In 2013, the implementation of the AIFM Directive gave the French legislature the opportunity to rationalize the French range of regulated investment vehicles. This rationalization aimed at making France’s financial market more attractive, not only to French institutional investors but also to foreign investors that might invest in French vehicles.
In August 2015, as the French asset management market continued to suffer from international competition, a law enacted the creation of a new category of fund, the société de libre partenariat (the “SLP”), a type of alternative investment fund with the legal personality (personnalité morale)(1). The main goal of the creation of the SLP was to establish a new category of fund similar to the English limited partnerships or to the Luxembourg société en commandite simple / spéciale (the “SCS”/ “SCSp”).
The creation of the SLP as a new corporate form for the structuring of a Specialized Professional Fund (Fonds Professionnel Spécialisé – the “FPS”) may be the French answer to the European and international competition to enable French managers to export their services. Indeed, this new vehicle
aims at responding to the main demands of foreign investors: a vehicle with operating methods similar to those applied abroad, having equivalent legal certainty and security and benefiting from a clearly identified tax law framework, and particularly one that is clearly identified by the investors’ own tax Authorities.
A legal framework inspired by the Anglo-Saxon limited partnerships
The SLP has organizational rules similar to those of a limited partnership. As a consequence, the SLP has two categories of partners: the general partners (associés commandités) with unlimited liability and the limited partners (associés commanditaires), which are liable for the debts of the SLP only up to the amount of their capital contributions.
As a regulated French fund, subscription of shares in a SLP is limited to the following categories of investors:
– professional clients within the meaning of the MiFID;
– the SLP’s manager, its management company, the general partners or any company providing services related to the management of the SLP, as well as their officers, employees or any legal or natural persons acting on their behalf;
– investors who commit more than € 100,000; and
– any other investors provided that their subscription is completed in their name and on their behalf by an investment services provider acting within the scope of an investment management service (mandat de gestion).
With respect to its governance, the SLP must appoint at least one manager (gérant), which will not necessarily be a general partner. The manager is the sole decision-making body of the SLP and will manage the SLP and represent it with respect to third parties. Limited partners cannot carry out any act of management.
The SLP can either (i) be a self-managed vehicle or (ii) delegate the management to a regulated portfolio management company, it being understood that the second solution is the current market practice in France. The management company must be regulated as an alternative investment fund manager (AIFM) either by (i) the Autorité des Marchés Financiers (the “AMF”, the French financial markets regulator) or (ii) an EU regulatory authority (2). A SLP will be in a position to be marketed across Europe through the European marketing passport.
The SLP must also appoint a custodian, which will be, among others, in charge of the custody of the SLP’s assets, as well as statutory auditors which will certify the SLP’s accounts.
Being a FPS, the SLP can invest in a large variety of assets, such as financial instruments, as well as any assets (real estate, commodities, debts, tangible assets…) which comply with cumulative criteria (3).
The SLP also benefits from specific rules which constitute an advantage for the French asset management industry, such as:
– no prior approval from the AMF – the fund is only declared to the AMF after its creation;
– freedom in the drafting of the SLP’s by-laws, which can be drafted in English and remain confidential (4);
– great flexibility in the investment rules (contractual diversification rules, level of leverage…) and fund organization (contractual liquidity rules for open-ended or close-ended funds, governance…) of the SLP;
– possibility to issue different types of shares, with various political and financial rights, including carried interest shares; and
– possibility to set-up an umbrella fund with segregated sub-funds…
Furthermore, within the framework of the recent entry into force of the ELTIF Regulations (5), the French Code monétaire et financier has been updated to allow the FPS, and as a result the SLP, to grant loans directly, either through the ELTIF status or without the ELTIF status (6). Such an evolution constitutes a breach to the French banking monopoly which is welcomed by the French asset management industry.
A favorable tax regime for foreign investors
The implementation of the SLP was aiming at helping French asset managers to attract foreign investors, notably the German institutional investors, for which the status of the other French professional funds was not attractive (i.e., fonds commun de placement without legal personality cannot qualify as so-called “investment partnership” for German tax purposes).
Accordingly, the legal status of SLP is an achievement for said foreign investors seeking an investment fund with legal personality.
Furthermore, the SLP benefits from a tax transparency regime and will not be subject itself to any taxation. Tax will only be due on the net distributable income when such income is distributed to the investors in the SLP.
Accordingly, the Fund is « transparent » for the purposes of determining the type and the source of income received by the investor when the SLP makes a distribution (i.e., capital gains, dividends, interests):
– foreign investors will not be taxable on their French-source capital gains distributed by the Fund (provided no investor holds 25% or more of the underlying company through the SLP). Foreign investors will also not be subject to capital gain tax in France on the sale or redemption of their Fund’s shares;
– a 30% withholding tax is generally levied on the payment of Frenchsource dividends. However, reduced rates can apply according to the applicable double tax treaty;
– no withholding tax usually applies to the payment of interests.
Please note that a dissuasive taxation regime may apply in France to investors located in a foreign jurisdiction listed in France as a Non-Cooperative State and Territory (7).
Antoine Sarailler
Dechert
Partner, Financial Services, Paris
+33 1 57 57 80 16
(1) The SLP will be registered with the Trade and Commerce Registry (Registre du Commerce et des Sociétés), which will allow the SLP to obtain an official registry extract (Extrait Kbis).
(2) In such a case, the AIFM will manage the SLP through the management passport (either by creating a branch or through the freedom to provide services) set forth under the AIFM Directive.
(3) Financial instruments, as well as any assets (real estate, commodities, debts, tangible assets…) which
comply with the following criteria: (i) ownership of the asset is established, either by registration, an
authentic instrument or a private deed, (ii) the asset is not pledged as a security other than those established for the purposes of managing the SLP, (iii) the asset is subjected to reliable valuation in the form of a precisely-calculated and regularly updated price and (iv) the liquidity of the asset allows the SLP to meet its obligations in terms of completing redemption with respect to its investors as described in its by-laws.
(4) The only obligation is to register a French excerpt with the Trade and Commerce Registry.
(5) Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds. See also the guide published by the AMF on the matter (Guide sur les fonds européens d’investissement à long terme).
(6) A decree has yet to be published to determine what conditions will have to be met to allow FPS to grant loans directly.
(7) As of the date of this Client Briefing, the list of Non-Cooperative States and Territories is as follows: Botswana, Brunei, Guatemala, Marshall Islands, Nauru, Niue and Panama.