France benefits from a full legal and regulatory framework that applies to any French alternative investment funds (AIFs) and portfolio management companies.

AIFs are subject to general common requirements from European Directive No 2011/61/EU on alternative investment funds managers (AIFMD), which was implemented into French law on 28 July 2013.

Before that, France already had its own legal and regulatory framework on investment funds; for instance, the first French law on investment companies was adopted on 2 November 1945. However, the French portfolio management industry has developed substantially during the last 30 years, and France is now one of the leaders of the European portfolio management industry.

French law has instituted various legal forms of specific investment funds, such as the investment company with variable capital (SICAV), the mutual fund (FCP) and the special limited partnership (SLP). SICAVs and SLPs are both commercial companies, with a legal personality and variable capital, which benefit from high flexibility in terms of functioning rules, governance rules, shares issuance, etc.

FCPs are investment funds with a contractual form and do not have any legal personality. An FCP is characterised as a co-ownership of assets.

Both FCPs and SICAVs may qualify as Undertakings for Collective Investments in Transferable Securities (UCITS), if requirements from the UCITS Directive are met, or as AIFs.

Moreover, French portfolio management companies (investment fund managers) must be authorised by the French Financial Markets Authority (Autorité des marchés financiers – AMF) and are subject to various regulatory requirements in terms of internal governance, human resources and technical means, prudential rules, etc.

In 2022, the key data on the French portfolio management industry is as follows (source: Association française de la gestion financière (AFG)):

• at the end of 2021, there were 708 French portfolio management companies, four of which were ranked in the top 25 globally but the large majority of which (more than 450 portfolio management companies) are composed of entrepreneurial groups – the predominance of such entrepreneurial groups constitutes a key distinctive element of the French portfolio management market;
• there are EUR2,231 billion of assets under management in French funds (+6.9% over a year), including EUR1,295 billion in French AIFs (+8.3% over a year);
• of the nearly 11,000 investment funds located in France, 72% are AIFs, with the number of AIFs located in France (7,900) increasing in 2021; and
• nearly EUR750 billion are managed for non-resident investors (through funds or through management mandates).

The French Monetary and Financial Code (MFC) distinguishes between two main categories of AIFs: AIFs de jure and AIFs de facto (Autres FIA).

AIFs de Jure

French AIFs de jure are collective investment vehicles listed by the MFC and are therefore subject to a specific legal and regulatory framework in terms of investment rules, governance, functioning rules, etc.

The MFC distinguishes between four subcategories of AIFs de jure, depending on the type of assets in which they may invest and the type of eligible investors, as follows.

• French AIFs de jure open to both retail and professional investors:
1. generic investment funds (fonds d’investissement à vocation générale – FIVG);
2. private equity investment funds (fonds de capital investissement – FCPR, FCPI or FIP);
3. real estate investment funds (organismes de placement collectif immobilier – OPCI);
4. real estate investment civil companies (sociétés civiles de placement immobilier – SCPI);
5. forest savings companies (sociétés d'épargne forestière or groupements forestiers d'investissement – SEF or GFI);
6. closed-ended investment companies with fixed share capital (sociétés d’investissement à capital fixe – SICAF); and
7. alternative funds of funds (fonds de fonds alternatifs – FFA).
• French AIFs de jure open to professional investors (or other investors under conditions – see 4.2 Marketing of Alternative Funds):
1. generic professional investment funds (fonds professionnels à vocation générale – FPVG);
2. professional real estate investment funds (organismes professionnels de placement collectif immobilier – OPPCI);
3. professional private equity investment funds (fonds professionnels de capital investissement – FPCI);
4. professional specialised investment funds (fonds professionnels spécialisés – FPS); and
5. special limited partnerships (sociétés de libre partenariat – SLP).
• French employee savings funds (fonds d’épargne salariale – ie, FCPE and SICAVAS).
• French financing vehicles:
1. securitisation vehicles (organismes de titrisation – OT), which may be subject to the AIFMD if they meet certain criteria; and
2. specialised financing vehicles (organismes de financement spécialisé – OFS).

AIFs de Facto

A French AIF de facto is any entity that qualifies as an AIF pursuant to the definition of AIFs in the AIFMD. These AIFs are not subject to any authorisation or notification process with the AMF but are subject to the general rules applicable to any AIF, as provided for in the AIFMD, and are still supervised by the AMF. The main qualification criterion is the economic analysis of the purpose of this vehicle: if its purpose is to raise capital from investors in order to invest it in accordance with a predefined investment policy, an investment vehicle may qualify as an AIF.

AIFs de Jure

Two types of legal structure are generally used for French AIFs de jure:

• an FCP, which is a co-ownership of assets and does not have any legal personality, so cannot be self-managed and must always be managed by an AIF manager (AIFM), which represents the FCP vis-à-vis third parties; or
• a SICAV, in the form of either a simplified limited company (société par actions simplifiée – SAS) or a public limited company (société anonyme – SA). As it has a legal personality, an investment company may be self-managed, in which case it has to comply with any requirement applicable to French portfolio management companies.

French real estate investment funds (OPCI and OPPCI) may be set up as a corporate entity (SPPICAV) or as an FCP (called an FPI).

A French professional specialised investment fund may also be set up in the form of an SLP.

AIFs de Facto

French AIFs de facto may adopt any type of legal structure (trust, civil or commercial company, etc).

