The French Finance Act 2013 (the "Finance Act") has made important amendments to the treatment of social security contributions paid in respect of stock options and supplementary retirement schemes.

Stock Options and Allocation of Free Shares. The Finance Act implements new conditions that must be met in order for the proceeds of stock options and share sales (where the stock option or free share awards were granted on and after 28 September 2012) to benefit from an exemption from social security contributions.

Before the Finance Act, such stock awards benefited from an exemption from social security contributions when the options or shares were held for a period of four years before the options were exercised or the shares sold. Under the Finance Act, this four-year "holding" period has been abolished. For the exemption to operate, the employer must notify the French Social Security Administration of the name of the beneficiaries as well as the number and the value of shares allocated to each of them.

The Finance Act also now classifies the proceeds of stock options and share sales as salary income that is subject to the income tax regime. It further treats stock options and free share allocations as regular salary income for the purpose of CSG/CRDS contributions. The contribution rate is 8 percent. (CSG/CRDS contributions are specific contributions that are usually deducted from employee's remuneration and which finance, in particular, state health, welfare and retirement schemes.)

Supplementary Pension Plans (retraites chapeau). The Finance Act has implemented a new marginal rate of income tax of 45 percent which has also affected supplementary pension plans.

Before the Finance Act, pensioners had to pay social security contributions at the rate of 7 percent on their supplementary pension income between €400 and €600; 14 percent on pension income between €600 and €24,000 and 21 percent on pension income that exceeded €24,000.

This new 45 percent income tax rate would have had the effect that supplementary pension plan income received in 2012 and 2013 could, at the highest marginal rate, be subject to an effective rate of income tax in excess of 75 percent. The highest Constitutional Court has invalidated this change on the grounds that such level of taxation is excessive given the financial position of most of the taxpayers caught by this rate. Following this decision, it appears that the maximum social security contribution rate that can be imposed upon supplementary pension plans is 14 percent and the maximum effective rate of income tax on these incomes is therefore just over 68 percent.