In various Q4 Opinions, the AoL Committee has once again addressed the income tax treatment applicable to the capital gains realized by managers who are transferring shares carrying attached warrants (actions à bons de souscription d'actions, "ABSA") received as part of a management package within the context of a given LBO transaction.
In several of the cases reviewed by the AoL Committee, the managers of a company about to be bought out had subscribed ABSAs in the holding company that was to carry the buyout. The number of shares that a given warrant could give right to was inter aliacontingent upon the internal rate of return of certain other financial investors in such holding company.
As in many other similar cases, the French tax authorities have challenged the capital gains subsequently realized upon the transfer of the ABSAs, on the basis that the managers were actually benefitting from a profit-sharing scheme rather than capital gains realized by an actual investor, and that the income derived from such scheme was to be subject to personal income tax as employment income (in the cases at hand, the ABSAs had further been assigned to the plans d'épargne en actions of the managers, i.e., a type of shares savings plan entitled to a favorable capital gains tax regime).
Unlike certain opinions issued earlier in 2013, the Q4 Opinions sided with the French tax authorities.
The AoL Committee indeed found that while (i) the managers had funded the ABSAs on their own and (ii) such funding was substantial compared to their global income, certain features of the management package should lead to the characterization of employment income: (a) the provisions of the ABSAs were such that the exercise conditions of the warrants amounted to an allocation among the managers of a pre-determined sum, and (b) the managers had a de facto guarantee of recovering their initial investment, with the additional opportunity of realizing a substantial gain.
Interestingly, the AoL Committee disregarded the fact that the managers were not effectively guaranteed against the loss of their investment, and that the sale price always reflected the market value of the relevant warrants.