Following the French fiscal storm which struck stock options, free shares became less appealing for both employers and employees. Now that the storm has passed, the Macron Law may give companies new appetite for this incentive tool.

Originally favourable when it was introduced in 2005, the free shares regime gave employers full exemption from social security contributions and employees a fixed rate of 41% (including social contributions) levied on the 'gain on acquisition' (equal to the market value of the shares on the date of vesting of the award).

However, the tax benefits for employees decreased over the years, in particular with the creation of a specific employee contribution, the rate of which rose to 10%. In contrast, the cost of issuing free shares drastically increased. A sui generis employer social contribution was also created, the rate of which eventually rose to 30%. This was payable within one month of grant of the award and was non-refundable, even if the award never effectively vested.

Free shares eventually ceased to benefit from a fixed tax rate and the gain on acquisition became subject to the normal sliding scale of personal income tax (at rates of up to 45%) for awards made on or after September 28 2012.

With free shares being subject to social contributions, taxed as additional employment income and subject to a non-negligible formalism, employers and employees lost interest in this type of instrument.

Macron free shares

The Macron Law aims to render free shares attractive once again. The law was published in the Official Gazette on August 7 2015 and the new free shares regime introduced by the law will apply to awards of free shares authorised by shareholders after its enactment. For awards made under foreign plans which do not require shareholder approval under local law, the Macron Law will apply to plans adopted by the relevant corporate bodies after August 7 2015.

For employers
The rate of the employer social contribution has been reduced from 30% to 20% and is due only on – and subject to – the vesting of the free shares.

The positive effect is that this social contribution will be due only if the participants effectively acquire the free shares. If vesting of the award is subject to performance conditions, the contribution will be due only if those conditions are met. The downside is that the effective cost of the awards for the employer will be uncertain at the time of grant, because the employer contribution will be assessed on the market value at vesting. In case of a significant increase in the market value of the shares between grant and vesting, the actual cost may be higher than under the previous regime.

For employees

Free shares will no longer be subject to the 10% employee social contribution.

In addition, the gain on acquisition (equal to the market value of the shares on vesting, but taxable only at the time of sale) will now follow the same tax regime as the gain on sale (equal to the difference between the sale price and the market value of the shares on vesting). As a consequence, on sale of the shares, the employee will be subject to the normal sliding scale of personal income tax, at rates of up to 45% (excluding the exceptional contribution on high earners), levied on the sale price of the shares. However, the basis of assessment for income tax may be reduced by 50% if the employee effectively holds the shares for at least two years after vesting, and by 65% if the shares are held for at least eight years.

Social security contributions, levied at a rate of 15.5% (of which 5.1% is deductible from the basis of assessment for income tax due in respect of the year during which such social taxes are paid), will continue to be due on the total gain, without a reduction.

This preferential tax and social security regime will apply provided that the award is made in accordance with the Commercial Code and specific disclosure requirements are fulfilled.

In practice, the differences between the tax treatment applicable before and after the introduction of the Macron Law are summarised in the following table.

Click here to view table.

Commercial Code

The Macron Law regime applies to free shares granted under French plans and foreign plans that fulfil the requirements of the Commercial Code. If changes to a foreign plan are required to ensure compliance with the code, these will generally be embodied in a sub-plan.

The main requirements of the code, as interpreted by the tax authorities, are set out below. Except for the duration of the vesting and holding periods, the requirements have not been significantly amended by the Macron Law:

  • The foreign company making the grant must be comparable to a société par actions (ie, a société anonyme, a société par actions simplifiée or a société en commandite par actions). The tax authorities' guidelines indicate that it is not possible to draw up a list of foreign entities that are comparable to sociétés par actions – therefore, a case-by-case analysis must be performed to determine whether a foreign company making a grant is comparable to a société par actions. In practice, a foreign company which is listed on a regulated stock exchange should be comparable to a société par actions.
  • The tax authorities have specified that the shares to be allocated on vesting may be preferred shares, provided that they constitute actual equity rights with no guaranteed return.
  • The company awarding the free shares must hold, directly or indirectly, at least 10% of the share capital or voting rights of the company employing the French resident participants. However, where the issuing company is listed, it may also grant free shares to employees and officers of both parent and sister companies.
  • An individual participant cannot hold more than 10% of the share capital of the company making the award at the time of grant, and the award itself cannot result in that participant holding more than this percentage.
  • The total number of free shares awarded generally cannot exceed 10% of the issuing company's share capital (15% if the company is an unlisted small or medium-sized company within the meaning of EU law).
  • Shares transferred to the participants may be either newly issued shares or reacquired shares – if reacquired shares, the company making the grant must repurchase its own shares before the date on which it is intended that the shares be transferred to the employees.
  • Awards of free shares cannot vest – that is, ownership of the shares cannot be transferred to the French resident participants – before the expiry of one year from the date of grant of the awards, except in certain cases such as death or total and permanent disability, provided in this last case that early vesting has been authorised by the shareholders. If the vesting period is shorter than two years, a holding period of the shares must also be imposed so that the total vesting and holding period is at least two years.
  • Shares must be transferred to the employees without any cash consideration. If they are required to pay a nominal amount for the shares under a foreign plan, this should not jeopardise the benefit of the favourable tax regime, provided that this amount is not significant (ie, less than 5% of the market value of the shares, according to the tax authorities).
  • During the vesting period, beneficiaries do not benefit from shareholder rights, so during this period they are not entitled to dividends, even in the form of a bonus of an equivalent amount or by way of a deferred payment at the time of vesting. Thus, according to the tax authorities, grants made under foreign plans providing for the payment of dividend equivalents should not benefit from the preferential tax treatment.
  • Heirs of a deceased participant are entitled to request, in the six months following the participant's death, that the awards be transferred to them. Heirs are entitled to sell the shares immediately without complying with any holding requirement.
  • If the issuing company is listed on a regulated market, closed windows must be imposed during which the shares cannot be sold by the employees:
    • within the 10 market days preceding and the three market days following the date on which the accounts of the company are made public; and
    • in the period between the date on which the corporate bodies of the company granting the shares are made aware of information which, if made public, could have a significant impact on the market price of the shares, and 10 market days after the date on which such information is made public.

