France to offer capital gains tax rebates

In the latest twist in the French saga, President François Hollande has revealed plans to create a more sympathetic capital gains tax regime.

In a meeting with French entrepreneurs on Monday, Hollande outlined a regime that will reduce the effective capital gains tax rate via a rebate scheme.

Although capital gains will still technically be taxed at 45 percent, plus an additional 4 percent tax on high income, sellers will benefit from rebates depending on how long the asset has been held. 

The amount due will be reduced by 20 percent if the asset has been held for at least a year. The rebate will then be gradually increased, so that after eight years the reduction would be 65 percent. That would equate to an effective tax rate of 32.75 percent.

Legal sources believe that any realizations on transactions that have taken place since 1 January 2013 will benefit from the new regime.

“It's good news for private equity as there will be significant exemptions and an overall lower rate for capital gains,” said Paris-based SJ Berwin tax lawyer, Raphaël Béra.

The French Private Equity Association (AFIC) also welcomed the proposals. In a statement, AFIC said it was encouraged by the government's desire to engage in a dialogue with entrepreneurs and believed the proposals would encourage private equity and venture capital in supporting France's economic growth.

Last year the French private equity industry was outraged by plans to increase the capital gains rate to 45 percent plus an additional 15.5 percent in social contributions, which is in line with the French income tax rate.

“The [private equity] industry, already impacted by the downturn, will collapse in France should these measures take effect,” said Louis Godron, president of AFIC, following France’s 2013 Budget proposals back in October.

Hollande’s attempts to remove carried interest’s classification as capital gains also had the industry up in arms last year.

Last year’s draft budget said carried interest should no longer benefit from the flat 19 percent tax rate. This was even more of a blow for private equity as France’s Parliament had decided a few years previously that carried interest qualified as capital gains. Recent clarifications to a 2008 law had also indicated that carry’s tax status would not be in danger. 

However, the government later rowed back on this plan when a group of French entrepreneurs, calling themselves Les Pigeons, staged an effective media campaign, which gained thousands of online supporters via Twitter and Facebook.