A new French tax law, effective since the beginning of this year, has generated much excitement by creating an enhanced favorable tax regime – the PEA PME-ETI – for individual investors. The new regime is similar to the Plan d’Epargne en Actions (PEA – a share savings plan)1 that allows French individuals to benefit from a tax exemption for capital gains, distributions and other income2 related to their investments in equity issued by companies located in EU Member States and certain EEA Member States.
As background, the investments eligible for the PEA may be made directly, or indirectly through investment funds – such as UCITS vehicles, French funds, and foreign funds authorized for distribution in France, as long as such entities invest at least 75% of their assets in eligible assets (as further described below). Investment through investment funds has been very popular – most assets placed in existing PEAs have been made via investment funds and, in fact, most major asset managers have already launched a fund or sub-fund eligible for the PEA regime in order to facilitate their fundraising in France.
The new law3 provides tax benefits for investments in small and medium companies (PME) as well as Mid Cap companies (ETI). So great was the interest in the PEA PME-ETI that more than 20 funds were available to participate in the new regime even prior to the publication of the decree that lays down the implementing rules of this law.4
Changes to the PEA Concept
The new law expands upon the PEA regime in two ways: by raising the cap on permissible investments in PEA accounts (from €132,000 to €150,000), and – more importantly – by creating the PEA PME-ETI account, which is dedicated to investments in small and medium companies. The cap for this new savings plan is €75,000.
Even though the new ceiling for the PEA is not a major change and could have been increased further, the current good shape of the financial markets should generate an additional demand for existing funds eligible for traditional PEA accounts.
The PEA PME-ETI regime provides opportunities to both investors and asset managers. Investors who have already made the maximum contributions to their PEA accounts (up to the new €150,000 limit) now have a new type of savings plan in which to invest. French asset managers – as well as EU asset managers (namely, EU managers distributing a UCITS in France or managing a French fund directly via either the UCITS management passport or the AIFMD passport) – can attract this additional allocation of assets through subscription to fund vehicles that invest in eligible PME and ETI.
Companies Eligible for the PEA PME-ETI
As with the traditional PEA, companies in which investments may be made under the new PEA PME-ETI are: (i) French companies; (ii) companies located in an EU Member State; and (iii) companies located in an EEA jurisdiction that has entered into a tax agreement with France which provides administrative assistance to prevent tax evasion.5 In addition to the above criteria, such companies (other than newly established companies and venture capital companies) must be subject to French corporate tax or an equivalent tax in their home jurisdiction.
Under the PEA PME-ETI regime, investments may only be made in securities6 issued by a company with (i) fewer than 5,000 employees and (ii) an annual turnover below €1,500,000 or a total balance sheet below €2,000,000. These criteria are to be assessed at the time of the acquisition of the relevant securities – either by the investor (in the case of direct purchase) or by the investment fund. Consequently, if the above thresholds are crossed after the acquisition, this has no impact on the eligibility of a company for the PEA PME-ETI regime.
An Enhanced Opportunity for Investments via Investment Funds
Assets placed in a PEA PME-ETI account might be invested via French FCP or SICAV, as well as foreign UCITS authorized for distribution in France, provided that:
the fund invests at least 75% of its assets in companies eligible for the PEA PME-ETI; and
at least 50% of the securities issued by eligible entities are in the form of equity.7
Practically speaking, this means that within the 75% ratio, 25% of the assets of the investment fund could be invested in bonds issued by PME and ETI. Such flexibility with respect to the allocation between debt and equity is not possible either in the traditional PEA or when investing directly in eligible companies. This provides a significant benefit for investment funds intending to make an offering that is eligible for PEA PME-ETI accounts.
It is also relevant to note that assets might be placed in a PEA PME-ETI account via investment through French private equity funds such as FCPR,8 FCPI9 and FIP,10 which vehicles are not eligible for the traditional PEA. However, French regulations do not set forth any specific ratio for such private equity funds with regard to the eligibility under the PEA PME-ETI regime.
Opportunity for EU Asset Managers
As indicated above, investment funds eligible for the traditional PEA are numerous due to the appetite for such vehicles offering a favorable tax regime to French investors. French asset managers seem to anticipate comparable success with the new regime, which explains the growing number of vehicles already eligible for the PEA PME-ETI. A further factor that might lead to a positive response to the PEA PME-ETI by the French market is the good performance of Small and Mid Cap securities over the past few years as compared to Large Cap securities.
It is important to keep in mind that, even though the tax advantages offered by the PEA PME-ETI are available only to French residents, investments are not limited to French companies or those placed through French asset managers. In this respect, a management team that demonstrates depth of experience with Small and Mid Cap securities across the EU (and especially in a jurisdiction where no French manager has such expertise) has considerable opportunity to capture a part of the market. The cross-border passports under both the UCITS Directive and the AIFM Directive will further facilitate the distribution in France of investment funds eligible for PEA PME-ETI accounts.