The Société de Libre Partenariat: A New French Fund Alternative
The implementation of the AIFM Directive has afforded the French legislature the opportunity to simplify its range of regulated investment vehicles, with the aim of making France’s financial markets more attractive – both to French and international institutional investors.
In August 2015, as the French asset management industry was faced with growing international competition, the French legislature enacted a law creating a new category of fund – the société de libre partenariat (SLP) – a type of alternative investment fund with legal personality (personnalité morale)1. A main goal in the creation of the SLP was to establish a new category of fund comparable to the English limited partnership or the Luxembourg société en commandite simple / spéciale (SCS/SCSp).
The creation of the SLP as a new corporate form of specialized professional fund (fonds professionnel spécialisé, or FPS) may be the French answer to European and international competition and enable French managers to take advantage of the AIFM Directive passport. Indeed, the SLP is designed to address key demands of foreign investors, as a vehicle allowing for operating rules similar to those applied abroad, having a legal personality, and benefiting from a tax treatment that is more easily understood by investors’ own tax authorities. A chart of the main characteristics of the French SLP is set forth in the Appendix.
Legal Framework Inspired by the English Limited Partnership
The SLP has organizational rules similar to those of a limited partnership. It has two categories of partners: general partners (associés commandités) with unlimited liability; and limited partners (associés commanditaires) that are liable for the debts of the SLP only up to the amount of their respective capital contributions.
As a regulated French fund, subscription for shares in an SLP is limited to the following categories of investors:
- “Professional clients” within the meaning of MiFID;2
- The SLP’s manager, the SLP’s management company, their respective general partners, and any third party to whom management-related services are delegated, as well as their respective officers, employees or any legal or natural persons acting on their behalf;
- Investors who each commit at least €100,000; and
- Any other investors, provided that their subscription is completed in their name and on their behalf by a duly registered investment services provider acting within the scope of an investment management service (mandat de gestion).
With respect to its governance, the SLP must appoint at least one manager (gérant), who may (but need not) be a general partner. The manager is the sole decision-making body of the SLP and represents the SLP vis-a-vis third parties. Limited partners cannot carry out any management activities.
The SLP can either (i) be a self-managed vehicle; or (ii) delegate its management to a regulated portfolio management company (as is the current market practice in France). The management company must be regulated as an alternative investment fund manager (AIFM) either by (i) the Autorité des Marchés Financiers (AMF, the French financial markets regulator) or (ii) an EU regulatory authority.3 An SLP will therefore be able to be marketed across Europe through the European marketing passport.
The SLP must appoint a custodian of its assets, as well as statutory auditors to certify the SLP’s accounts.
As an FPS, the SLP can invest in a large variety of assets, including financial instruments and assets (e.g., real estate, commodities, debts, tangible assets) that comply with certain criteria.4
The SLP also benefits from the following:
- No prior AMF approval requirement – a declaration is made to the AMF after the fund’s creation;
- Latitude as to the content of the SLP’s by-laws, which can be drafted in English and remain confidential;5
- Great flexibility as to the SLP’s investment rules (e.g., diversification, leverage) and fund organization (e.g., liquidity for open-ended or closed-ended funds, governance);
- Ability to issue different types of shares (including carried interest shares), with various voting and financial rights; and
- Ability to establish an umbrella fund with segregated sub-funds.
Furthermore, within the framework of the recent entry into force of the ELTIF Regulations,6 the French Code monétaire et financier has been updated to allow the FPS – and as a result the SLP – to originate loans directly (whether or not as an ELTIF).7 This development opens up alternative loan possibilities for French asset managers, which options were formerly available only to the French banking industry.
Favorable Tax Regime for Foreign Investors
One aim of the creation of the SLP is to help French asset managers attract foreign investors, especially institutional investors, for whom other French fund structures do not provide comparable tax benefits (i.e., fonds commun de placement without legal personality cannot qualify as a so-called “investment partnership” for German tax purposes).
Furthermore, the SLP benefits from a tax transparency regime, and is not itself subject to fund-level taxation. Tax will only be due on the net distributable income once such income is distributed to the investors. In this regard:
- The fund is “transparent” for the purposes of determining the type and source of income (i.e., capital gains, dividends, interest) received by the investor.
- Foreign investors will not be taxable on their French-source capital gains distributed to them (provided no investor holds 25% or more of the underlying portfolio asset through the SLP). Foreign investors will also not be subject to capital gains tax in France on the sale or redemption of their fund shares.
- A 30% withholding tax is generally levied on the payment of French-source dividends. However, reduced rates can apply in accordance with applicable double-taxation treaties.
- Generally, no withholding tax is imposed with respect to the payment of interest.
Please note that a prohibitive taxation regime may apply in France to investors located in a foreign jurisdiction listed in France as a Non-Cooperative State and Territory.8
Conclusion
The creation of the SLP is a welcome step in making the French market more attractive to foreign investors, especially in view of its corporate regime. In recent months, many successor funds of fonds professionnel de capital investissement have been structured as SLPs, and we anticipate that this trend will continue.
Appendix
Main Characteristics of French SLP
- Prior regulatory approval → Not required
- Restrictions on eligible assets → Large variety of financial instruments and tangible assets permitted, provided certain criteria are met
- Risk spreading → Contractually agreed
- Shares → Different share categories possible (including carried interest shares)
- Governance and investment rules → Contractually agreed
- Liability → General partner: unlimited; Limited partners: limited to capital contributions
- Minimum subscription → No minimum for professional investors €100,000 for retail investors
- Tax → Tax transparent
- Documentation in English → Permitted
Footnotes
1) The SLP is formed as a société en commandtie simple, a French corporate form that grants legal personality, whereas French funds are usually set up as collective investment schemes (fonds commun de placement) without legal personality. Furthermore, as an entity with legal personality, the SLP will be registered with the Trade and Commerce Registry (Registre du Commerce et des Sociétés), which will allow the SLP to obtain an official registry extract (Extrait Kbis).
2) See Annex II of MiFID, implemented under article D. 533-11 of the French Code monétaire et financier.
3) In such a case, the AIFM will manage the SLP through the management passport (either by creating a branch or through the freedom to provide services) set forth under the AIFM Directive.
4) Each of the following criteria must be complied with by such other assets: (i) ownership of the asset is established, by registration, a deed entered into before a French notary or a private deed; (ii) the asset is not pledged as a security (save in connection with managing the SLP); (iii) the asset is subjected to reliable valuation in the form of a precisely calculated and regularly updated price; and (iv) the asset has liquidity sufficient to enable the SLP to meet the redemption obligations set forth in its by-laws.
5) The only obligation is to register a French excerpt of the by-laws with the Trade and Commerce Registry.
6) Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds. For further information, see AMF guide (Guide sur les fonds européens d’investissement à long terme).
7) A decree has yet to be published to determine what conditions will have to be met to allow an FPS to grant loans directly.
8) As of the date of this article, the jurisdictions on this list were: Botswana, Brunei, Guatemala, Marshall Islands, Nauru, Niue and Panama.
