Client Alert
| January 21, 2009
Taxation of Carried Interest in France—New Regulations
In early 2002, following extensive lobbying and arduous negotiations with the French tax authorities, the French Venture Capital Association ("AFIC") eventually achieved what was considered to be the top priority of French investment fund managers: favorable tax treatment for carried interest. The circular published by the French tax authorities in March 2002 (the "Carried Interest Circular") first of all confirmed that carried interest generally was to be treated as salary income, which is subject to a marginal income tax rate of 40 percent, as well as social security contributions (20-25 percent borne by the employee and 40-45 percent borne by the employer). However, the Carried Interest Circular also provided the conditions under which carried interest granted to the managers of French private equity funds (FCPR) or venture capital companies (SCR) could benefit from capital gains treatment (i.e., currently an effective tax rate of 30.1 percent). The private equity industry welcomed this regime, and relied on the Carried Interest Circular to structure the fund managers' incentive, even though it was unanimously agreed that this benefit in favor of the industry could be abolished at any time.
This memorandum is intended only as a general discussion of these issues. It is not considered to be legal advice. We would be pleased to provide additional details or advice about specific situations. For additional information on this important topic, please feel free to call upon your Dewey & LeBoeuf relationship partner. No part of this publication may be reproduced, in whole or in part, in any form, without our prior written consent.
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