.jpg)
Attracting American capital offers a massive growth opportunity for French funds, provided they don't let tax and compliance hurdles stand in the way.
Faced with a tighter capital market in Europe, more and more French funds are looking to American investors. This presents a real opportunity, provided they don't underestimate a key point that is often misunderstood: compliance.
In recent months, demand has increased dramatically. American investors, sometimes French citizens based in the United States, and sometimes local business angels or family offices, are showing growing interest in French funds, particularly through club deals. However, many funds are still hesitant to open their capital rounds across the Atlantic.
"There’s still a lot of fear surrounding US regulations” observes Yoann Brugière, co-founder of Orbiss. Some funds still prefer to refuse American investors, or accept them without fully investigating the issue. This strategy may seem effective in the short term, but it carries significant risks.
Three levels of compliance but one real point of friction
When a French fund welcomes American investors, three levels of compliance must be distinguished.
The first issue is legal, related to the SEC (the U.S. Securities and Exchange Commission). It concerns the rules governing the offering of securities in the United States. "It's primarily a regulatory matter that should be handled by law firms , " comments Yoann Brugière. In practice, it mainly involves adhering to specific formalities in the subscription documents, with possible exemptions. This is a well-established framework, already handled by numerous international firms, and rarely the main obstacle.
The second level relates to banking compliance, via FATCA (Foreign Account Tax Compliance Act) regulations. Whenever a fund has American investors, it may be subject to specific reporting obligations. "This is a separate issue from SEC legal matters ," explains Yoann Brugière. Here again, the framework exists, but it requires identification and anticipation.
The third level, however, is often the one that poses the most problems: taxation. "It's not mandatory, but it's strongly recommended to take care of it ," insists the co-founder of Orbiss. Because if nothing is planned, it's the American investor who could find themselves exposed to very unfavorable tax regimes.
Taxation: the issue that can scare away a US investor
From an American perspective, everything depends on how the fund is classified for tax purposes. "We always start by reviewing the fund's structure and its default tax status in the United States ," explains Yoann Brugière. Two legal status options exist: corporation and partnership.
If the fund is considered a “partnership”, it is fiscally transparent. Income and expenses are reported annually to the American investor, who must declare them in proportion to their shareholding. “This is the default status for most American funds, but administratively, it can be very burdensome ,” emphasizes Yoann Brugière.
If the fund is classified as a “corporation”, it may then fall under the category of Passive Foreign Investment Companies (PFICs). In this case, dividends or the sale of shares may be subject to an “ excess distribution ” regime. “In states like New York or California, tax rates can reach between 50% and 60% ,” says Yoann Brugière. A clearly dissuasive scenario for an investor.
However, options do exist to avoid these regimes, often referred to as "unfavorable regimes," provided one plans ahead. Yoann Brugière specifically mentions the QEF (Qualified Electing Fund) option, which allows investors to be taxed as on a standard US capital gain. "In the states we're discussing, the rates can be around 35%" he explains. But this option requires the fund to provide the investor with the necessary information through a dedicated annual report.
Ultimately, there is no single right solution. The best choice depends on several factors: the capital gains horizon, the distribution policy, and the fund's sensitivity to administrative burden. But one point is clear: addressing these issues upfront is no longer a luxury.
“Today, American investors are increasingly aware of these rules ,” concludes Yoann Brugière. Failing to anticipate them risks misunderstandings, or even conflicts, at the time of exit. Conversely, a fund that prioritizes transparency and anticipates this issue effectively strengthens its credibility… and significantly expands its access to American capital.
Originally published in French by Maddyness. This article has been translated and adapted for an English-speaking audience. Click here to read the original version.