As the AIFMD was implemented into French law through French Ordinance No 2013-676 of 25 July 2013, common requirements provided for in the AIFMD and EU Regulation No 231/2013 (AIFM Regulation) apply to any French AIF. These include:

• rules concerning the marketing of AIFs;
• rules on the obligation to appoint a custodian responsible for:
1. safeguarding the assets of the AIF; and
2. ensuring the compliance of management decisions;
• rules on the obligation to appoint an AIFM and concerning their remuneration;
• rules concerning public disclosure; and
• rules on the obligations of reporting and valuation of AIF assets.

In addition to common requirements, AIFs de jure are individually subject to specific investment rules provided for in the MFC, concerning the following:

• investment quotas and ratios regarding certain types of assets;
• risk-spreading ratios, counterparty risk ratios and control ratios;
• rules and criteria on asset eligibility; and
• limits on certain operations, such as the use of financial derivatives, cash borrowings, guarantees, etc.

In particular, generic investment funds, private equity funds open to retail investors and real estate investment funds are subject to strict investment constraints.

AIFs open to professional investors are subject to more flexible investment rules.

Thus, specialised professional investment funds (FPS and SLP) and specialised financing vehicles (OFS) are not subject to any constraints in terms of diversification, risk-spreading ratios and leverage or borrowings, unless they benefit from the European Long-Term Investment Fund (ELTIF) label or the economy financing fund label (fonds de prêts à l'économie).

Some categories of AIFs de jure may benefit from an exemption to the French rules on banking monopoly and then originate loans.

In that context, loan origination by a French AIF is allowed pursuant to two different legal regimes, as detailed below.

The ELTIF Regime

Certain types of professional AIFs that benefit from the ELTIF label may grant loans in France and other EU member states. In particular, the ELTIF label implies compliance with several rules provided for in the EU Regulation on ELTIF (EU Regulation No 2015/760) on:

• investment strategy and asset eligibility; and
• diversification and other investment ratios.

Any AIF wishing to obtain the ELTIF label must be authorised as such by the AMF.

In France, the ELTIF label is only available to certain categories of professional AIFs de jure.

Alternative Regime

Some categories of AIFs may grant loans to non-financial companies, pursuant to specific legal provisions that only apply to such categories of AIFs – ie, the FPS, OFS, FPCI and OT.

In this context, the following conditions apply:

• loans have to meet certain conditions in terms of duration;
• the redemption of shares or units of the AIF must be strictly limited;
• leverage must be limited; and
• the AIF may use financial derivatives only in limited situations.

Moreover, the AIFM of such AIFs must have specific authorisation from the AMF and must implement specific internal human and technical resources related to loan origination activity.

AIFs de facto are not authorised to grant loans in France (except in specific cases that constitute exemptions to the French banking monopoly).

Investment in Digital Assets

Before the publication of French Law No 2019-486 of 22 May 2019 on the growth and transformation of companies (the PACTE law: Plan d'Action pour la Croissance et la Transformation des Entreprises – Action Plan for the Growth and Transformation of Businesses), the only category of investment vehicle likely to invest in cryptocurrencies was the AIF de facto.

The PACTE law now enables certain professional AIFs de jure (FPSs, SLPs, OFSs and FPCIs) to invest directly in crypto-assets. For instance, this new investment possibility is available to French FPSs, which are entitled to invest in assets whose ownership rights are based on a distributed ledger technology.

Previously, FPSs were able to hold any types of assets or goods, provided that their ownership right was based on a “registration, a notarial deed or a private deed”. By formally recognising that the ownership right may also be registered via a blockchain technology, the PACTE law is undoubtedly a huge step for the development of the French crypto-asset market.

However, this investment possibility for FPSs is still conditional upon the reliable evaluation of such crypto-assets. The AIFM will have to ensure that such valuation is performed on a regular basis – for instance, with the help of independent crypto-asset valuators.

It should be noted that the PACTE law also enables FPCIs to invest in cryptocurrencies and utility tokens up to a limit of 20% of their assets.

Investment in Other Non-traditional Assets

As mentioned above, French law does not limit the ability of any AIF de facto to invest in non-traditional assets (except for investments in loans, which are covered by the French banking monopoly – see 2.4 Loan Origination). Therefore, AIFs de facto could invest in any non-traditional assets, provided that the general requirements on valuation are complied with.

FPSs, SLPs and OFSs may also invest in any type of goods, including non-traditional assets such as digital assets, litigation funding, cannabis-related investments, or any other type of goods that may constitute an investment opportunity, as long as the following general legal conditions are met:

• the ownership right on the good is based on a registration, a notarial deed or a private deed. Such condition is also fulfilled for goods that are registered via blockchain technology;
• the good is not backed by any security other than that granted for realising the AIF's investment objective;
• the good is sufficiently liquid so that the AIF is able to fulfil its obligations vis-à-vis its investors in terms of redemption; and
• the good is subject to a reliable valuation.

In April 2021, the AMF published a press release on investments in non-traditional assets (precious metals, forests, wine, cannabis, etc). Regarding investments in the cannabis sector, the AMF noted that the legalisation of therapeutic or recreational cannabis in some countries or states (Canada, California, etc) has contributed to an increase in proposals to invest in the cannabis sector. According to the AMF, such investments can take different forms: equity, exchange-traded funds (ETFs), funds or purchase of cannabis plants/plantation plots for a monthly fee. However, the AMF reiterates that French law prohibits the marketing and consumption of cannabis on French territory.

Regarding litigation funding (or third-party funding), all the costs linked to a dispute are financed by a financing company or a fund, which is a third party to the dispute and is remunerated by taking a percentage of the sums recovered at the end of the dispute in the event of success and bears the costs and risks of the financed party in the event of failure.

