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France increases tax rates on certain qualified free share plans

Executive summary

The 2017 French Finance Act is introducing an increased rate of taxation on the value of share income gains employees receive from qualified free share schemes where the total value received in a year is in excess of EUR 300,000.

The change applies only to qualified free share awards granted under a plan where implementation has been authorized by shareholders since 31 December 2016.

Key changes

Modification to taxation of acquisition gain

The 2017 French Finance Act, published on 30 December 2016, introduced a change to the tax treatment of the acquisition gain on a sale of shares depending on the amount of gain. The gain is based on the fair market value of shares at the date of their delivery to the employee.

For the portion of the acquisition gain under an annual threshold of EUR 300,000, the applicable tax treatment remains unchanged. At the date of sale of the shares, this portion of the acquisition gain is subject to:

  • Individual income tax at standard progressive rates (currently up to 45%) with a reduction of the taxable amount of 50% if the shares are sold more than 2 years after the date of vesting. This reduction is increased to 65% if the shares are sold more than 8 years after the date of vesting.
  • 15.5% social taxes on investment income (without any reduction of the taxable amount).

For the portion of the acquisition gain exceeding an annual threshold of EUR 300,000, the 2017 French Finance Act increases the tax due. At the date of sale of the shares, this portion of the gain is subject to:

  • Individual income tax at standard progressive rates (currently up to 45%), without any reduction of the taxable basis.
  • 8% social taxes on employment income.
  • 10% employee social security contribution.

Increase in employer social contribution rate to 30%

The rate of the employer social security contribution due on the acquisition gain has increased from 20% to 30%. This is due on the date of delivery of the shares to the employee.

Provided certain conditions are met, the employer’s contribution is not due for companies considered as “small” and “medium” sized enterprises under EU regulations.

Evolution of taxation of French qualified free share awards

The rules on the tax treatment of share awards received under qualified free share plans are now particularly complex, depending on the date of the share award, the date of the shareholder’s decision and in some cases to the amount of gain the employee receives in a year.

 

Granted since 28 September 2012

Granted in accordance with an authorization given by the shareholders after 8 August 2015 and before 31 December 2016
(“Macron law”)

Granted in accordance with an authorization given by the shareholders since 31 December 2016
 (2017 French Finance Act)

Portion under the annual threshold of EUR 300,000

Portion exceeding the annual threshold of EUR 300,000

Income tax
plus an additional exceptional tax on high income may apply at a rate of 0.75% if applicable

Progressive income tax rates (currently up to 45%)

 

Progressive income tax rates (currently up to 45%) with potential reduction of the taxable basis of 50%/65%

Progressive income tax rates (currently up to 45%) with potential reduction of the taxable basis of 50%/65%

Progressive income tax rates (currently up to 45%)

Social taxes

8%

15.5%

15.5%

8%

Employee social contribution

10%

-

-

10%

Employer social contribution 30% at grant 20% at vest 30% at vest

Entry into force

These new tax rules apply only to French qualified free share awards granted under a plan where the plans implementation has been authorized by the shareholders as from 31 December 2016.

The rules do not apply to awards already granted or to awards granted as from 31 December 2016 but under a plan where implementation has been authorized by the shareholders before this date.

Next steps

Companies should review their current long term incentive compensation structure to review and confirm their compliance with the changes in French taxation rules and analyze the opportunity of implementing a new incentive plan to benefit from the new tax rules.

EYG no. 00170-173Gbl

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