FIP-FCPI
Your Objective
While accepting a risk of capital loss, you diversify your assets by supporting the activities of SMEs eligible for FIP and FCPI schemes.
Moreover, this investment grants you a 25%* reduction on your income tax, within the associated limits.
Details
FIP (Local Investment Funds) and FCPI (Mutual Funds for Investment in Innovation) are two investment vehicles approved by the French Financial Markets Authority (AMF). Both funds are UCITS (Undertakings for Collective Investment in Transferable Securities) that fall under the category of FCPR (Risk Mutual Funds). By nature, FIPs and FCPIs involve financial risks as the invested capital is not guaranteed.
Similarities Between FIP and FCPI:
- Both vehicles allow investments in companies that are in the development phase.
- Both funds must consist of at least 70% of eligible SME securities, with the remaining percentage being invested by the fund manager in other financial products.
- The income tax reduction is the same for both vehicles: 25% by default*.
Differences Between FIP and FCPI:
FIPs and FCPIs differ based on the activity or location of the companies they finance:
- FIPs aim to promote local investment by investing in SMEs that are less than 7 years old and located in four neighboring regions. The companies must have a turnover of less than 50 million euros, a balance sheet total of less than 43 million euros, and employ fewer than 250 employees.
- FCPIs have no geographical constraints within the EU but must invest in innovative SMEs/SMIs that are less than 10 years old and employ fewer than 2,000 employees, with no restrictions on turnover or balance sheet size.
Investment Limits:
- For a single person: a limit of 12,000 euros investment for a maximum tax reduction of 3,000 euros.
- For a couple filing jointly: a limit of 24,000 euros investment for a maximum tax reduction of 6,000 euros in 2018.
- Although it is possible to invest in both a FIP and a FCPI in the same year, all amounts invested are subject to the 10,000 euro tax niche cap.
Note:
- FIP Corse and Overseas FIPs focus on developing regions suffering from territorial inequalities and offer an enhanced reduction rate of 38% of the invested amount.
- Due to the tax-neutral year, an investment in 2018 will generate a tax reduction payment due in September 2019.
Advantages
- A tax reduction equivalent to 25% of the invested amounts.
- Tax advantage upon exit: potential capital gains are not subject to income tax, although social contributions remain.
- Diversification, as unlisted stocks do not react as directly to economic conditions as listed stocks.
OptiFi’s Opinion
Investing in a FIP or FCPI requires careful consideration. We strongly recommend reviewing the fund’s complete prospectus (including the regulations). These documents provide detailed information about fund management, operational procedures, investment risks, and associated fees. This documentation, along with an analysis of the management company, will be essential in comparing and potentially selecting these investment vehicles.
It is difficult to draw firm conclusions about the past and future performances of these funds since their track records vary greatly. However, OptiFi notes that the average performance of these funds, excluding the tax reduction, is generally close to zero or even negative.
Including the benefit from the tax reduction (equivalent to 25% profitability), the chances of achieving positive returns improve significantly. However, when this gain is averaged over the typical investment period (around 7 years), it translates to about 3.6% per year. Therefore, the fund’s performance will be crucial as the tax reduction relative to the investment period makes the product less attractive for the level of risk involved.
Moreover, the regulatory constraints of FIPs and FCPIs often limit their profitability compared to Risk Mutual Funds (FCPR), which do not offer tax reductions but can invest in a broader range of assets (stocks, bonds, convertibles, etc.). It is often observed that the net-of–tax performance of FCPRs is higher than that of FIPs or FCPIs. This lower performance of FIPs and FCPIs can be explained by their popularity in terms of invested amounts and the number of funds and management companies involved. Increased competition in this segment reduces investment opportunities.
Conversely, FCPRs, which do not benefit from upfront tax incentives and have lower demand, offer a wider and more diverse range of investments.
Therefore, when choosing an investment vehicle, it is important not only to consider the tax reduction but also to evaluate the investment based on its quality and overall return. Given the inherent risks of these investments, we encourage you to consult a professional to determine whether this type of investment aligns with your investor profile.