On that subject, the National Council of Bars (Conseil National des Barreaux – CNB) recommends a regulation that would include a framework for the conditions of terminating financing contracts, the introduction of a reinsurance obligation for financing companies/investment funds and the protection of the rights of the financed party by respecting professional secrecy and the latter's freedom to choose their lawyer.

Depending on the category of AIF, either the authorisation process or the notification process with the AMF may apply in connection with an AIF's creation.

In principle, the creation and material amendments of French AIFs de jure are subject to the prior authorisation of the AMF. However, certain French AIFs de jure reserved to professional investors are not subject to AMF prior approval, but their creation, modification or termination are subject to a notification process with the AMF.

Authorisation Process with the AMF

The following categories of French AIFs are subject to an authorisation process with the AMF.

• French AIFs open to both retail and professional investors:
1. FIVG;
2. FCPR, FCPI and FIP;
3. OPCI; and
4. FFA.
• French AIFs open to professional investors:
1. FPVG; and
2. OPPCI.
• Employee savings funds (FCPE and SICAVAS).

In order to issue an approval for the creation of these products, the AMF verifies the compliance of the AIF with the applicable regulations, and that the investors are properly informed.

The AMF authorises and monitors French AIFs by checking the information provided in the marketing materials and the regulatory documentation – ie, the key information document (KID), relevant for AIFs distributed to retail investors, and the prospectus, to which are attached the rules for an FCP or the articles of association for a SICAV.

In practice, if the AIFM is regulated by the AMF, the authorisation file is sent to the AMF through the GECO online platform.

Once the AMF receives a complete file, it issues an acknowledgement of receipt, which mentions the authorisation deadline (one month – ie, 23 business days – from the issuance of the acknowledgement of receipt).

In addition, a fast-track authorisation process enables the following AIFs to be authorised within eight business days from the issuance of the acknowledgement of receipt:

• AIFs that are similar to another AIF or UCITS that has previously been authorised pursuant to the standard process (referred to as “analogy procedure”); and
• AIFs that are dedicated to a certain number of investors (maximum 20) or to a predetermined category of investor (eg, subsidiaries of a group).

Notification Process with the AMF

The notification process covers the following categories of French AIFs:

• FPCI;
• FPS;
• SLP;
• OT; and
• OFS.

The creation and material amendments of such AIFs must be notified to the AMF within one month of their constitution or material amendments, through a notification file.

Once the AMF has received a complete file, it issues an acknowledgement of receipt within eight business days.

Alternative Investment Fund Managers

The AIFMD created a European passport regime in order to enable access to the European market for AIFMs located in EU member states. The passport procedure allows any AIFM that is duly authorised by the regulator of its home country to operate throughout the EU or in a state that is party to the agreement on the European Economic Area (EEA).

In order to be able to manage French AIFs, any manager must be:

• authorised and regulated by the AMF as a French portfolio management company authorised to manage AIFs, if it is located in France; or
• authorised and regulated by its local regulator as an AIFM and comply with the “passport” notification procedure pursuant to the AIFMD, if it is located outside France but in an EU member state.

However, if the AIFM is located in a third country, it needs to apply for specific approval from the AMF in order to manage French AIFs. In such cases, the AIFM has to comply with stringent requirements set out in the MFC, the General Regulation of the AMF and the relevant AMF instructions. The following requirements are of particular importance:

• compliance with all provisions applicable to French AIFMs;
• the appointment of a legal representative in France;
• the existence of a bilateral or multilateral tax agreement entered into between its home country and France;
• the existence of an appropriate co-operation agreement between its local regulator and the AMF, etc.

Therefore, there is no requirement to have a local AIFM as a condition for managing a French AIF. Any foreign AIFM located in the EU may benefit from the passporting regime pursuant to the AIFMD and then be able to manage any French AIF.

Delegation of Financial Management

Any French AIFM may use the delegation route with respect to the financial management of French AIFs (see 3.6 Outsourcing of Investment Functions/Business Operations).

In this context, the delegate investment manager must be authorised by its local regulator “for portfolio management purposes”. Therefore, the delegate investment manager is not required to be located in France or in another EU member state.

As such, the following entities may manage the portfolio (or a portion of the portfolio) of French AIFs through the financial management delegation route:

• portfolio management companies authorised in France or other AIFMs duly authorised in the EEA;
• any other entities authorised pursuant to the EU Directive on markets in financial instruments (MiFID) to provide the service of portfolio management on behalf of third parties; or
• any other entities in a third country that are authorised by their local regulator for “portfolio management purposes”, subject to the AMF and the relevant local regulator having entered into a co-operation agreement.

There are no other local requirements regarding the local substance of AIFs.

However, there are some local substance requirements for French AIFMs (see 3.7 Local Substance Requirements).

In accordance with the AIFMD, the custodian must be established in the following jurisdictions:

• EU AIFs:
1. the home member state of the AIF;
• non-EU AIFs:
1. the third country where the AIF is established;
2. the home member state of the AIFM; or
3. the member state of reference of the AIFM.

Non-local Administrators

In accordance with Annex 1 of the AIFMD, an AIFM may perform an administration function on an ancillary basis in the context of its AIF management functions.

Some administrative functions (eg, legal services, client enquiries) may be delegated to entities that do not have specific approvals and therefore do not necessarily have local representation in France.

However, an entity performing certain specific administrative functions, such as securities administration (ie, account management and centralisation), must be regulated.

For instance, the General Regulation of the AMF provides that the service provider in charge of centralising subscription and redemption orders (centralisateur) may entrust the performance of centralisation tasks to:

• one of the persons mentioned in Article L. 214-24-46 of the MFC or an investment service provider located in a state that is party to the agreement on the EEA; or
• an intermediary authorised within a state that is party to the EEA to carry out centralisation tasks within the meaning of Article 422–43 of the General Regulation of the AMF.

