France unveils a new tax regime for management packages: a long-awaited clarification
Pierre Bonamy
Reinhart Marville Torre, Paris
Background: years of uncertainty and the 2021 French Conseil d’État rulings
For years, the tax treatment of management packages in France has been in murky waters, marked by considerable uncertainty. At the heart of the issue lies the possibility of recharacterising capital gains realised by employees or corporate officers on their packages as employment income, subject to progressive income tax rates and social security contributions (such requalification leading to an effective tax rate that can exceed 60 per cent, while capital gains are typically taxed at around 34 per cent).
This risk was crystallised by the landmark rulings issued by the French Conseil d’État (Supreme Administrative Court) on 13 July 2021 (CE, 13 July 2021, nos 435452, 428506 and 437498), which established a broad framework for determining when such gains are considered to result from salaried (or management) functions rather than from a genuine investment.
The Court’s approach was based on a multi-factor analysis of the evidence (faisceau d’indices), taking into account contractual clauses, economic risk, the existence of good/bad leaver clauses, liquidity mechanisms and performance-linked returns.
At first, practitioners decided that legally recognised instruments, such as the free allocation of shares (or AGA) and stock options or share warrants (including Bons de souscription de parts de créateur d’entreprise or BSPCEs), were safe. The logic was that the tax administration could not use the link with salaried or management functions to requalify the gains because such a link was a legal prerequisite to granting those instruments.
However, over the last couple of years, tax audits have targeted legally recognised instruments (mostly AGA) when the underlying shares used ratchet mechanisms, leading to the aggressive accretion of managers’ financial rights in cases where performance criteria were met.
In any case, the absence of clear statutory guidance created legal uncertainty and led to a surge in tax audits and litigation.
A new legislative framework: Article 163 bis H of the French Tax Code
To address this legal limbo, the 2025 Finance Bill introduces a new legal framework, codified under Article 163 bis H of the French General Tax Code (Code Général des Impôts or CGI), applicable from 15 February 2025.
This reform aims to provide clarity by creating a dedicated regime for gains realised on securities acquired or granted in consideration for salaried or management functions (whether by the issuing company, its subsidiaries or the parent entity).
Scope: all management instruments are now captured in the net
The scope of the new regime is deliberately broad. It covers all instruments typically used in management packages, regardless of whether they are structured within legally recognised plans (AGA, stock options, BSPCE) or bespoke instruments (such as warrants for the subscription of shares (BSA), preference shares, etc).
While statutory instruments retain their specific treatment upon being granted or exercised, the new regime applies to the capital gain portion when such gain is considered to arise from the recipient’s corporate role, and provided it exceeds a certain threshold.
A clear philosophy: certainty over litigation
The new regime replaces the previous ambiguity through the application of the following binary approach:
- up to three times ‘the multiple of financial performance’, the gain qualifies as a capital gain, taxed at a flat rate (usually around 34 per cent); and
- beyond this threshold, the excess portion is treated as employment income, subject to a progressive tax (up to 45 per cent), potentially to the contribution based on a high income (up to four per cent) and to a new ten per cent special social contribution (but excluded from standard employer social charges).
This regime is aimed at providing legal certainty.
Previously, taxpayers had to argue, often with little success, that the gain was disconnected from their employment or management functions.
Now, there is no need to engage in complex factual assessments. Either the threshold is not exceeded, and the gain is considered to be a capital gain, or it is exceeded and there is a split between capital gain and salary.
It should, however, be said that capital gain taxation is only available when there is a real risk of loss for the manager. As a result, a favourable price formula guaranteeing that the manager will receive more than their purchase price means that the whole gain will be taxed as salary.
Criticism by some private equity players
Some private equity market players are not fully satisfied with this logic, as they would have wished to retain the possibility to consider a package as purely a capital gain, regardless of its performance.
In other words, they would have wanted to be able to ‘take the risk’.
However, this strategy is increasingly daring and, arguably, unnecessary. Three times the multiple of the financial performance already makes room for a sizable upside for managers.
Focus on the multiple of financial performance
The threshold above which gains are taxable as salary is determined as follows:
Threshold = Purchase Price x Exit Value / Entry Value – Purchase Price
Where:
- the exit value is a fair market value of the issuing company on the date of the disposal of the shares or any event treated as a disposal, after adjustment for debt (see below);
- the entry value is a fair market value (FMV) of the issuing company at the date of acquisition, subscription or attribution of the shares, after adjustment for debt (see below); and
- the purchase price is the actual price paid by the employee or manager to acquire or subscribe to the shares (for free shares, this refers to the value crystallised at the end of the vesting period, as reported for social security purposes).
