In-depth reform of the French tax regime governing management packages

The new general regime codified in Article 163 bis H FTC covers the “net gain” realized on securities subscribed or acquired by employees or managers, or allocated to them, when this gain is acquired in consideration for their duties. This notion of net gain is not specified in the law, and pending further clarification from the tax authorities, the doctrine considers that all the various components of the net gain are taxable, including, where applicable, the “acquisition gain” (the difference between the fair market value of the securities at their acquisition or subscription date and the preferential price at which they were acquired or subscribed) and the “exercise gain” (the difference between the fair market value of the securities at the date the option is exercised  and the subscription or purchase price, plus the amount paid to acquire the option, and where applicable, the previously taxed gain on acquisition), in addition to the “capital gain” (the difference between the sale price of the securities and the amounts paid in advance, plus any previously taxed gains on acquisition and exercise).

The new regime is general in its scope, covering all types of employee and executive equity interests. As such, the new regime applies to both “qualified” plans (i.e. those benefiting from a defined preferential regime, such as stock options, free shares and “BSPCE” – stock options for founders of small to mid-size companies) and “non-qualified” plans (i.e. all other forms of employee and management equity interests which, until the advent of Article 163 bis H of the FTC, depended on a case-by-case analysis based on the solutions provided by case law). However, for qualified plans, their acquisition gains are excluded from the net gain. Thus, for qualified plans, both the provisions of Article 163 bis H of the FTC and the rules specific to the type of qualified plan concerned must be applied. Experts are particularly looking to the tax authorities to clarify how to apply the two regimes in parallel (i.e. the new common law regime of Article 163 bis H FTC and the special regime applicable to a qualified plan).

The single triggering event for the new regime applies to any disposal, transfer, conversion or leasing of shares carried out on or after 15 February 2025, including where the shares were allocated prior to that date but have not yet been disposed of by the beneficiary. This means that all management package plans entered into before 15 February 2025, fall within the scope of the new provisions.

Despite the principle of taxing the net gain as employment income, part of the gain realized upon disposal (excluding the part of the gain governed by qualified plans) may be taxed under the capital gains on securities regime. However, the acquisition gain and the exercise gain remain exclusively subject to taxation as employment income.

To fall within the scope of capital gains tax, the acquired securities must meet the following conditions:

• for non-qualified plans, the securities must present a risk of loss of the capital subscribed or acquired and must have been held for at least two years
• for qualified plans, the securities must present a risk of loss of their acquisition or subscription value

If the risk of capital loss and, where applicable, the holding period are met, the gain on disposal is taxed as follows:Taxed as a capital gain on securities up to the limit = (acquisition value x a financial performance multiple) – acquisition value. The financial performance multiple:

Net gains exceeding the above limit are taxed as employment income.

Here again, experts are awaiting clarification of the concepts of capital losses and the calculation rules to be applied to the portion taxable as capital gains on securities.

For the portion of the net gain taxable as employment income, the tax burden can in principle be as high as 59 per cent, i.e. 45 per cent(marginal personal income tax rate) + 4 per cent (marginal exceptional contribution on high incomes tax rate) + 10 per cent​ (specific employee contribution at source).

For the taxable portion of the net gain taxable as capital gains on securities, the burden of compulsory deductions is in principle limited to 34 per cent, i.e. 12.8 per cent (single flat-rate withholding tax) + 17.2 per cent (social security charges on income from assets) + 4 per cent (marginal exceptional contribution on high incomes tax rate).

It should also be noted that, regardless of the applicable the tax regime, the net gain is excluded from the assessment basis for the general and specific social security charges (contribution sociale généralisée (CSG))contribution au remboursement de la dette sociale (CRDS)) on income from professional activity (art. L 136-1-1, III-3°-a bis new of the Social Security Code), as well as fromthe base for both employee’s and employer’s social security contributions,(new article L 242-1, II-8° of the French Social Security Code). This exclusion is particularly favorable, since it represents a departure from the general rule under which the assessment basis for these charges and contributions includes benefits in return for, or in connection with, employment.