In principle, such functions do not need to be carried out locally. However, in practice, administrative functions are also performed by the AIF's custodian, which is subject to local requirements (see below).

Non-local Custodians

Any French AIF must appoint a custodian located in France, as listed in a French decree. However, the custodian may delegate its depositary functions to a non-local custodian, under certain conditions.

AIFs can be created as corporations (eg, SICAVs), partnerships or co-ownerships (eg, FCPs). Their tax regime broadly depends on the legal form they choose.

Corporations

Corporations are subject to corporate income tax (CIT) under standard rules. However, certain provisions of the French Tax Code (FTC) provide that certain forms of investment funds (SICAVs, venture capital companies (SCRs) and SPPICAVs) may benefit from a CIT exemption with respect to profits and capital gains derived from the operations they realise in accordance with their corporate purpose. Conversely, French AIFs de facto or OFS funds are subject to CIT under standard rules when they exist as corporations.

Partnerships or Co-ownerships

In contrast, AIFs existing as partnerships or co-ownerships of assets (mutual funds) are tax transparent. As a result, profits and gains they realise are not taxed at their own level but at the level of unit-holders (see 4.7 Investors: Tax Regime). This concerns FCPs, FCPRs and FPCIs, SLPs (SLPs enjoy the same tax regime as FPCIs), FCPIs and FIPs (which are specific types of FCPRs), FCTs (securitisation vehicles) and OFSs (if incorporated as mutual funds).

As a general rule, entities must be subject to CIT in France in order to be entitled to double-tax treaty benefits. Therefore, subject to certain exceptions, AIFs are generally not eligible to benefit from double-tax treaties. This holds true notably for FCPs or FCPRs (which are not subject to CIT in France on profits and gains they realise) and also for SICAVs or SPPICAVs (which are expressly exempt from CIT in France with respect to profits and capital gains derived from the operations they realise in accordance with their corporate purpose).

However, the French tax authorities consider that non-resident investors may benefit from double-tax treaty clauses with respect to French-sourced income (eg, dividends or interest) originating from FCPs or SICAVs, on the condition that they provide the necessary justifications to the depositary of the fund. This tolerance does not apply to sums paid to non-resident investors that are located in a non-co-operative State or territory within the meaning of Article 238-0 A of the FTC.

For certain types of investments (mostly private equity and real estate), it is quite common to use subsidiaries for investment purposes.

From a legal and regulatory perspective, the use of subsidiaries may enable an AIF to benefit from leverage at the level of its subsidiaries. Such investment pattern also enables the “blocking” of any liability and legal actions related to the relevant investment at the level of the subsidiary only. In practice, the subsidiary may then directly raise loans, grant securities or guarantees, and bear the liability of construction works or other types of operations on the assets indirectly held by the AIF.

Sponsors of French AIFs may come from any country (the USA, UK, Canada, China, UAE, etc); there is no clear trend in this matter.

There is no clear trend regarding the country of origin of investors in French AIFs, even though, due to the impact of Brexit and the perceived stability of the current political situation in France, there appear to be more opportunities to invest in France. According to the AFG, nearly EUR750 billion was managed for non-resident investors at the end of 2021 (through funds or management mandates).

At the end of 2021, the value of assets under management in investment funds amounted to EUR2,231 billion (an increase of +6.9% or +9.4% (excluding monetary funds) and +4.9% since 2011), including EUR1,295 billion in French AIFs.

Increase in Portfolio Management Companies

The number of portfolio management companies jumped to 708 at the end of 2021, due to the creation of 42 portfolio management companies in that year (compared to 43 in 2020 and 45 in 2019). This significant increase since 2019 can be explained, among other things, by:

• the establishment in France of a significant number of management companies in the context of Brexit; and
• a dynamic for the creation of portfolio management companies specialising in investments in "alternative" assets (private equity, real estate, etc).

Convergence of Portfolio Management Companies

At the same time, there has been a trend towards the convergence of portfolio management companies (mergers or aggregation) over recent years, in order to address an increase in competition and a decrease in margins.

General Market Trends

In Europe, including France, the investment management sector has experienced three years of unprecedented growth of assets under management. In France, the growth rate of investment funds managed in France amounts on average to +9.8% for each of the last three years. This high growth may be explained by a context of low rates, a large increase in equity markets, the COVID-19 crisis and an increase in savings. However, the current economic context in 2022 (tighter monetary policies, high inflation and current military and geopolitical tensions) seems to generate important risks for the resumption of economic activity and financial stability.

Regulatory Development

The French AIF industry is also benefiting from a favourable trend in terms of regulatory development. New French laws and regulations have enabled the creation of new types of investment funds and provided incentives to develop the French AIF industry (eg, the 2019 PACTE law, which enables professional investment funds to invest in crypto-assets or to be invested in the context of unit-linked life insurance contracts; the 2017 French ordinance that created the OFS; and the 2015 “Macron Law” that created the SLP).

This trend is also occurring at the EU level, with the recent adoption of EU regulations in favour of the creation of new types of investment funds (EU Regulation No 2019/1238 on the creation of a pan-European Personal Pension Product (PEPP), the ELTIF Regulation, EuVECa and EuSEF Regulations, etc).

At the EU and France levels, there is also a regulatory trend towards enhanced information disclosure and transparency requirements. For instance, EU Regulation No 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) came into force on 10 March 2021, and the AMF published Recommendation No 2020-03 on information to be provided by investment funds implementing non-financial approaches. Both texts impose new disclosure requirements for AIFs that implement non-financial investment criteria (sustainable investment and environmental and/or social criteria).

