France enables ELTIFs to grant loans

Driven by EU legislation, the French Parliament has made some important national tax changes that promise to impact the private equity sector.

At the end of last year, France made amendments to tax regulations in order to tackle tax avoidance and enable European Long Term Investment Funds (ELTIFs) to grant loans.

As part of the changes, the PEA (plan d’epargne en actions) savings scheme has been extended to other forms of financing including units in European Long Term Investment Funds (ELTIFs). These are a new type of alternative investment fund that enable investments to be made in long-term, private equity, infrastructure and other illiquid assets.

In addition, an amendment has also been made to allow ELTIFs to grant loans to borrowers in specific conditions, which French investment funds cannot currently do, and may encourage French private equity fund managers to establish this type of fund.

In an effort to tackle tax avoidance, changes have been made to the parent-subsidiary regime in compliance with amendments made to the EU Parent-Subsidiary Directive last year and the European council’s request for a clamp-down on aggressive tax planning by corporate groups.

The changes also include the introduction of an EU anti-abuse clause, which targets investors structuring investments in different holding companies. This amendment will effect, for example, US subsidiaries in France that are held through EU holding companies.

As part of the tax changes, the exemption for dividend distributions paid by subsidiaries has also been reduced to 99 percent.

Previously in France, dividends paid by French subsidiaries in a French tax consolidated group (which can only contain French companies) were fully exempt from taxation on dividends received. However, non-French EU subsidiaries received a 95 percent exemption on dividends and were taxed on the remaining 5 percent.

The change has been made following a ruling by the European Union Court of Justice stating that previous rules discriminated against parent companies that own subsidiaries in other member states and did not allow them to benefit from the full tax exemption.

This change in law is part of an EU-wide incentive to simplify corporate structures and aims to encourage firms to place subsidiaries underneath one holding company. It may have negative effects on the structuring of private equity transactions because it will increase the amount of tax paid on each company.

However, the exemption will have a positive impact for French groups with EU affiliates because they are now subject to a 1 percent taxation, rather the than 5 percent they were taxed previously.

The changes were driven by EU legislation and have taken effect on dividend distributions paid from January 1, 2016.