Currently, the advantage issued from the exercise of the option (difference between the value of the security at the time of the exercise of the option and the price of the option), is indeed exempt from social security contributions, apart from the part of the discount exceeding 5% (or 10% for options granted before July 1st, 1993) of the security price at the time when the option is granted.
Article 11 of the new law challenges this exemption if certain conditions are not fulfilled.
Now, this advantage is considered as an additional salary and subject as such to social security contributions when the conditions of form and time-limit provided by Article 163 bis C-I of the French General Tax Code are not fulfilled, i.e. when:
- the securities are not registered,
- or, but for particular events concerning the beneficiary (dismissal, retirement, disablement or decease), if they are sold/transferred before the expiration of a five-year time limit as of the date of granting of the option.
In fact, the purpose of this new law is to submit to social security contributions the beneficiaries of stock options who can be deemed as benefitting from an additional wage with their stock options (i.e. stock option plans are generally deemed to be granted to some employees in order to make them take share to the future projects of the company: stock options should be a long term investment and not a short term and speculative one).
The principle of liability may also be extended to withdrawals, the base of which is lined up with that of social security contributions: unemployment insurance contributions, contributions to the National Fund of Wages Guarantee, contributions for supplementary pension, transportation contributions, apprenticeship tax, employment tax for training and continuing education and construction. Moreover, the advantage drawn from the exercise of the option will, in these hypotheses, be liable for the French general social contribution as a salary.
The sale/transfer of the securities (or their conversion to bearer securities depending on the case) shall trigger off the payability of the contributions (no contribution will be due at the time of exercise of the option, except for, if need be, discount exceeding 5% as mentioned hereabove).
Concerning the new provisions, several remarks can be made:
- these provisions will have no consequence if the conditions required by Article 163 bis C-1 of the French General Tax Code are fulfilled;
- they harmonize the tax and social regime of the advantage drawn from the exercise of the option, since the non-respect of the conditions required by Article 163 bis C-I will lead to consider this advantage as an additional salary regarding as much income tax as social security contributions.
- these provisions are part of a more global system the aim of which is to moralize the stock option regime. In this respect, it is to be noted that the draft of law (not voted) provided for the subjection to social contributions of the capital gain of exercise of the option in all cases and not only in the case of sale/transfer before the five-year period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.
For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/78.63.72.35, Joel Fischer on 33/78.63.72.31, or Laurent Borey on 33/(1).55 61 10 10 or enter text search: "ARCHIBALD ANDERSEN Profile".
The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.
