Reducing your tax bill in private equity: Key tax strategies

Private equity has become a favoured option for diversifying portfolios and aiming for high returns. However, taxation can be complex, which is why it is necessary to find out about the tax rules surrounding these investments in order to maximise the benefits. There are a number of schemes that can offer significant advantages, such as income tax reductions or tax exemptions specific to investments in SMEs or venture capital funds.

Private equity investments carry risks, particularly the risk of capital loss. Taxation is also subject to change, so it is important to consult a tax adviser or investment professional before making any decisions.

What is private equity?

Private equity refers to investment in companies that are not listed on the stock exchange. These companies are often in a development or growth phase, and investors generally participate in their capital to support them and help them evolve. One of the main attractions of private equity is the potential for high returns, as companies can be sold on at a significant capital gain.

Tax framework for private equity in France

In France, the tax framework for private equity is based on a number of schemes and regimes. Here are the main points to bear in mind:

Prélèvement Forfaitaire Unique (PFU): the PFU applies to capital income and amounts to 30%, including 12.8% income tax and 17.2% social security contributions. This is the standard system for taxing dividends and capital gains on private equity investments.

• Social security contributions (17.2%) : These contributions are in addition to income tax and apply to all gains received through private equity funds such as FPCIs and FCPRs.
• Distributed income: Income distributed by private equity funds is generally taxed under the PFU system (30%). However, certain situations may entitle investors to more favourable tax treatment.
• Capital gains : Capital gains realised on the sale of units in private equity funds are, in principle, subject to the FTP. However, an exemption from income tax is possible under certain conditions, particularly for "fiscal" FPCIs. To qualify, investors must hold their units for at least 5 years and reinvest the income received within the fund.

Types of private equity funds and taxation

Private equity comes in a variety of forms, each with its own specific tax characteristics.

Risk Mutual Funds (FCPR) and Innovation Mutual Funds (FCPI)

FCPRs and FCPIs are investment funds that allow individuals to invest in the capital of unlisted companies.

• FCPR: FCPRs do not offer tax relief on subscription. However, capital gains realised on the sale of units may be exempt from income tax under certain conditions.
• FCPI: FCPI funds offer income tax relief of up to 25% of the amount invested, subject to certain limits. As with other "tax" funds, capital gains are exempt from income tax, subject to the holding period and the reinvestment of income.

Local Investment Funds (FIP)

FIPs invest in local SMEs and offer attractive tax benefits. These funds offer a reduction in income tax and exemption from capital gains tax, provided that certain rules on holding periods and reinvestment are complied with.

Private equity and tax optimisation: the best approaches to adopt

To optimise private equity investments, it is essential to combine intelligent investment strategies with appropriate tax solutions.

Investment diversification

Diversification is a key strategy for reducing risk while maximising potential returns. By opting to invest in several companies or sectors, you increase your chances of making a successful investment. It also makes it easier to manage the tax impact, as returns and capital gains can be spread across different asset types and tax structures.

Use of dedicated tax vehicles

Investing via FIP/FCPI funds or PEAs offers considerable tax advantages, such as reduced income tax or exemption from capital gains tax. We therefore recommend exploring these solutions to optimise returns net of tax.

Planning your exit

Good management of the exit from the investment is essential to maximise gains. The timing of the sale of shares in a company can have a direct impact on the tax applied. For example, it is more advantageous to wait five years to benefit from partial or total exemption from capital gains tax in the event of sale.

Investing in tax-efficient sectors

Certain sectors benefit from favourable tax arrangements, such as innovative companies or companies located in specific geographical areas. Investing in private equity funds focused on innovation or SMEs can enable you to benefit from tax exemptions, such as the income tax reduction offered by FIP or FCPI funds.

Support from a tax expert

Tax issues in private equity are complex, so it is advisable to be accompanied by an expert in wealth management or a tax specialist. He or she will be able to advise you on the best tax strategies for your investor profile and help you structure your investments to minimise the impact of tax.

Tax and regulatory developments in private equity

The taxation of private equity is constantly evolving. Here are the recent changes to take into account:

• New progressive tax scale: For certain funds, you can choose to be taxed according to your overall income rather than via the PFU.
• Inclusion of private equity in PERs: Since October 2024, PERs have been required to include a private equity component. This allows you to diversify your investments and benefit from the potential of non-listed companies.
• Finance Bill for 2025: This bill includes measures that could have an impact on private equity, in particular a surcharge on corporation tax for large companies and a tax on share buybacks.

These changes are designed to make private equity more accessible and attractive, while offering investors new opportunities for diversification and profitability.

This article was produced by Eurazeo Global Investor and is for information purposes only. It should not be construed as a solicitation or offer relating to financial products or as legal, tax, financial or any other kind of advice. Readers are invited to contact their own advisors for any analysis relating to the content of this article. The information presented does not claim to be exhaustive. Accordingly, this document alone should not be relied upon in making an investment decision. Please refer to the legal documentation of the funds mentioned before making any final investment decision.

Past performance is not necessarily indicative, nor a guarantee of future results. Information on past investments is provided solely to illustrate the nature of these investments and the related investment strategy and process. There can be no guarantee that the investments made by the funds will produce comparable results, or that the targeted returns will be achieved. Investing in Private Equity/Private Debt funds involves a risk of capital loss and illiquidity.