Letter from Paris: France, tax shelter

Why Gallic GPs are shrugging at tax and regulatory upheaval across Europe.

On a cold, rainy December day in Paris, at the Hilton hotel near the Arc de Triomphe, a high level group of private equity professionals gathered at an EVCA conference to discuss the threats facing their industry – especially the one from Brussels. The looming “Directive on Alternative Investment Fund  Managers” being fine-tuned by the European Union at the moment was on  everyone’s mind. Though still a moving target, and thus somewhat opaque, exactly how the legislation (if passed as currently drafted) would affect firms’ prospects was an issue raised repeatedly.

Curiously though, the French fund managers at the event seemed less worried about the AIFM than some of their colleagues who had caught trains and planes to Paris that day. Was it because culturally, the new EU framework in its current guise is to some extent closer to the existing French regulatory environment as compared to other European countries? “Some issues the AIFM contemplates, like minimum capital requirements or the need to have a depository for the fund, are already a part of daily life for French fund managers,” says one industry insider. By this rationale, the French fund industry is so heavily regulated already that the AIFM implementation will simply be less of a shock for French GPs.

In addition, some of the lunchtime chatter in Paris focused on another reason why French GPs may be in a more fortunate position than some of their peers: taxes.

You read that right: taxes. France, traditionally the land of heavy-handed taxation, today looks more appealing to fiscally aware investment professionals than many other countries. Absurd, people would have said until recently, had they not laughed hysterically first.

The reality is, as one of EVCA’s delegates put it over dessert, things are getting so bad elsewhere that France’s 30.1 percent capital gains tax applied to carried interest, and the 40 percent income tax for top earners, are starting to look much more palatable than they used to.

Take the UK for example. It has repeatedly bumped up income taxes, with the top bracket now bracing for a 52 percent rate to come into effect in April 2011. And, somewhat similar to proposals that have been kicked around in the US, many expect that the next budget report in April will go after carry, too. One commentator in UK newspaper The Guardian recently said a raise on capital gains tax from the current 18 percent to something “more aligned” with the 52 percent rate would not be surprising.

Concluding that this will result in GPs trading in their fish and chips for coq au vin is probably a bridge too far, as these issues may (and often do) change from year to year. As several sources pointed out, that’s particularly salient given the financial services sector continues to be in the sights of politicians desperate to raise government revenues. But it does mean, for the first time in recent memory, French GPs may find themselves with a more favourable tax and regulatory situation than some of their European counterparts. The prospect of that, says one French private equity professional, “makes me smile”.