In France, management packages are currently subject to hard discussions with the French Tax Authorities and structuring of such management packages is now an important issue for private equity transactions. As usual, the main benefit of management packages is acquisition gain on target’s securities and is subject to the presence of the beneficiary at closing. From a tax standpoint this gain aims at qualifying as a capital gain on securities, this classification allowing favourable tax treatment to the beneficiary and avoiding tax/social charges cost for the company. The French Tax Authorities are recently becoming more and more interested in such gains and frequently challenge tax qualification as wages. For the first time, this position has been confirmed by recent French case law.
The high tax jurisdiction (Conseil d’Etat, 26 Septembre 2014, case law n° 365573) has recently rendered a decision confirming the tax qualification of a management packages as a complementary salary. The main arguments were the fact that: (i) the manager had an obligation to stay in the target company for a period of five years to benefit from the management packages; (ii) the number of the shares under option depended on his performance (i.e. specific internal rates); and (iii) he did not take any financial risk.
Management packages are a key structuring issue for French private equity transactions and their tax treatment remains extremely uncertain. This used to be an issue purely for managers, but now this also affects the Fund provided the requalification of the package gain could have an impact on the value of the target considering the recent evolution of French law.