In France, the Finance Law for 2021 includes some social security measures intended to encourage employee shareholding. Certain proposed reforms in relation to withholding tax levied on French-source acquisition gains of individuals who are not tax resident in France have been dropped.
Social security contributions
The French government wishes to see an increase in employee shareholding in France, and undertook to make employee shareholding more attractive to employers. The Finance Law for 2021 cuts the employer's share of social security contributions owed on certain stock options and free shares grants or on payments made by the employer to help employees in acquiring company shares.
The French Finance Law for 2021 provides for several measures in favour of employee shareholding. These measures aim to encourage employees to invest in strengthening companies' equity capital and to increase employee shareholding, as a factor of company growth.
Indeed, the French government is pursuing an objective of increasing employee shareholding in French companies up to 10%.
1. Extension of the social security contribution exemption on free shares and stock options
In France, employers owe a social security contribution upon the grant of stock options and restricted stock units ("RSUs") . The rate of contributions is in principle set at 20% or 30%.
Accordingly, this contribution owed by the employer has to be accounted for and represents an additional cost when granting RSUs or stock-options.
However, an exemption exists for certain employers. It was previously provided only to employers falling into the small and medium-sized enterprises category.
The benefit of this exemption has now been extended to stock options and RSUs granted to employees by companies with 250 to 5,000 employees and with a turnover of less than €1.5 billion.
2. Exemption from the flat-rate social security on payments made to savings plans
In France, companies may set up a collective savings plan that allows employees – and managers in small companies – to acquire securities with the help of the company called plan d'épargne entreprise (company savings plan or CSP) . Employees and companies can make payments into the CSP.
The employee's payments can be increased by a company bonus called abondement. When the company makes a bonus payment to the CSP autonomously, that is, without the employee making a payment, the payment is called an abondement unilateral. Payments made in addition to an employee's payment and payments made unilaterally by the employing company are subject to different social security contribution treatment.
The employer is in principle liable for a social security contribution, called forfait social, for the payment of such a bonus.
The standard contribution rate of the forfait social stands at 20%. It is, however, lowered to 10% for bonus payments made by the employer in addition to the employee's payment for the acquisition under a CSP of shares or investment certificates issued by the employer (or by an company included in the same financial consolidation group 10).
For bonus payments made in addition to the employee’s payments in 2021 and 2022, the employer will be exempted from the forfait social contribution. An important clarification is that employers will still be liable for the reduced 10% forfait social contribution on bonus payments made unilaterally (abondement unilateral).
The Finance Law for 2021 drops the reform of the withholding tax levied on French-source acquisition gains of individuals who are not tax resident in France, which had been initiated by the Finance Law for 2019.
Withdrawal of the measure abolishing the withholding tax on French-source wages (and other assimilated income such as acquisition gains realised within the framework of free share or stock option plans) paid to persons whose tax domicile is outside France.
A withholding tax is levied on French-source acquisition gains of individuals who are not tax resident in France (the "withholding tax" or WHT).
This withholding tax is calculated by applying a three-tier scale to income with rates of 0%, 12% and 20% respectively (see table below).
The fraction of income taxed at a 12% rate is not taken into account for the computation of the income tax due by the non-resident; the WHT partially discharges the non-resident of their tax liability.
The Finance Law for 2019 had previously initiated a reform of the withholding tax. The main objectives of the reform were:
- to align the calculation methods of the non-resident withholding tax with that of the withholding tax on the income of French residents;
- to eliminate the partially discharging nature of the non-resident WHT.
The Finance Law for 2021 has dropped in its entirety the reform initiated in 2019. Accordingly, the method of calculation of the non-resident withholding tax remains unchanged and the withholding tax retains its partially discharging character.