The French National Assembly recently adopted a draft of the 2013 Finance Bill (“Bill”) which proposes to increase taxes for French residents in several ways, including by changing the tax treatment of French-qualified awards. The draft will be further discussed over the next few weeks and is subject to change until the end of December.
Impact on French-Qualified Options and RSUs granted on or after September 28, 2012
For employees, the proposals will result in changes to the income tax and social insurance contribution rates applicable to income realized at exercise of French-qualified options/vesting of RSUs (with tax still being deferred until sale). The proposed changes are complex, but the overall result is that, under certain circumstances, employees could be subject to income tax and social insurance contributions on the income at exercise/vesting at a maximum rate of 79.5% (payable when they sell the shares acquired pursuant to French-qualified options or RSUs). This would be the consequence of the income being taxed as salary at progressive rates and an increased social insurance contribution rate. Not every employee will fall in this category, but generally, the tax result for employees with French-qualified awards will be negatively impacted by the proposed changes.
For the employer, the draft Bill does not provide for any additional rate increases (but recall that the employer social tax due at grant of French-qualified awards has already been increased from 14% to 30% effective for grants made on or after July 11, 2012). In fact, the proposed changes may present rare good news. Please recall that, currently, if an award become disqualified because the applicable holding periods are not met, the employer is again subject to social insurance contributions calculated on the spread at exercise of options or the fair market value of the shares at vesting of RSUs, without any credit for the employer social tax paid at grant. Under the draft Bill, additional employer social insurance contributions would not be due if the holding periods are not met. We are currently analyzing whether this would also be the case if awards are disqualified for other reasons such as modification of an award and/or if the employer fails to complete the necessary reports. However, the proposed change would mean that employers may no longer have to keep track of the holding period to avoid another employer social tax event.
For grants made prior to September 28, 2012, the current regime will continue to apply.
Other Changes Affecting Employees
- Progressive income tax rates are proposed to increase from a current maximum of 41% to a maximum of 45%.
- A new exceptional surtax at a rate of 18% is proposed to apply to employment income (including the income at exercise of non-qualified options and vesting of non-qualified RSUs) above certain thresholds (EUR1,000,000 for a single taxpayer; EUR2,000,000 for married taxpayers).
- The capital gain tax rate is proposed to increase from 19% to 24% for capital gains realized in 2012. From 2013 forward, it is proposed that capital gains would be subject to progressive rates up to 45% (however, capital gains taxed at progressive rates may also benefit from a reduction in the tax basis depending on how long the shares are held). Additional social taxes of 15.5% (with a 5.1% tax credit) and the existing surtax of 3% on income over EUR 250,000 and 4% on income over EUR500,000 would continue to apply to capital gains.
- In addition, there are also proposed changes to the taxation of dividends and the wealth tax regime.
If your company has been evaluating the differences between French-qualified awards and non-French-qualified awards or if you are planning on making any grants in France while the draft Bill is pending, we suggest you reach out to your GES attorney to find out the latest information on applicable rates. If your company provides tax information regarding equity awards to employees, you should plan to update such information as soon as the changes are final and you may wish to consider flagging current tax supplements to indicate that changes are imminent. Finally, if your company does not provide tax information about equity awards granted in France, you should consider doing so given the significant impact of these proposed changes.