French rules leave unanswered questions

While recent changes to French tax rules bring the country closer to the rest of the world regarding carried interest, a delay in announcing expected clarifications is leaving many managers wondering how to best structure funds.

France made changes to the taxation of carried interest at the end of June. Since then, several planned clarifications to the regulations, which could significantly affect the financial situations of many managers in the country, continue to be delayed.

Under the new regulation, carried interest from French fund structures for the private equity market or from venture capital companies will continue be treated as capital gains, which is currently taxed at an overall rate of 30.1 percent. Employment income is currently subject to French progressive income rates up to approximately 40 percent, and requires 23 percent of social security contributions to come from the employee and 40 to 50 percent to come from the employer.

The biggest new change is carried interest holders must now contribute at least 1 percent of the total commitments of the fund, while any amounts derived from carried interest shares should only be paid out five or more years after the fund has been set up.

The changes ensure that France’s treatment of carried interest is more in sync with the rest of the world. However, despite the fact that it has been enforced since the end of June, managers have been awaiting several clarifications that are slow in coming.

Sylvie Vansteenkiste and Raphaël Béra of SJ Berwin say that among the points that need to be clarified are the scope of the rules, especially the definition of entities qualifying for the new regime. So far it is known that entities based in the US, Caymans, Jersey and Guernsey will not be covered, but there are still questions about which European vehicles will be qualifying entities.

A decree will set forth certain exceptions to the 1 percent rule, which should in particular deal with carried interest lower than 20% and specific categories of funds. Another point that needs to be clarified is whether co-investments can be taken into account to meet the 1 percent rule. They say the industry is eagerly hoping to see such exceptions enacted, but funds being structured for now should not expect such security until the final clarifications are announced.