Innovation rewarded

A new piece of government legislation has been put in place to entice high-net-worth individuals to subscribe to special FCPI funds designed to invest primarily in innovative SMEs. The incentive lies in wealth tax reductions offered on the amount invested. Last month unquote" touched on FCPIs by covering the four launched by the Credit Agricole and Natixis banks. The funds were offered to their customers and were to be managed by the banks' private equity subsidiaries. This month draws focus on the other FCPI available and highlights the subscription details.

FCPI funds plan to take full advantage of a new tax relief law for investors (Travail, l'Emploi et le Pouvoir d'Achat law of 22 August 2007). As a result French tax payers can reduce their wealth tax liability (ISF) by investing in SMEs via an FCPI. The total tax break can be between 30-45% however the FCPI must meet certain criteria. A minimum of 60% of the FCPI fund has to be used to invest in young innovative unquoted companies and 40% of those companies must be under five years old. Some of the funds such as AGF FCPI Capital Croissance can choose to increase the fund allocation to target SMEs to up to 70% or 80% incurring a higher tax break of around 40% on the amount invested by its customers. The innovative nature of a company is judged according to its spending on research and development, or whether it has been approved by Oseo-ANVAR, the French research and innovation association. Most funds will be seeking to make around 12 investments in such companies. The remainder of the fund can be invested at the management's discretion. In order to benefit from the ISF tax breaks in 2008 the majority of the funds plan to collect their funds before the end of May.

FCPI funds may choose to charge an entry subscription fee of up to 5% although some do not charge at all. Certain funds target their parent bank's high-net-worth customers such as Naxicap's FCPR 'Natexis Development and Creation 2008' which will be financed solely and equally by individual customers at two private Natixis banks, Banque Privee St Dominique and La Compagnie 1818. On the other hand, other funds are more accessible and can attract any individual subscriber via the internet.

To qualify for the proposed tax break the investor has to agree to a minimum five-year period although most funds plan to have a lifespan of around eight years. A minimum subscription of between EUR2,000 and EUR5,000 and limited to below EUR50,000 is usually imposed. Although this offer is inviting, high investments and high tax breaks also come with high risk, especially in the SME market.

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