Such regulatory trends towards increased transparency also apply to fees (eg, European Securities and Markets Authority guidelines and the AMF's position on performance fees in certain types of AIFs).

AIFMs are subject to several disclosure and reporting requirements, initially set out in the AIFMD, which enforced some transparency requirements intended to protect investors through the annual report, pre-contractual information and reporting obligations to the AMF.

Annual Report

An AIFM must publish an annual report for each EU AIF it manages and for each AIF it markets in the EU. The content of this report is provided for in an AMF instruction. The report shall, in principle, be published no later than six months after the end of the financial year.

Pre-contractual Information

When the AIF is managed or marketed in the EU, the AIF or its AIFM must make the information provided in the General Regulation of the AMF available to investors before they invest in the AIF, as well as any material changes regarding such information. Article 23 of the AIFMD details the content of the information to be provided (see 4.6 Disclosure Requirements).

Offering Documents

There are many local requirements that apply to marketing materials, which are set out in AMF Position No 2011-24 and, at the EU level, in the guidelines on marketing communications issued by the European Securities and Markets Authority (ESMA) (ESMA34-45-1244). Moreover, the AMF is entitled to request any marketing materials related to any AIF marketed in France prior to their publication.

Reporting to the AMF

French AIFMs are required to report information to the AMF on a regular basis; such information is detailed in Annex 4 of the AIFM Regulation. In addition, ESMA issued guidelines on reporting requirements under the AIFMD (ESMA/2014/869), which are totally implemented by the AMF doctrine, via AMF Position No 2014-09 (methods for meeting requirements to report to the AMF under the AIFMD).

The frequency of such reports mostly depends on the amount of assets under the management of the AIFM, and the use of leverage (whether on a substantial basis or not).

For example, an AIFM regularly reports to the AMF on the main markets in which it operates, the main instruments it trades, its main exposures and its most significant concentrations.

In addition, AIFMs of AIFs de facto have an obligation to register them with the AMF.

Publicly Available Information

Portfolio management companies of AIFs de jure that are open to retail investors must send the prospectus and key investor information documents (KIIDs) of such AIFs to the AMF, and any amendments made to such documents. As a matter of principle, the KIIDs and prospectuses of such AIFs are publicly available in the GECO database (a database monitored by the AMF).

Such disclosure requirement does not apply to other types of AIFs, such as AIFs that are open to professional investors or AIFs de facto.

AIFs compelled to produce a KIID compliant with EU Regulation No 583/2010 will have to replace this with the key information document (KID) pursuant to EU Regulation No 1286/2014 (the PRIIPs Regulation) as of 31 December 2022. The obligation to produce a KID pursuant to the PRIIPs Regulation is already applicable to AIFs that are marketed to retail investors, which are not subject to EU Regulation No 583/2010 (such as AIFs de facto or SCPIs).

At the EU level, it is intended to amend the following directives or regulations.

• The AIFMD: a proposal for a new directive amending the AIFMD was published by the European Commission on 25 November 2021. The proposed amendments cover, inter alia, delegation arrangements, liquidity management tools and specific requirements on loan origination activities.
• The ELTIF Regulation: the European Commission noticed that the ELTIF label was not as successful as hoped, with only a small number of ELTIFs being launched since the adoption of the ELTIF Regulation in 2015 (currently approximatively 27), with a relatively small amount of net assets (below EUR2 billion). In particular, it is intended to broaden the scope of eligible assets and reduce potential barriers to investment. Therefore, on 25 November 2021, the European Commission published a proposal for a regulation amending the ELTIF Regulation.

The AMF will certainly supplement the regulatory regime of the OT (which has become obsolete) with new provisions in the General Regulation of the AMF and by future instruction.

French AIFMs typically use the following legal structures:

• a simplified limited company (SAS); or
• a public limited company (SA).

AIFMs are responsible for the portfolio management and risk management of AIFs.

Under French law, AIFMs must be authorised by the AMF as portfolio management companies.

As regulated entities, portfolio management companies are subject to a complete legal and regulatory framework so must comply with many requirements, including:

• obligations that apply to their internal governance, conducting officers, human and technical resources, etc;
• obligations in terms of own funds;
• obligations in terms of remuneration in the context of AIF management;
• good conduct rules (eg, any AIFM must act in the sole interest of the AIF shareholders or unit-holders);
• conditions and criteria that apply to the delegation and outsourcing of functions or activities (see 3.6 Outsourcing of Investment Functions/Business Operations);
• requirements on the detection and management of conflicts of interests; and
• rules on anti-money laundering and countering the financing of terrorism (AML/CFT).

Fees invoiced by portfolio management companies (ie, management fees and commissions related to the issuance or placement of shares/units) to AIFs are generally fully subject to CIT under standard rules, but are generally exempt from VAT. This holds true when they are invoiced to AIFs that are open to professional and non-professional investors, OFSs, SCRs, SPPICAVs or FPIs (the list of funds whose management is exempt from VAT is provided in Article 71 Annex III of the FTC).

As a general rule, companies must be operated in France in order to be subject to CIT in France on profits they realise.

In this respect, in a ruling dated 21 September 2012, the French tax authorities indicated that the fact that a French portfolio management company manages a foreign AIF should not, per se, make such AIF a French permanent establishment in France. Pursuant to this ruling, the profits and gains realised by such foreign AIFs are not subject to CIT in France. This rule applies to any type of AIF (ie, funds taking the form of corporations or partnerships or co-ownerships of assets), regardless of the jurisdiction in which they are established (EU member state or not). However, it is important to note that, by contrast, fees received by such portfolio management companies with respect to foreign AIFs and remunerations received by members of such companies, if located in France, are taxable in France.

