A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

MAIN ACTORS AND STRUCTURES

FCPR

FCPI

FIP

Tax regime

Tax incentives for individual investors: > Exemption from French tax on income distributed and on capital gains realised on the sale of shares in the fund when they are sold or redeemed after a five-year restricted period and the individual investor does not hold more than 25% of the shares of a company included in the fund’s portfolio of investments. > An income tax reduction equal to 25% of the amount invested in the funds, up to E 12,000 per person. > A wealth tax reduction equal to 50% of the amount invested, up to E 20,000 per person. However, French residents remain liable to social security contributions at 12.1%. Favourable tax regime for investors: Certain investments in French or EU-resident small or medium companies (SMEs), as defined under EU law, benefit from income tax and wealth tax advantages, where the investments are: > Made directly or through a holding in non-listed SMEs subject to local corporate income tax. > Held for a minimum five-year period. If so, individual investors can benefit from: > An income tax reduction equal to 25% of the amount invested, up to E 20,000 per person. > A wealth tax exemption and/or reduction. Favourable tax regime for SMEs: Tax incentives, such as tax research credits, are available to support and encourage the development of innovative companies. In addition, an attractive tax and social security regime applies to innovative newly-created companies (« Jeunes Entreprises Innovantes» ) (JEIs), which are SMEs dedicating more than 15% of their total expenses to research and development. JEIs can benefit from: > A total exemption for the first three profitable years, and a partial exemption (50%) for the following two profitable years, from social security contributions and corporate income tax. > An exemption from business tax for the first seven years (under certain conditions)

These funds must have a custodian for their assets, which must be a financial institution.

Administrator/ Custodian requirements

Copyright CACEIS, 2009

2.2

The majority of private equity and venture capital investors in France use FCPR, FCPI or FIP because these legal structures are tax neutral. In addition, as they are regulated funds (UCITS), and therefore supervised by the AMF financial regulator, investors have a degree of protection and transparency that other types of vehicles do not provide. The constraints, in terms of prudential ratios (ratios of capital to assets) and investment policy, applicable to FCPR are less strict than for more specialised funds (such as FCPI or FIP). In the last decade, the assets of FCPR (including FCPI and FIP) in France multiplied by 15, while their number increased from 154 in 1998 to 996 at the end of 2008, as displayed in graph 27. As already mentioned, these venture capital funds benefit from highly attractive tax incentives for investors, which can explain this exponential growth.

Figure 27: Evolution of the assets and the number of FCPR (including FCPI and FIP) in France (1990-2008)

55

1,100

996

50

1,000

45

846

900

40

800

741

35

700

32

602

30

30

600

514

25.5

445

25

500

Number of FCPR

368

20

400

FCPR assets in €bn

18

276

15

300

12.53

10.7 10.8

154 190 226

10

200

137 143 138 133 134 119 123 124

7 7.5

5.2

5

100

2

2.1

Copyright CACEIS, 2009

1.2 1.4 1.6 1.8 1.5 1.5 1.7

0

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: AFG, 2009

A thorough understanding of PE | page 47