Navigating carried interest in France

Yes.

Net distributions and gains are taxed at a flat rate of 31.4%, comprising 12.8% personal income tax and 18.6% social contributions.

The regime is subject to several cumulative conditions. First, the carry shares must constitute one single category of interests and must be identified in the articles of association and in the other documents provided to investors.  Each carried interest right must be subscribed at a fixed subscription price and must grant the same rights to all beneficiaries.  Second, the financial commitment of the executives must represent at least 1% of the total commitments received by the fund, measured at the end of each subscription period, although this threshold may be reduced in specific circumstances.  Third, the subscription or acquisition price of the shares must be based on their fair market value.  Fourth, a five-year lock-in period is required before any distribution.  Fifth, the executives benefiting from the carry shares must be remunerated on arm’s length terms, meaning that the carried interest must not form part of their salary. 

The beneficiary of the carry shares must, at the subscription date or acquisition date, be an employee of either an “Eligible Fund” or a company rendering management services to an Eligible Fund. See below for the definition of an Eligible Fund. 

Eligible Funds are mainly venture capital funds located within the European Union or in a member state of the European Economic Area that has entered into a double tax treaty with France including an administrative assistance provision.  They must also have as their main purpose the direct or indirect investment in shares of unlisted European companies.  In practice, an analysis of the key features and investment strategy of the fund is recommended to confirm that it qualifies as an Eligible Fund.

Yes, at a rate of 18.6%, which is included in the 31.4% flat tax rate.

Because of the number of conditions that must be satisfied, this regime is rarely applied in practice.  In practice, the default regime often referred to is the one introduced by the Finance Bill for 2025, under which net gains derived from the disposal of shares are taxed as capital gains, i.e., at the 31.4% flat tax rate, up to a multiple of performance referred to as the “Financial performance ratio.”   Any excess above that threshold is taxed as salary at the ordinary personal income tax rate, up to 45%.  In that case, the ordinary social contributions otherwise due on salary, which may reach up to 45% for employer contributions and up to 22% for employee contributions, are replaced by a 10% contribution assessed on the portion of the gain treated as salary.