apply to carried interest in funds located in the EU or in an EEA State with which France has signed a treaty for avoidance of double taxation including an anti-tax avoidance clause, provided the main purpose of the fund is to invest in companies neither listed in France nor abroad.

If the carried interest share is not eligible for the capital gain tax treatment it will be subject to tax (at rates up to 40%) and social security tax as salary income.