Impact of France’s 2013 finance law on qualifying stock option and restricted stock unit plans incites companies to examine remuneration alternatives
The French government has decided to increase taxation of the wealthiest taxpayers, and to align the tax treatment of income derived from employment and from capital. For example, capital gains previously taxed at a 19 percent flat rate1 are now subject to individual income tax at progressive rates of up to 45 percent.2 The government originally implemented more aggressive income tax increases of up to 75 percent for wealthy taxpayers. However, those rules were deemed contrary to the French Constitution 3 and are not currently in force.
In light of these changes, the 2013 French Finance Law has modified the existing favorable tax and social security regime for qualifying Restricted Stock Units (RSUs) and Stock Options (SOs) granted on or after 28 September 2012. As a result of the new rules, RSUs and SOs are significantly less attractive methods of remunerating employees and managers in France than before. Consequently, we anticipate French employers will look to other means of remunerating their key employees. This article summarizes the impact of the new French tax rules on qualifying SO and RSU plans, i.e., plans that comply with specific requirements set out in the French business code. Non-qualifying plans are already subject to the same tax and social security treatment as salary, and therefore are not affected by the new rules discussed below.
Impact of the New Rules on Qualifying Stock Options Plans
The table below compares the tax treatment of the “acquisition gain” and “sale gain” applicable to qualifying stock options under the new rules (applicable to all grants made as of 28 September 2012) with the old tax rules (which still apply to all grants made before 28 September 2012).
The “acquisition gain” is the difference between the fair market value of shares on the exercise date and the exercise price. The “sale gain” is the difference between the price of the shares upon their subsequent sale by the option holder and their fair market value on the exercise date.
For qualifying SOs, any acquisition gains and any sale gains are subject to tax in the year the shares are disposed of, not the year in which the options are exercised. This timing is also applicable for RSUs, i.e., any acquisition gains and any sales gains are both taxed when the shares are disposed of, not when the RSUs vest.
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Impact of the New Rules on Qualifying Restricted Stock Units
The table below compares the tax treatment of the “acquisition gain” and “sale gain” applicable to qualifying RSUs under the new rules (all grants made on or after 28 September 2012), and the old tax rules (which still apply to all grants made before 28 September 2012).
In the context of RSUs, the “acquisition gain” is the fair market value of the shares on the date they are delivered to the employee (generally when the RSUs vest). The “sale gain” is the difference between the price of the shares upon their subsequent sale by the RSU holder and their fair market value on the date they are delivered to the employee. Under qualified RSU plans, the shares must not be transferred to the employee until a minimum of two years have passed from the RSU’s grant date and, once transferred to the employee, the shares must not be sold before the expiration of an additional twoyear holding period.8
France’s new regime imposes higher tax and social security contributions for qualifying SO and RSU beneficiaries and may be further modified. We therefore anticipate that French corporations will turn their backs on these types of plans in favor of alternative types of remuneration such as deferred cash bonuses to incentivize their key employees.
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