These requirements must also be met for shares awarded by foreign companies, unless local law already provides for closed windows which offer comparable protection to the Commercial Code's requirements.

  • If the share capital of the company granting the award is modified during the vesting or holding period, the awards may be adjusted in order for this change to be neutral for the participants, provided that:
    • the adjustment has the sole effect of preserving the participants' rights; and
    • additional shares which could be issued as a result remain subject to the same requirements (including the vesting period and the holding requirement) as those applying to the original award.

The Commercial Code also defines a formal procedure to be followed by companies for the grant of these awards, involving a decision of the extraordinary shareholders' meeting which defines the proportion of the share capital to be awarded and the vesting and holding periods, and which then authorises the board of directors to determine the other conditions of the awards and to make the grants during a period of no more than 38 months. The tax authorities' guidelines specify that this formal process could be adapted to take account of a foreign company's own legislation. In practice, for awards made by foreign companies, the authority to grant free shares must be given and the actual awards made by the relevant corporate bodies of the foreign company which are entitled to do so under local law. Regarding the authority given by the relevant corporate body to make awards, this may be granted for a duration longer than 38 months, provided that it is given for a determined and reasonable period. In this respect, the tax authorities have confirmed that an authorisation given for a 76-month period is considered reasonable. The tax authorities also consider that a longer duration is acceptable where the issuing company is subject to laws which offer guarantees similar to those offered under French commercial laws in terms of shareholder protection and transparency of the board. Companies which are subject to the US Securities Exchange Act 1934 and whose shares are listed on the New York Stock Exchange or NASDAQ are deemed subject to such laws.

Grants to corporate officers

French law limits the cases in which corporate officers who do not have employment contracts can be awarded free shares.

Only a defined list of officers can receive free shares. This list includes the chairman of the board of directors, the chief executive officer, the deputy chief executive officer, the members of the management board and the manager of a joint stock company. Further, the tax authorities' guidelines indicate that an individual who is president of a société par actions simplifiée should be regarded as an officer entitled to receive free shares.

In addition, a specific holding period is imposed on officers. Where an officer has received free shares, the board must prohibit the sale of all or some of those shares for as long as the officer holds office. However, the tax authorities' guidelines specify that this rule applies only to officers of the issuing company, and will thus not apply to officers of a French subsidiary receiving shares of the foreign parent company.

Finally, for corporate officers of a French subsidiary or branch of the issuing company, a grant of free shares will be possible only if the issuing company is listed and meets one of the following conditions:

  • All of its employees and at least 90% of the employees of its subsidiaries or branches receive qualifying free shares or stock options; or
  • An employee profit-sharing plan offering benefits above the minimum required by law is in place at the level of the company and benefits at least 90% of the employees of its subsidiaries.

In its guidelines the tax authorities indicate that the restriction also applies to foreign companies granting free shares to officers of their French subsidiaries although only employees of French subsidiaries and branches will be considered. Accordingly, grants of qualifying free shares can be made to officers of a French subsidiary if at least 90% of all employees of the group's French subsidiaries or branches receive qualifying free shares or options or benefit from an improved profit-sharing plan.

As the rules are complex, specific care must be taken when a company wishes to grant free shares to corporate officers.

Disclosure requirements

Specific disclosure requirements are imposed on the employer.

Following the date of vesting, the employer must issue an individual statement for each employee who has acquired shares and send the statement to the employee. The statement must be sent by March 1 of the year following vesting.

Information relating to the awards must also be reported by the employer on its annual wages declaration to inform the Unions de Recouvrement des Cotisations de Sécurité Sociale et d'Allocations Familiales. Failure to do so will result in regular employer and employee social security contributions applicable in relation to employment income being payable by the employer.

Withholding requirements

There is no withholding obligation for the employer, except for income tax where the employee is not tax resident in France. Income tax must be withheld at the time of sale of the shares by the individual if he or she has become a non-resident of France for tax purposes when the shares are disposed of. The withholding tax applies only to that portion of the sale price corresponding to the gain on acquisition which is regarded as being from a French source. The tax authorities' guidelines explain that the gain from a French source must be determined when the individual has transferred his or her residence between grant and vesting.

The obligation to withhold falls on the person or entity "which distributes to the employee the proceeds of the transfer of the shares acquired via the plan". According to the tax authorities' guidelines, this will be:

  • the company, if the plan is managed internally;
  • the broker which the company has designated to administer the plan; or
  • the broker which holds the employee's share account.

For further information on this topic please contact Nadine Gelli, Priscilla van den Perre or Benoit Ménez at Ashurst LLP by telephone (+33 1 53 53 53 53) or email ([email protected]?, [email protected] or [email protected]). The Ashurst LLP website can be accessed at

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