FISCAL FCPRs AND THE TAX REGIME FOR ASSET ALLOCATIONS
Newsletter - April 2022
The private equity funds referred to in Article L. 214-27 of the Monetary and Financial Code (CoMoFi) constitute a category of funds oriented towards so-called “risky” investment, of which venture capital funds (FCPR) are part.
Two categories of venture capital funds can be distinguished according to the composition of their assets and the tax benefits (if any) enjoyed by their unitholders:
- The so-called “legal” FCPRs, whose assets, as defined in Article L. 214-28 of the CoMoFi, include a minimum proportion of unlisted securities and limited liability company shares. Their tax regime and that of their unit holders follows that of mutual funds (FCP);
- The so-called “fiscal” FCPRs are “legal” FCPRs whose assets also meet the conditions set out in II of Article 163 quinquies B of the General Tax Code. Under certain conditions, unitholders benefit from a favourable tax regime.
Conditions for benefiting from the long-term capital gains regime
The so-called “fiscal” FCPRs must be comprised of at least 50% of assets (or 60% for FCPIs) of securities of European companies which are not admitted to trading on a regulated or organised market and that also meet specific criteria related to their activity and tax system. Namely, they must be subject to corporation tax under the conditions of common law or be liable for it under the same conditions if the activity was carried out in France.
Asset allocations made by FCPRs are deemed to correspond in priority to a tax-free repayment of contributions. For the remainder, they are entitled to the long-term capital gains regime provided that, in accordance with 2° of 5 of article 38 of the GTC, the capital contributions were made by the investor at least two years before the distribution. Otherwise, they are included in the taxable result at the statutory rate.
The administrative doctrine also considered that the benefit of the long-term regime for a unitholder not having the status of initial subscriber is conditional on the acquisition of the fund units for at least two years at the date of the distribution.
The position of the Council of State
The Council of State had to rule on the condition of the term of holding the of units acquired in a decision of 8 March 2022 (CE 8th -3rd ch. 31-3-2022 no. 461406).
In practice, and in application of the texts, the entire distribution is eligible for the long-term regime if the contributions have been made for at least two years at the date of the distribution.
There is no legal requirement that the units be held by the holder for a certain period of time. Thus, the Council of State considered that by subordinating the benefit of the long-term capital gains regime to a condition of term of ownership of the units acquired, the tax administration had exceeded the law.
Consequently, the Council of State specified that the taxable portion of the distribution of assets made by a fiscal FCPR is subject to the long-term regime as soon as the capital contributions have been made for at least two years at the date of this distribution, regardless of the length of time the acquired units have been held.
Taxpayers who acquired their units in an FCPR less than two years ago on the date of the distribution of the fund’s assets may therefore request the application of the long-term regime, provided that the capital contributions were made at least two years prior to that date.
This claim must be filed before 31 December of the second year following the year of payment of the corporate tax (or income tax if the investor is an individual) whose amount is disputed.
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