Some companies, in order to retain their senior executives, set up a "management package" involving them in the company capital, in the form of share acquisition schemes. They may use schemes that are not reserved solely for employees and whose tax regime is not regulated by law: autonomous stock subscription bonds (known as "BSA") or stock option contracts (known in French as "COA").
The gains realized on the sale of these shares are in principle taxed as "capital gains on the sale of securities". This is not the case, however, when, in view of the conditions under which the gain is realized, it is acquired "not by reason of the seller's status as an investor, but in consideration of his duties as an employee or manager". It therefore constitutes income taxable in the category of salaries and wages. This is what the French administrative supreme court, the Conseil d'Etat, ruled in three decisions dated 13 July 2021.
In two of these cases, two taxpayers challenged the fact that their gains from the sale of the bonds were subject to the income tax in the salary and wages category. They considered that they should have been considered as capital gains for individuals and therefore taxed according to what they considered to be more favorable terms.
In the third case, the tax authorities challenged the classification in this category of capital gains for individuals from the sale of shares acquired under a COA".
The Conseil d'Etat first ruled on the tax consequences of the acquisition of these shares at a preferential rate. The fact that stock options or bonds were acquired or subscribed at a preferential price in relation to their real value on the date of such acquisition or subscription is likely to reveal the existence of an advantage in the amount of the difference between the price thus paid and that value.
Such a benefit, when it is essentially derived from the exercise by the interested party of his functions as a director or employee, has the character of a benefit granted in addition to the salary.
Consequently it is therefore taxable for the year of acquisition or subscription of the options or bonds in the category of salaries and wages pursuant to the tax code.
In view of the conditions under which the gain is realized, this gain must be considered as acquired, not because of the transferor's status as an investor, but as consideration for his duties as an employee or manager. It therefore constitutes income taxable as wages and salaries in accordance with the tax legislation. It must be considered as acquired and available the year of the transfer of these bonds.
Key Action Points for Human Resources and In-house Counsel
This case clarifies a grey legal zone and means that both employers and employees must be vigilant of the tax treatment of such management packages. They are likely to be taxed as wages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.