French funds can welcome U.S. investors, but they need to manage three levels of compliance: SEC securities rules, FATCA reporting and, above all, U.S. taxation. If the fund is treated as a corporation for U.S. tax purposes, it may be a PFIC, exposing U.S. investors to very unfavorable tax rates. Planning ahead, for example with a QEF election, avoids that.
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 U.S. regulations,” observes Yoann Brugiere, 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.
When a French fund welcomes American investors, three levels of compliance must be distinguished.
The first issue is legal and relates 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 Brugiere. In practice, it mainly involves following 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 under FATCA (the Foreign Account Tax Compliance Act). 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 Brugiere. Here again, the framework exists, but it requires identification and anticipation.
The third level 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. If nothing is planned, it is the American investor who could find themselves exposed to very unfavorable tax regimes.
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 Brugiere. There are two possible classifications: corporation and partnership.
Options exist to avoid these regimes, provided the fund plans ahead. Yoann Brugiere specifically mentions the QEF (Qualified Electing Fund) option, which allows investors to be taxed as on a standard U.S. 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 Brugiere. Failing to anticipate them risks misunderstandings, or even conflicts, at the time of exit. Conversely, a fund that prioritizes transparency and anticipates this issue strengthens its credibility and significantly expands its access to American capital.
Orbiss helps funds and international companies with U.S. tax and advisory questions like these. Talk to our team before your next round.
Originally published in French by Maddyness. This article has been translated and adapted for an English-speaking audience. Read the original version.
Three levels: securities rules from the SEC on offering securities in the United States, FATCA banking and reporting obligations, and U.S. taxation, which depends on how the fund is classified for U.S. tax purposes.
A Passive Foreign Investment Company. A foreign fund classified as a corporation for U.S. tax purposes may be a PFIC, in which case dividends or share sales can fall under the “excess distribution” regime. According to Yoann Brugiere, combined rates in states like New York or California can reach 50% to 60%.
The Qualified Electing Fund option lets U.S. investors be taxed as on a standard U.S. capital gain, around 35% in those states. It requires the fund to provide the necessary information through a dedicated annual report.
Not necessarily. A partnership is fiscally transparent and is the default for most U.S. funds, but the annual reporting to each investor can be very burdensome. The right choice depends on the capital gains horizon, the distribution policy and the fund’s tolerance for administrative work.
This article is for general informational purposes only and does not constitute legal, tax, or accounting advice. Rules and requirements vary by company, individual, and jurisdiction, and can change. Please seek advice appropriate to your specific situation.