There have been some recent changes in the way the French tax authorities are applying the rules regarding tax-favoured share awards and options (awards) granted by non-French companies to French employees.
These changes may mean that awards granted under the French appendices to UK companies (and other non-French companies) share plans do not qualify for tax favoured treatment. Care will also be needed in respect of future grants to French employees. Our Paris office is having discussions with the French tax authorities to seek a concession that these changes do not cause awards granted under the French appendices to non-French companies share plans to lose their tax-favoured treatment.
The requirements for granting tax-favoured share awards in France are included in the French Commercial Code and include a condition relating to corporate approval of the plan. Ever since the regime was introduced, there have been questions over how UK companies should, if at all, satisfy this condition (in particular, to what extent a UK company needed to comply with provisions of the French Commercial Code, rather than the tax code).
Some recent rulings of the French tax authorities have clarified the position in relation to non-French companies as follows:
- Generally shareholder approval should be obtained for a plan. However, if no shareholder approval is required as a matter of UK law (for example because the plan uses only existing shares and no directors participate) then board approval is sufficient.
- If the approval is given for a period of more than 38 months, the period must be limited and reasonable. The French tax authorities have ruled that 10 years is not reasonable (even though this would be the norm for a UK company).
The concern arises from the second bullet point above and the requirement for a “limited and reasonable” period. There is no guidance on what period (between 38 months and 10 years) the French tax authorities might consider reasonable. In the absence of any guidance, French advisers are unable to give any definitive advice on an appropriate period but it is thought that, in broad terms, the period should be no longer than 5 years. Helpfully, French advice is that even if approval is obtained for a ten year period, provided a grant is actually made within a “limited and reasonable” period after that approval, then it will still qualify.
These rulings apply to existing grants – so if you have granted awards to French employees more than 5 years (but possibly only more than 38 months) after the plan was approved, those awards may not qualify for tax favoured treatment in France. (Note that in some cases, awards which do not qualify may have already been released to employees on the basis that they do qualify.)
Therefore, we are recommending that non-French companies check when grants have been made to French employees relative to the date the plan was approved and obtain further advice.
If non-French companies wish to make future grants on a tax favoured basis, it will be important that they check whether they need to “refresh” the approval for French reasons (even though the renewal date in the UK has not yet come round). For a plan that requires shareholder approval, it may be appropriate to seek that approval at the 2011 AGM.