Capital gains tax overhaul welcomed by Afic

"Some key ideas are currently gaining ground," said Afic chairman Louis Godron (pictured) at the association's annual conference in Paris last month, "notably when it comes to the crucial role of competitiveness in the country's future and the importance of entrepreneurs. There has been a noticeable change since the autumn, and I would say that we have seen more progress in a few months than in the past few years."

Truer words were never spoken: earlier this week, French president François Hollande unveiled a series of measures that should go a long way towards appeasing a business community scarred by nearly a year of apparent bullying by the newly elected Socialist government. Afic was quick to praise the initiative for "restoring the dialogue between the government and the business community."

Chief among these measures is a significant overhaul of capital gains taxation (CGT) – an issue that came to symbolise the growing rift between a government intent on honouring Hollande's election pledge to align capital gains and income tax regimes, and myriad entrepreneurs warning of a death blow to France's entrepreneurial spirit.

Recent announcements by the government could go a long way towards appeasing the local PE community

The tax reform sparked controversy in business circles when it emerged that proceeds from the sale of a business could be taxed by as much as 65%. Although the private equity industry was particularly vocal about the negative impact of higher CGT rates on investors as well as business owners, a small group of entrepreneurs – self-proclaimed "Les Pigeons" – managed to gain greater exposure and force a rethink of government policy in the autumn.

Although theoretically still taxed at the same level as income, capital gains will now benefit from substantial rebates depending on the nature of the shareholder and the length of the holding period.

As a rule of thumb, CGT could be cut down by as much as 65% following an eight-year holding period. While this seems to encourage long-term holdings, the break actually tapers sharply after just two years, reducing by 50%. These changes would result in an effective tax rate of 32.75%.

Investors in young SMEs, owners going into retirement, and transactions between family members will benefit from even more favourable rebates. In that case, the CGT rate will be cut down by as much as 85% after an eight-year holding period, Shareholders selling their assets after only a year will still benefit from a 50% rebate. The effective tax rate would settle at 23.75% under this regime.

On the rebound
In addition, the government announced a series of incentives designed to foster entrepreneurship and innovation in France. These include further tax rebates for innovative start-ups and corporate venture, as well as accelerated visa procedures for immigrants looking to create an innovative business in the country.

While Afic was – in a rather unusual fashion after months of alarming statements – particularly upbeat about the news, local GPs will no doubt wait to see if this change of attitude can reassure twitchy international LPs before clocking it as a clear win at last.

Private equity activity was particularly lacklustre in France last year: according to unquote" data, dealflow decreased by nearly a third in 2012 compared to 2011's 306 recorded transactions, while the overall value of these 214 deals was halved to around €9bn. While the tame macroeconomic environment definitely played a role in this setback, many in the industry chiefly blamed the uncertainty borne out of Hollande's aggressive fiscal reforms.

Luckily, it would seem that French deal-doers decided to make the best of a tough situation this year, even before the government's fiscal U-turn was announced. Activity for Q1 2013 showed a welcome uptick compared to the same period last year, according to unquote" data: France was home to 60 transactions worth an overall €2bn between January and March, against €1.6bn across 48 deals in Q1 last year.

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• Topics
• France
• Regulation
• France
• AFIC