Investing in an SCR: What Tax Benefits for Companies?

Sociétés de Capital-Risque (SCR, venture capital companies) are investment vehicles dedicated to financing unlisted SMEs. In France, they benefit from a specific tax regime designed to encourage equity investment in the real economy. For companies subject to corporate income tax (IS), investing in an SCR can allow for significant tax optimization. Still, it's important to understand the exemption mechanisms, the conditions to meet, and the complementary schemes available. This article is specifically built on the French tax system, please reach out to your tax advisor for any question.

1. Tax exemption on income distributed by the SCR

When a company invests in an SCR, it may receive income in the form of dividends or capital gains distributions.

If the distributions come from capital gains realized by the SCR on the sale of eligible securities (SME securities held for at least 2 years), they are fully exempt from corporate tax for the receiving company.

If the underlying securities don't meet this condition (sold before 2 years, or not eligible under the 50% SME quota), a reduced rate of 15% applies to the distribution.

This corporate tax exemption on dividends is a major tax advantage, since it lets the company avoid taxation on these gains, unlike distributions from a standard company subject to the parent-subsidiary regime.

Legal reference: Article 219, I-a sexies of the French General Tax Code (CGI)

Note that, unlike the parent-subsidiary regime, which requires a minimum 5% stake, the company is not required to hold a minimum share of the SCR.

2. Favorable tax treatment on capital gains from the sale of SCR shares

Companies holding SCR shares can resell them and realize a capital gain. Depending on the holding period, the applicable tax treatment can be extremely favorable:

If the company has held the SCR shares for at least 5 years, the capital gain on the sale benefits from a corporate tax exemption on the portion corresponding to eligible securities (SME securities held by the SCR for more than 2 years).

If the SCR invested 80% of its assets in eligible SMEs, then 80% of the capital gain will be exempt from corporate tax for the selling company.

Taxation on the resale of SCR shares is therefore considerably reduced for companies investing over the long term.

Legal reference: Article 219, I-a sexies of the CGI

Valeureux's first multi-asset fund is structured as an SCR, and Valeureux invests 100% in science-based SMEs located in France. All holdings are therefore eligible.

3. Conditions to meet in order to benefit from these advantages

For the investing company to benefit from these exemptions, certain conditions must be met:

Minimum holding period:
SCR shares must be held for at least 5 years to benefit from the capital gains exemption regime.
Securities sold by the SCR must be held for at least 2 years for the distributed income to be exempt from corporate tax.

Compliance with the SCR's investment quota:
The SCR must invest at least 50% of its assets in unlisted SMEs for the investor to benefit from the exemptions. (As already noted, Valeureux's first fund is well above this ratio.)

No majority stake:
A single company cannot hold more than 40% of the voting rights of a company financed by the SCR. (No risk of that at Valeureux.)

4. A scheme compatible with the parent-subsidiary regime?

The parent-subsidiary regime allows for a 95% exemption on dividends if the company holds at least 5% of a subsidiary for at least 2 years.

Good news: if a company holds 5% or more of an SCR, it can combine the parent-subsidiary regime with the SCR tax regime.

Legal reference: Article 145 of the CGI

In practice, however, this would only be worthwhile if a large portion of the holdings were not eligible for the exemption on dividend distributions or share sales.

At Valeureux, the SCR regime alone performs better than the parent-subsidiary regime.

5. Why should a company invest in an SCR?

Diversifying investments: Investing in an SCR allows a company to allocate part of its cash reserves toward innovation and high-potential SMEs.

Tax optimization: The corporate tax exemption on dividends and capital gains makes this investment particularly attractive.

Contributing to the real economy: By financing startups and SMEs, the company contributes to entrepreneurial dynamism.

Conclusion

Investing in a Société de Capital-Risque (SCR) is a tax and strategic opportunity for companies subject to corporate income tax. The tax exemption on dividends and capital gains from share sales makes it an attractive investment vehicle for those looking to optimize their cash reserves while contributing to the development of French SMEs. However, it is essential to meet the specific conditions of the SCR regime in order to fully benefit from these advantages.

Legal references:
Article 219, I-a sexies of the CGI
Article 145 of the CGI (parent-subsidiary regime)
BOFiP tax guidance BOI-IS-BASE-20-20-30-20 (corporate regime)

Would you like to optimize your tax situation while investing in the real economy? Consider SCRs and consult a tax expert to refine your investment strategy.

To join the Value-X SCR, Valeureux's first multi-asset fund, benefit from this tax exemption, discover our first holdings, and take part in selecting the next ones, go directly here: www.invest.valeureux.com

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Any investment in unlisted companies carries risks of illiquidity and capital loss.

Tax rules may change; consult official sources and a specialist.

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