Rude VC: France’s new PEA-PME
For tech startups in France, the September rentrée from summer holidays often seems to hold regulatory and fiscal surprises, certainly from the current government administration. This year is no exception, although the rumors are promisingly less detrimental than last year’s bombshell, when the new fiscal budget announced a debilitating capital gains tax regime.
The flagship measure this year, thanks undoubtedly to the heroic behind-the-scenes efforts of France Digitale, is the launch of a new type of PEA specifically pertaining to SMEs.
For those unfamiliar with the nomenclature, a PEA (plan d’épargne en actions) is an investment vehicle for French residents that receives favorable tax treatment. The vehicle itself is essentially a brokerage account whose cash can be invested into most public stocks and mutual funds nationwide, as well as many traded on other European stock exchanges. The benefit is that the capital gains are tax-free. The catch is that you cannot make a withdrawal for at least five years. In many ways, it’s like a Roth IRA in the States but better: higher limits (132k€ vs. $5k), a shorter holding time commitment (5 years vs. until retirement), albeit still with CSG charged on the gains (which our friends at the I.R.S. claim is not a tax anyway, boo…).
Now, the new PEA-PME announced by Pierre Moscovici last week appears to represent a new flavor of PEA open to all and eligible for investments exclusively in SMEs, public and private alike: up to 75k€ per taxpayer into companies with a maximum market cap of 1B€, and benefitting from the same tax-free capital gains treatment if the 5-year hold is met.
This idea behind this new measure is to stimulate the flow of more private savings toward SMEs, which often get short shrift from investors or money managers who favor CAC40 and other large cap stocks. I’m not sure how effective this measure is going to be, but I find the intentions good and the premise sound. Although I struggle to envision a direct funding impact for private SMEs like tech startups, there could be indirect benefits that trickle back by helping capitalize downstream companies that are larger and already listed, thus addressing the chronic problem of Alternext liquidity which I’ve discussed before (see here and here). This initiative also dovetails nicely into Moscovici’s recent Enternext marketplace project.
I’ve long been a fan of the PEA. Its similarity to my old Roth IRA friend was probably part of the reason, as well as its ample offer of no-fee or low-fee investment options.
But upon further thought, what I like most about the PEA is that it forces the spotlight on performance. For the PEA behaves in a way completely transparent to the performance of the underlying asset, just like direct investing in the stock market.
No smoke and mirrors of instant tax rebates concealing compulsory annual management and distribution fees of 3~5%, with cosmetically retreated IRR metrics.
The tax benefits of a PEA only kick in if the performance of the chosen investments is positive on a risk-adjusted basis, and that’s exactly how it should be.