A specific tax regime applies to distributions paid and gains realised on sales of carried interest shares or units by carried interest shareholders or unit-holders under certain conditions (these conditions concern both the shareholders or unit-holders and the carried interest shares or units).

This tax regime applies to:

• carried interest shares or units issued by FCPRs or FPCIs; and
• carried interest shares issued by SCRs and SLPs.

Under this regime, distributions paid by such funds and gains realised on sales of carried interest shares or units by carried interest shareholders or unit-holders are treated as capital gains or income on securities for individual income tax purposes, and benefit from a flat taxation rate of 30% (see 4.7 Investors: Tax Regime).

Otherwise, distributions and gains are treated as salaries for individual income tax purposes (taxed at scaling rates up to 49%). They are also subject to a specific social contribution at a rate of 30%.

AIFMs are authorised to outsource and/or delegate investment functions and business operations, including all functions linked with AIF management as listed in Annex I of the AIFMD:

• the portfolio management or risk management functions of the AIF; and
• the ancillary functions that an AIFM may perform in the context of management of the AIF – namely, the administration of the AIF, the marketing of units and the activities related to the assets of the AIF.

However, the delegation of AIF management functions should not lead to the AIFM essentially becoming a “mailbox entity”, so must always be cognisant of the activities carried out by the portfolio management company. Portfolio management companies are required to maintain adequate resources at all times and must retain added value in monitoring the risks linked with their outsourced or delegated activities. Subsequently, an AIFM may not delegate both the portfolio management and the risk management of its AIFs.

Any outsourcing of essential or important operational tasks or functions and delegation of AIF management functions must meet some general conditions as required by the AMF and detailed by Articles 318-58 to 318-61 (outsourcing of essential or important operational tasks or functions) and Article 318-62 (delegation of management functions) of the General Regulation of the AMF. In particular:

• such delegation or outsourcing arrangement has to be described in the AIFM's programme of operations;
• the AIFM and its senior managers remain fully responsible for fulfilling their professional obligations;
• any outsourced or delegated tasks or functions must be adequately monitored by the AIFM; and
• the AIFM must enter into a written agreement with its delegate with respect to the delegated or outsourced tasks or functions.

In addition, when the delegation concerns portfolio management, such delegation must in particular:

• not be granted to the custodian or its delegate, nor to any other entity with a conflict of interest; and
• be granted only to entities that are authorised for “portfolio management purposes” and subject to supervision or, where this condition cannot be fulfilled, only with the prior approval of the AMF (see 2.7 Requirement for Local Investment Managers).

Moreover, the delegate must have sufficient resources to perform its tasks, and its managers must be of good reputation and have sufficient experience. Thus, the AIFM must be able to demonstrate that:

• the delegate is qualified and capable of undertaking the relevant delegated tasks;
• the delegate was selected with all due care; and
• it is able to effectively monitor the delegated activity at any time, to give instructions to the delegate and to withdraw the delegation with immediate effect.

In addition, the AIFM's liability (towards the investors and the AIFs) may not be affected by the delegation or outsourcing.

Any AIFM must maintain sufficient financial, technical and human resources in line with the nature of its business, investment services and the complexity of its activities. As such, the AIFM must have:

• at least two conducting officers, including at least one present on a full-time basis – the other conducting officer may be present on a part-time basis, but for at least 20% of its working time; and
• more generally, at least three people present on a full-time basis, including at least two full-time portfolio managers, in order to ensure the continuity of its resources.

In addition, the compliance and internal control officer (RCCI) must be located in France.

French AIFMs and local branches of foreign AIFMs must appoint a money-laundering reporting officer (eclarant/correspondant TRACFIN). As this person is the key contact for the French financial intelligence unit (TRACFIN), it is recommended that they are permanently located in France.

French AIFMs must in particular:

• be authorised by the AMF to manage AIFs;
• join a professional association;
• establish a registered office in France;
• have a minimum initial capital of EUR125,000, which must be fully paid up;
• appoint a person responsible for compliance and internal control functions (RCCI); and
• comply with the own funds requirements in EU Regulation No 575/2013 (the CRR).

EU AIFMs that manage French AIFs on a cross-border basis, pursuant to the AIFMD passport regime, are submitted to the supervision of the competent authority of their home member state. However, they must also comply with some good conduct rules applicable in France, including:

• rules applicable to marketing and supplying information to investors or potential investors;
• rules on marketing materials;
• good conduct rules on financial solicitation (démarchage) if relevant, etc.

Foreign AIFMs located in a third country do not benefit from the AIFMD passport regime. Therefore, if they wish to manage French AIFs, they must in particular:

• have the AMF’s prior approval;
• comply with all the provisions applicable to French portfolio management companies derived from the AIFMD;
• appoint a legal representative in France, acting as a local contact point;
• appoint one or more third-party service provider(s) to act as custodian(s), and notify the AMF of such appointment;
• have appropriate co-operation arrangements in compliance with the AIFMD between the AIFM’s home country regulator and the AMF for systemic risk oversight in line with international standards;
• be from a country that has entered into a bilateral or multilateral tax agreement with France; and
• not be from a country that appears in the list of risk countries published by the Financial Action Task Force (FATF).

French law provides for a wide range of investment funds implementing different types of investment strategies. The type of investor interested in investing in a particular AIF depends on the investment strategy implemented by the relevant AIF and the eventual tax regime that applies to investments in such investment fund.

For instance, French venture capital funds are mostly designed for retail investors looking for a favourable tax regime related to such type of private equity investments.

