FCPI/ ISF
FCPI: supporting SME/SMI while enjoying tax benefits
FCPI are mutual funds belonging to the Private Equity category. Specifically created for France, they are designed for private clients and well-informed investors.
Innovation-focused mutual funds (FCPI) were created by the 1997 Finance Act in order to support the development of innovative SME/SMI. The 2002 and 2006 Finance Acts extended this plan until December 31, 2010.
Article 6 of the TEPA Act, adopted August 21, 2007*, amended the enactment, increasing the tax benefits gained from holding FCPI units.
FCPI are subject to very specific regulations, with particular regards to limits on the holding of assets and the distribution of risk within portfolios. FCPI are also subject to approval and auditing by the French financial markets authority (Autorité des marchés financiers - AMF).
*Act n° 2007-1223 of August 21, 2007 promoting Work, Employment and Purchasing Power
Why invest in a FCPI or FIP (Fonds d’investissement de proximité - Proximity Investment Funds)? |
Investing in a FCPI or FIP allows you to access the private equity markets through high-risk investment vehicles supervised by the AMF. These products also enjoy significant tax benefits and provide you with the opportunity to diversify your portfolio while contributing to the development of non-listed companies. Over the last 10 years, the private equity market has delivered high returns compared to the performances of other asset classes (equities, bonds, money market, etc.)
What are the features of a FCPI ISF? |
A FCPI ISF allows individuals subject to Wealth Tax (WT) to invest in so called "eligible" SMEs while benefiting from a WT reduction. The enactment applies provided that at least 40% of the fund assets are invested in European SMEs with more than five years of existence and 20% in innovative companies; the remainder being invested in mutual funds of outstanding asset management firms.
The eligible companies are SMEs listed in the European Commission Regulation of January 12, 2001:
| - meeting the definition of small and medium-sized companies*;
- in which no single company, or companies jointly, not classified as SMEs, hold 25% or more of the capital;
- employing less than 250 employees;
- which turnover does not exceed 50 million euros and which total annual current assets do not exceed 43 million euros ;
- which shares cannot be admitted to trading on a French or foreign regulated market (with the exception of shares traded on an organised market such as Alternext or AIM in London);
- exclusively exercising a commercial, industrial, handcrafted, professional or agricultural activity.
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Hence companies involved in the management of moveable properties, fixed assets and building rental are definitely excluded.
*according to Annexe I of the (EC) Commission Regulation n°70/2001
What are FCPI ISF tax benefits? |
FCPI offer a triple tax advantage. Taxpayers having their tax residence in France who invest in FCPI ISF units in year N benefit from:
| - on the portion of SMEs eligible for EC SMEs present in the investment (70%): a reduction of wealth tax in year N equivalent to 50% of the investment, up to a maximum of Euro 20,000**;
- on the remainder (30%): a reduction in income tax in year N+1 equal to 25% of the cash subscriptions up to a maximum of Euro 3,000 for a single person and Euro 6,000 for a married couple (gross amounts paid, including subscription charges);
- for the calculation of their wealth tax base during the FCPI units holding period : the exclusion of the investment’s portion considered to be invested in eligible SMEs.
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**investment certificate must be attached to the declaration and reduction directly applied to the WT payable by the taxpayer
| Example of tax reductions accorded to a married couple subscribing FCPI units invested up to 70% in eligible SMEs |
| Amount of the investment (net of subscription charges) | 40,000 euros |
| Amount invested in eligible SMEs (70%) | 28,000 euros |
| Wealth tax reduction (50%) | 14,000 euros |
| Balance available for income tax reduction (30%) | 12,000 euros |
| Income tax reduction (25%) | 3,000 euros |
Total income tax reduction:
amount
percentage | 17,000 euros
42,5% |
| Tax reduction simulation table for persons liable for WT* |
| HTMF units in euros | Exemption
base (70%) | WT reduction (50%) | Income tax reduction (25%) | Total reduction
Euros % |
| 5,000 | 3,500 | 1,750 | 375 | 2,125 | 42.5 |
| 10,000 | 7,000 | 3,500 | 750 | 4,250 | 42.5 |
| 15,000 | 10,500 | 5,250 | 1,125 | 6,375 | 42.5 |
| 20,000 | 14,000 | 7,000 | 1,500 | 8,500 | 42.5 |
| 25,000 | 17,500 | 8,750 | 1,875 | 10,625 | 42.5 |
| 30,000 | 21,000 | 10,500 | 2,250 | 12,750 | 42.5 |
| 40,000 | 28,000 | 14,000 | 3,000 | 17,000 | 42.5 |
| 50,000 | 35,000 | 17,500 | 3,750 | 21,250 | 42.5 |
| 57,143 | 40,000 | 20,000 | 4,258 | 24,285 | 42.5 |
As the wealth tax reduction’s upper limit is fixed at 20,000 euros, there is no tax incentive to invest above this ceiling.
| - Gains are made provided that the FCPI units are held for at least 5 years (in general, the holding period can be up to 8 or 10 years).
- Capital gains are exempted from capital gains tax and are only subject to social security contributions, provided that the FCPI units are held for at least 5 years from the subscription date.
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*exclusive of the purchase costs of the FCPI units
Are FCPI a risky investment? |
FCPI belong to the high-risk mutual fund investment category and are therefore complex products designed for well-informed investors only.
The fund invests at least 60% of its assets in innovative companies with fewer than 2,000 employees in which one or more legal entities do not hold a majority shareholding.
The remaining 40% will possibly be invested in financial instruments authorised under current regulations, in equities or funds for instance.
The performance of the fund will depend on the success of these companies' projects.
Given the innovative and risky nature of the projects, you must be aware that those investments carry a high level of risk. The potential return from these innovations and the tax benefits are also offset by the risk of loosing money.
Funds can invest to some extent in non-listed companies. The Net Asset Value (NAV) of the units will be calculated by the asset management firm according to the method described by the fund regulation and under the supervision of the fund auditor (the NAV calculation can prove to be delicate).
What are the constraints to fulfil? |
You must be a French tax resident individual and a well-informed investor for the full duration of the investment. Non-French individuals residents will not qualify for a tax break on income earned in France.
To benefit from the tax advantage, the previously mentioned 60% threshold must be met within a maximal period of two financial years and the units subscribed must be held for at least five years. However, the optimum investment period is not linked to this tax constraint due to the fact that the fund invests in companies that might take longer to reach maturity.
What are the consequences of early redemption? |
Early redemption (before the end of the 5-year period), will mean losing the product's tax benefits: the 25% tax reduction must be paid back and the capital gains will be taxed, other than in one of the following three cases:
| - death of the subscriber or his/her spouse;
- 2nd or 3rd degree invalidity of the subscriber or his/her spouse;
- redundancy of the subscriber or his/her spouse;
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The redemption conditions may depend on the fund's ability to sell its assets quickly. It may not agree to immediate redemption and may offer a price lower than the last published net asset value. If the units are sold to another unit holder, the selling price may also be lower than the last published net asset value.
