CMS Expert Guide to Holding Company Regimes in France

Since 1985, France has had the so-called ‘venture capital companies’ (“SCR”) regime, which was created with the main purpose of supporting the equity of unlisted companies in return for a favourable tax regime for the investors with long-term investments. The regime is open to companies incorporated as joint stock companies (SA / SAS) that meet certain legal criteria, and is widely used in the private equity sector.

SCRs provide tax benefits that mainly depend on the nature of the assets held and their holding period.

The main tax features of the SCR regime are as follows.

• A full corporation tax exemption for the SCR, provided that the SCR operates in accordance with its legal status.
• Distributions to non-resident investors levied on capital gains from the sale of qualifying securities may be exempt from withholding tax in France under certain conditions (otherwise, distributions are subject to French withholding tax at 12.8% or 25%).
• Capital gains realised by non-resident investors on the sale of their shares in the SCR are generally not taxed in France.
• French resident investors benefit from special corporation and income tax exemptions on (i) distributions from the SCR levied on capital gains from the sale of qualifying securities, as well as (ii) capital gains from the sale of shares in the SCR, subject to a maximum shareholding in the companies included in the SCR portfolio, a minimum 5-year holding period and (if applicable) reinvestment of SCR income received during this period.
• The issue of carried interest shares with a favourable tax regime for French resident managers offering a 30% flat rate taxation (instead of tax at progressive scale).

No legal requirements; freely determined by the articles of association.

Debt financing limited to 10% of the SCR's net assets.

At least 50% of the net book value of the SCR must be represented on a consistent basis by securities giving direct or indirect access to the capital of unlisted companies (i) subject to corporation tax (ii) having their registered office in the EEA and (iii) carrying on an industrial or commercial activity.

The sole object of the SCR must be portfolio management. However, the assets may include cash, as well as movable and immovable property necessary for the operation of the company. The provision of services as an extension of the company's object is authorised on an ancillary basis.

If the SCR raises funds from several investors, it is treated as an alternative investment fund (“Other AIF”) which requires registration or “management company” authorisation with the AMF. In order to enter the regime, a company must make an option with the French tax authority. Additionally, specific filing obligations apply in addition to the annual tax return.

The general corporate tax regime provides for quasi-exemptions from corporation tax on dividend receipts and capital gains on qualifying participations. Dividend payments to foreign investors are subject to withholding tax at 12.8% or 25%, but specific domestic exemptions exist, and the rate may be reduced or eliminated via applicable double tax treaties. French source interest is generally not subject to withholding tax.