Some AIFs that are open to retail investors are also mostly used as unit accounts in life insurance contracts.

In addition, AIFs that are open to professional investors (such as FPS, SLP and OPPCI) are invested mostly by institutional investors (pension funds, credit institutions, insurance companies, large corporate entities, etc).

Depending on the type, AIFs may be marketed either to retail and professional investors or just to professional investors.

The main distinction is as follows:

• AIFs that target professional investors (AIFs de jure eligible to professional investors – ie, FPVGs, OPPCIs, FPCIs, FPSs and SLPs); and
• AIFs that market their shares to both retail and professional investors (ie, FIVGs, FCPRs, FCPIs, OPCIs and SICAFs), to which special rules apply.

For AIFs de jure open to professional investors (or other investors under conditions), an eligible investor is one of the following:

• a professional investor within the meaning of MiFID;
• any investor with an initial investment equal to at least EUR100,000;
• any investor, provided that the subscription or acquisition of shares or units is performed in its name and on its behalf by an investment services provider acting in the context of the service of portfolio management;
• as the case may be, any retail investors if the AIF benefits from the ELTIF label pursuant to EU Regulation No 2015/760; or
• for some professional AIFs (FPCIs, FPSs and OFSs), any member of the management team or the management company, or any person who assists the management company and whose initial investment is equal to at least EUR30,000.

Rules that apply to firms marketing AIFs in France are provided in the MFC, the General Regulation of the AMF and the relevant AMF instructions and guidelines applicable to the content requirements of marketing materials.

The marketing of AIFs in France is subject to a complete regulatory framework, in particular the following.

• The AMF adopts a definition of marketing that is wider than the definition provided for in the AIFMD and the MFC – even so, the AMF lists some situations that are not considered as “marketing”, including the “pre-marketing” route. Note that the French regulatory framework on pre-marketing was substantially amended in 2021 via the implementation of EU Directive No 2019/1160 into French law by French Ordonnance No 2021-1009 of 31 July 2021.
• The marketing of AIFs in France is subject to either a notification process with the AMF or prior approval by the AMF (see 4.5 Investors: Regulatory Regime).
• There are many local requirements that apply to marketing materials, which are set out in AMF Position No 2011-24 and in ESMA's guidelines on marketing communications (ESMA34-45-1244). Moreover, the AMF is entitled to request any marketing materials related to any AIF marketed in France prior to their publication.

Local investors may invest in AIFs established in France. However, some types of AIFs are open only to professional investors or retail investors that invest at least EUR100,000. Some AIFs may also provide additional restrictions or conditions.

The marketing of AIFs in France is subject to:

• prior approval by the AMF if the relevant AIFs are to be marketed to retail investors; or
• a notification process with the AMF if the marketing involves promoting the relevant AIFs to professional investors only (pursuant to the AIFMD).

In addition, please note that, at this stage, the AIFMD passport regime only applies for cross-border marketing to professional investors. Therefore, the approval process with the AMF for AIFs marketed to retail investors constitutes a local regime that only applies in France.

These filings have to be made upwind of the marketing of AIFs.

In the event of a substantial change in any of the information communicated at the time of the application for authorisation or when notifying the AMF, the AIFM must notify the AMF electronically at least one month before implementing any planned change, or immediately after an unexpected change.

An annual contribution is also due to the AMF, amounting to EUR2,000 for EU AIFs authorised for marketing in France.

For each EU AIF that they manage and for each AIF that they market in the EU, AIFMs must make available to investors – before any investment is made – all the information listed in Article 23 of the AIFMD, including the following in particular:

• a description of the investment strategy;
• the identity of the AIFM, the custodian, the auditor and any other service providers;
• the AIF's valuation procedure; and
• the measures taken to manage the AIF's liquidity.

In practice, such minimum information is included in the prospectus and/or any constitutive document of any AIF (by-laws, rules, etc). For AIFs de jure, the AMF has published templates of its prospectus, rules and by-laws, which include such minimum information.

In addition, the AIF or its AIFM shall provide the unit-holders or the shareholders with a semi-annual report or quarterly report, and a semi-annual or quarterly asset composition.

Any French AIFM must also publish and/or make available to the investors information on the following:

• its policy on handling complaints;
• its voting policy;
• the way it takes into account environmental, social and governance criteria in its management policies (on its website and/or in its annual report);
• its internal remuneration policy (eg, through an independent remuneration policy statement, a periodic disclosure in the annual report or any other form); and
• its policy on execution of orders.

The applicable tax regime depends on the tax residence of the investor (ie, whether domestic or foreign) and on whether the investor is an individual or a company.

French Tax Residents

Individual investors

Regardless of whether they invest in an AIF in the form of a corporation (eg, SICAV) or a mutual fund (eg, FCP), individual investors are generally subject to income tax only when they effectively derive gains from such funds.

When they invest in an AIF created as a corporation (eg, a SICAV), individuals are generally subject to income tax on the distributions paid by this AIF. Such distributions are subject to the same tax regime as the underlying profits (ie, distributed capital gains are treated as capital gains, and redistributed dividends are treated as dividends for tax purposes). As a result, at the level of the investors, both types of income are treated identically and are subject to a flat tax rate of 30% (12.8% income tax plus 17.2% social levies) or, if such option is exercised, to a progressive scale of income tax.

When they invest in a mutual fund (eg, an FCP), individuals are deemed to directly derive the profits and gains derived by such fund in the year in which they are effectively distributed (however, please note that for FCPs, said non-taxation of the non-distributed profits carried out by the fund is subject to the condition that no individual investor holds more than 10% of the fund’s units). Therefore, individual investors in mutual funds generally enjoy a tax regime close to the one that applies to individual investors in funds taking the form of corporations, as described above.

