Macron’s proposed tax reforms: what impact on French PE?

Emmanuel Macron – virtually unknown among the general public a couple of years ago – led the first round of the election held on Sunday 23 April and will face off against far-right candidate Marine Le Pen in the second round on 7 May.

While Le Pen has largely appeared anti-capitalist and spent more time focusing on her anti-EU and closed-borders policies, Macron stands out as particularly pro-business and finance-friendly for a French centre-left candidate. He had already fostered significant goodwill with the local private equity community during his stint as finance and economy minister for the Hollande administration in 2014, with most private equity practitioners lauding his pragmatism and focus on boosting growth investments.

Macron is currently heavily favoured to see Le Pen off in the second round. Two main reforms in his economic programme stand out and could have significant ramifications for the private equity community: on the one hand, a drastic rethink of the capital gains tax rate; and on the other, a partial axing of France's wealth tax, the impôt de solidarité sur la fortune (ISF). 

Macron stated he would introduce a 30% flat tax that would be applied to all types of capital gains – including interest, rents and dividends – and that would also include social contributions (CSG and CRDS, currently accounting for a separate 15.5% rate).

The change would represent an improvement in two ways: first, it means those types of revenues would be taxed more mildly than they are at present; and second, it would bring a significant simplification of the system currently in place – a wish that has been expressed time and again by both investment managers and entrepreneurs in France.

Introduced by the Hollande government in 2012, the current tax regime on capital gains replaced the previous 34.5% flat rate, and was based on the income tax's progressive scale, with rates varying between 5.5% and 45% - to which the 15.5% of social contributions were added. This meant that in total, the tax rate could peak at around 60%.

Heavily criticised, the reform rapidly gave way to a protest movement known in France as the "pigeons" (French slang for people who can easily be taken advantage of), sparked by Isai Capital CEO Jean-David Chamboredon and quickly encompassing around 75,000 entrepreneurs and investors.

As a result of the protests, the tax regime was slightly softened, with the possibility for business owners to benefit from certain discounts based on the length of their ownership period. In this manner, if an owner was to sell its business within the first two years of ownership, no discount would be applied; between two and eight years, a 50% discount would emerge; and beyond eight years, that discount would rise to 65%.

Says Frederic Teper, partner at tax advisory firm Arsene Taxand: "The private equity sector is impacted by all these reforms in the sense that it binds together company managers and fund managers; in the current system, the carried interest perceived by the GPs was thus subject to the same discount system as company managers for their individual assets."

Consequently, introducing a 30% flat tax on capital gains and dividends would have an impact on carry too. "There's a real wish for simplification, as the system in place is very complex," says Teper. "If the measures are implemented in the way they've been announced, the change should be favourable for the private equity sector."

ISF rethink
Macron also intends to rethink France's long-standing wealth tax, ISF, applying only to individuals with significant revenues and/or assets. The tax, which would now cover real estate assets only, would take life insurance and company shares out of the equation. In his own words, the centrist candidate is willing to try and preserve investments that finance the country's economy and boost French SMEs' growth, keeping in line with the idea of promoting risk-taking over fixed income.

Says Teper: "An argument that is often put forward against the total removal of ISF is that certain systems currently in place, which offer a partial exemption from the ISF and contribute to the financing of medium-sized companies, would be suppressed too, cutting off a part of their resources."

Teper refers to the ISF petites et les moyennes entreprises scheme, according to which ISF tax payers investing directly in a French SME or in FIP or FCPI retail funds can, if they meet certain requirements, benefit from a tax deduction. "The partial or total suppression of ISF would remove and simplify a lot of questions related to the managers' investment or reinvestment in a business in which they are still involved."

While Macron's chances of becoming the next French president elect are high (bar a dramatic turn of events in which Le Pen drastically extends her support base in the space of two weeks), it is not a foregone conclusion that these reforms will come to pass. Macron's political apparatus is still embryonic and he is likely to have to govern with a coalition, or even an outright majority from one of the main parties. It remains to be seen whether, if elected, Macron would be willing to expend significant political capital on two reforms that would prove controversial with the left aisle of parliament.

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