FRANCE: VENTURE CAPITAL COMPANIES

A venture capital company (FCPR, or Fonds Commun de Placement a Risques) is an entity whose purpose is to invest in, promote and develop other corporations (provided those corporations are not involved in the provision of financial services). This is usually achieved through the venture capital company taking a participating shareholding in the target company. The law is set out in article 34 of the General Tax Code.

The FCPR legislation was initially enacted in 1983 at a time when the venture capital industry in France was in a way in its infancy. Since then, given the considerable changes in the French venture capital environment, the legislation has been significantly modified to encourage private equity financings. The FCPR can now be used as a master feeder fund, can be a fund divided into different series and can also be a fund of funds.

Recent regulations now confirm an FCPR to be an easy and tax efficient structure for the carried interest for the managers.

Furthermore, not only is the FCPR itself not subject to any taxation in France, but also, French investors pay tax when the gains are distributed and not when the FCPR realizes capital gains.

This makes the FCPR a very specific, unique and attractive investment vehicle and explains the big increase in the number of FCPRs formed in France over the past few years.

As of January 1st, 2006, corporations subject to corporate income tax benefited from the newly-introduced progressive capital gains tax exemption on the sale of their shares in FCPR and/or related to the capital gains made by the FCPR on the sale of their own shares.

Qualifying Preconditions

In order to qualify in France as an FCPR and therefore obtain the favorable fiscal advantages available a company must meet the following criteria:

• 50% of the FCPR assets must consist of shares, convertible bonds or participating interests in target companies.

• The target companies must be resident in a member state of the EU. The FCPR investment in a target company must not exceed more than 40% of the voting capital of the target company and its total investment in any target company must not exceed 25% of the share capital of the FCPR. If it exceeds these figures the target company may be considered a subsidiary and different tax rules will apply.

• The target company must not be quoted on the French or any foreign stock exchange.

• The target company must be involved in industrial or commercial activities and not in banking or insurance services (as defined in article 34 of the General Tax Code).

• Not more than 30% of the FCPR's shares can be held by any one individual.

Fiscal Incentives

• No corporate income tax is payable by an FCPR on any dividend income remitted by a target company in which the FCPR has a participating interest.

• No capital gains tax is payable by the FCPR on any profitable sales of its shareholding in a target company. In France capital gains are normally taxed as corporate income.

• Dividends remitted by the FCPR to individual shareholders which represent income are subject to a flat tax rate of 16% (at the time of writing) in the hands of the individual shareholders instead of the progressive tax rates that apply in France. Dividend income remitted to FCPR shareholders on the profitable disposal of assets held for a minimum of 2 years is subject to the lower rate of capital gains tax- currently 19% (In France there are 2 rates of capital gains tax - a long term rate which is lower and a short term rate which is higher.)

Local Investment Funds

Legislation in 2004 introduced Local Investment Funds. Such Funds have to use at least 60% of their capital to buy shares of enterprises or give current account advances, and at least 10% must be given to new enterprises created less than five years ago. Qualifying enterprises must be small or medium enterprises principally situated in a region or two or three adjoining regions, or otherwise have its registered office there. These enterprises should not be finance companies nor holding companies of finance companies but can be other risk capital mutual funds or risk capital companies, as well as companies giving guarantees in that region.

No individual can hold over 20% of the fund, no enterprise can hold more than 10% of the fund, and all enterprises together cannot hold more than 30% of the fund. Tax benefits are similar to those for the FCPR.

A number of other changes were made to individual taxation in 2004 in order to improve the position of people investing in FCPRs and Local Investment Funds. These include the SUIR (Individual Risk Capital Company). Such a company invests in non-quoted shares at the time of an initial issue or an increase in capital of a taxable EU company, holding from 5% to 20% of the shares.

The SUIR is exempt from corporate income tax for ten years. Dividends paid by the SUIR to its owner exempt from Personal Income Tax and from Withholding Tax.

The Fonds Communs de Placement dans l'lnnovation (FCPI) is a type of FCPR available to individuals. Individuals are entitled to a tax deduction equal to 25% of the amount invested in the FCPI up to EUR12,000 (about US$14,525) per person. To qualify for favourable tax treatment, at least 60% of the assets of the FCPI must be invested in securities of non-listed companies that are:

• innovative;
• established in the European Economic Area (EEA);
• subject to corporate income tax;
• held predominantly (directly or indirectly) by individuals; and
• staffed by fewer than 2,000 employees.

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