As an exception, individual investors in FCPRs, FCPIs, SCRs and SLPs may benefit from an individual income tax exemption regime (which does not apply to social security levies) on the dividends and gains derived from units or shares they hold in such funds, provided that the following conditions are met:

• they retain their shares or units for at least five years and reinvest in the fund the sums distributed during such period;
• investors (alone or with their spouse and their relatives in the ascending and descending line) do not hold directly or indirectly more than 25% of the share capital of the companies in which the AIF has invested; and
• the AIF respects certain investment ratios (notably, to invest 50% of its subscriptions in securities issued by certain non-listed European companies).

Corporate investors (subject to CIT)

As a general rule, corporate investors that are subject to CIT (in full or in part) and that hold shares/units in an AIF de jure are subject to CIT under standard rules (25% in 2022) upon any change in the liquidation value of the shares/units they hold in the fund (the so-called “mark-to-market” rule). This holds true whatever the legal form of the AIF de jure (mutual fund or corporation) and whatever its location (ie, inside or outside France). Furthermore, any distributions paid or capital gains distributed by the fund to investors are also subject to taxation at standard CIT rates (net of any mark-to-market taxation).

However, FCPRs, SCRs, SLPs, SPPICAVs, FPIs and certain SICAVs and FCPs investing at least 90% of their assets in shares (known as fonds actions) are not covered by this mark-to-market rule. Corporate investors in such funds are instead taxed at standard CIT rates (25% in 2022) upon any redistribution of profits and gains realised by the AIFs.

As an exception, certain FCPRs, SCRs and SLPs that invest mostly in non-listed companies are subject to a favourable tax regime under which their corporate investors may benefit from the French participation-exemption regime in respect of capital gains they distribute.

Non-French Tax Residents

Taxation of income received by the fund and distributed to the investors

As a general rule, non-French tax resident investors are treated as if they have directly derived profits from the AIFs in respect of the distributions they receive. As a result, non-resident individuals and corporate investors are generally subject to a withholding tax (WHT) in France on the distributions paid by AIFs according to the rules applicable to each corresponding category of income they received.

Accordingly:

• distributions reflecting dividends received by AIFs from French companies are generally subject to 12.8% WHT when they are distributed to individual investors who are EEA tax residents, and to 25% WHT when they are distributed to other investors (to be applicable, such income may not be distributed in a non-co-operative state or territory within the meaning of Article 238-0 A of the FTC); however, note that most double-tax treaties entered into by France provide for reduced WHT rates that vary from 0% to 15%, depending on the tax jurisdiction of the investor (although investment funds do not generally enjoy the benefits of all double-tax treaties entered into by France; double-tax treaty relief may instead be claimed by the investors themselves – see 2.12 Double-Tax Treaties);
• distributions reflecting interest income received by AIFs from French companies are generally not subject to WHT in France; and
• distributions drawn out from capital gains realised by AIFs from the disposal of shares in a French company are generally not subject to taxation in France unless the investor, their spouse and their relatives in the ascending and descending line hold, directly or indirectly, more than 25% of the rights in such underlying company (known as the "substantial participation regime").

Such rule does not apply to distributions of capital gains realised by FPIs or SPPICAVs (which are always subject to WHT in France).

Taxation of capital gains made upon disposal of the fund units or shares

Subject to the exceptions detailed below, notably regarding SPPICAVs and FPIs, capital gains derived from the disposal of units in an AIF are not generally subject to taxation in France, except in cases where the shareholder/unit-holder, their spouse and their relatives in the ascending and descending line hold, directly or indirectly, more than 25% of the rights in one of the French companies of the fund’s portfolio (or in the fund).

As an exception, capital gains derived by non-French tax resident investors on the disposal of shares held in FPIs and in SPPICAVs, provided they hold 10% or more of their shares, are generally taxable in France (subject to double-tax treaties) at the following rates:

• 25% for corporate investors; or
• 19% for individual investors (increased by social contributions in certain cases).

FATCA

FATCA was enacted in 2010 by the US Congress to target non-compliance by US taxpayers using foreign accounts. It requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. FATCA has been implemented in France insofar as France and the USA entered into an intergovernmental agreement regarding FATCA on 14 November 2013.

CRS

The CRS was developed in response to the G20 request and approved by the OECD Council on 15 July 2014 to improve the transparency and automatic exchange of tax information. The CRS requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. France signed the multilateral agreement for the automatic exchange of information relating to financial accounts on 29 October 2014.

Article 56 of France’s Amending Finance Bill for 2017 introduced provisions regarding the obligations of financial institutions in relation to FATCA, the CRS and the European Directive on Administration Cooperation in Taxation provisions related to financial accounts, notably regarding carrying and archiving the audit trail of their client due diligence reports, as well as their supervision by the French financial regulator (in addition to the tax authority). Article 56 also created new penalties for financial institutions and clients in the case of failure to meet certain requirements related to FATCA and the CRS.

A French decree dated 3 July 2018 (which came into force on 1 November 2018) specified rules relating to the preparation of and the procedure applicable to financial institutions for transmitting the list of clients who refuse to communicate information about their tax residence (known as "the list of holders of defaulting financial accounts"). Finally, a French decree dated 10 February 2020 modified the reporting obligations of French financial institutions as regards automatic exchange of information concerning financial accounts. It notably updated (as of 1 January 2021) the list of financial accounts that do not have to be declared by French financial institutions (eg, building savings accounts). These reporting obligations were amended again in 2021 and eventually in 2022 via a decree of 25 April 2022.