France: A New Regime for French Approved Options

After much debate, a new regime for tax-approved options in France has been settled by the French Parliament. In summary, the rules are as follows.

The "Discount" is the difference between the market value of the shares on the day an option is granted and the option exercise price. Under French corporate law, a Discount can only be granted where the shares are listed. Any Discount not exceeding 5% of the market value of the shares is free from income tax and social security contributions upon exercise of the option. Any Discount exceeding 5% is taxed, upon exercise of the option, as salary chargeable to income tax at a rate of up to 52.75% for 2001 and is liable to employee (around 20%) and employer (around 40%) social security contributions.

The "Acquisition Gain" is the difference between the market value of the shares on the day the option is exercised and the option exercise price less that part of the Discount which exceeds 5%. Any Acquisition Gain of less than FRF 1,000,000 realised during a calendar year is now taxed at 30% if the shares are held for a minimum period of four years from the date of grant; this rate is reduced to 16% if the shares are held for at least 6 years. Any Acquisition Gain exceeding FRF 1,000,000 is taxed at 40% if the shares are held for a minimum period of four years from the date of grant; this rate is reduced to 30% if the shares are held for at least 6 years.

The "Sale Gain" is the difference between the sale price of the shares and their fair market value on the day the option is exercised. Any Sale Gain is taxable as a capital gain at 16%.

Both the Acquisition Gain and the Sale Gain are exempt from employee and employer social security contributions but are subject to CSG (7.5%), CRDS (0.5%) and a specific social security contribution of 2%.

The assistance of Francois Kopf is gratefully acknowledged

"© Herbert Smith 2002

For more information on this or other Herbert Smith publications, please email us."