Management packages are frequently addressed by the advisory committee in charge of abuse of law matters (Comité de l'abus de droit) under the angle of income tax treatment applicable to the capital gains realized by managers who are transferring securities carrying attached warrants (bons de souscription d'actions, "BSAs"). This time, the question has been addressed by the Administrative Court of Appeal of Versailles ("Versailles CAA") under the angle of certain ancillary taxes (as well as social security levies) that must be paid or withheld by an employer on employment income (but not capital gains) received by its employees.
In the case at hand, a Belgian company had issued notes carrying BSAs to a financial institution, and the BSAs were subsequently transferred for free to the employees of the French subsidiary of the Belgian company. Following the exercise of the BSAs, the French company received an assessment from the FTA asserting that the income derived from the BSAs should constitute employment income and thus be subject to social security levies and relevant ancillary taxes at the level of the employer.
The Versailles CAA held that the opportunity offered to the employees of the French subsidiary to receive (through the exercise of BSAs awarded because of their employment by such subsidiary) shares at a price lower than their fair market value should be characterized as employment income, notwithstanding the fact that (i) the BSAs were not issued by the employer itself, (ii) the BSAs had initially been held by a financial institution as a result of a debt offering, or (iii) the income derived by the employees had been imposed as capital gains for personal income tax purposes.
To the best of our knowledge, the decision of the Versailles CAA has not been appealed by the taxpayer, and the above reasoning will therefore not be tested before the Conseil d'Etat.
Other cases should, however, provide such an opportunity because management packages, in particular when they are awarded in LBO-type transactions, are frequently challenged by the FTA.