The exit value and entry value have to be adjusted for debt: the issuing company’s fair market value must be adjusted by adding back any debts owed to shareholders or related companies (within the meaning of Article 39, 12 of the French Tax Code).
Debts created after acquisition are deemed to exist from the acquisition date for entry value purposes.
The text uses a net asset approach and states that the FMV is deemed to correspond to the actual value of the company’s equity, increased by related-party debt, as explained above.
For example:
A manager receives a package in consideration of their salaried functions. When she receives her package, the issuing company is worth €100m. When she exits, the same company is worth €200m. She invested €100,000 and she exits for €1m, leading to a gain of €900,000.
The threshold is equal to €500,000, ie, €100,000 x 2 x 3 - €100,000, where two is the multiple of the issuing company.
As a result, €500,000 is treated as a capital gain and the remaining €400,000 is treated as salary.
Cross-border issues: open questions
As a reminder, when instruments such as stock options, free shares or BSPCE are issued in a cross-border context, Organisation for Economic Co-operation and Development (OECD) recommendations and French guidelines dictate that gains must be split into two distinct components, as follows:
- the gain realised upon exercising the instrument, treated as employment income, falling under Article 15 of the OECD Model Tax Convention; and
- the gain arising from the sale of the shares acquired through the instruments treated as capital gains falling under the provisions of Article 13 of the OECD Model (Capital Gains), or under Article 21 (Other Income) if the treaty does not contain a capital gains article.
At first, there was no clear answer as to how to deal with the part of the gain exceeding the threshold of three times the multiple. Should it be taxed in the state of residence as capital gain or should it be taxed at source as employment income?
Choosing the latter could lead to a qualification conflict between France and the state of residence and, possibly, double taxation. Choosing the former could defeat the purpose of the new regime in an international context.
A similar uncertainty arises when considering exit tax. When a taxpayer leaves France, exit tax applies to their latent capital gains.
However, when stock options and other free shares are involved, the exit tax does not apply to the fraction of the latent gain, which is treated as employment income (since, in most cases, the right to tax will be allocated based on where the beneficiary effectively carried out its activities during the vesting period).
Then, the question is: when the beneficiary of a French package leaves France, what will happen to the share of the (latent) gain that is over the threshold and, as such, taxed as salary?
Very recently, the Direction générale du Trésor (the French Treasury) has let it be known that, both in regard to the exit tax and under bilateral tax treaties, the entire gain, including the slice above the three‑times multiple threshold, was to be treated as employment income.
A written (and binding) confirmation is expected to be published in the guidelines due to be published in May 2025.
In practice, however, some cross‑border frictions are expected to remain. For example, some countries view package gains as capital gains and tax them accordingly, giving rise to potential double taxation for French‑package beneficiaries residing in these jurisdictions on the portion treated as employment income in France.
What about company founders?
Another recurring question concerns founders. Do they fall within the scope of the new regime? As currently drafted, Article 163 bis H does not expressly exclude founders from its application.
Yet, founders are typically not ‘recruited’ by financial sponsors to perform management functions, they are the originators of the business, who welcome investors at a later stage. The intention behind the new rules seems to target the management of investors, not entrepreneurial founders (but one can only refer to the intention of the lawmaker if the law is unclear).
Alas, the French Tax Administration has recently announced that it did not plan on introducing any kind of carve out for founders.
It should, however, be noted that the Tax Administration, when it made that announcement, also mentioned that when multiple instruments were involved, the threshold should be assessed according to the entire package (as opposed to instrument by instrument).
This is good news in and of itself. And, for founders, this logic should lead to the conclusion that shares received in exchange for the initial investment by founders (ie, before the arrival of the financial sponsors) should not fall within the new regime.
The French Treasury has indicated, through unofficial communication at this stage, that they are inclined to follow this line of reasoning.
The deferral regime: a major pain point, in the process of being resolved
One of the most critical issues concerning Article 163 bis H relates to the inapplicability of capital gain deferral mechanisms.
Articles 150-0 B and 150-0 B ter of the French Tax Code provide for a deferral which applies when shares are contributed in kind, ie, in a share-for-share exchange.
While Article 163 bis H explicitly allows the portion of the gain treated as a capital gain (ie, within the three-times performance multiple cap) to benefit from the usual deferral rules in the case of qualifying contributions (eg, contribution to a holding company in exchange for shares), the excess portion treated as salary is immediately taxable, even in the absence of liquidity.
This presents a serious cash-flow concern, particularly in leveraged buyout contexts, according to which managers are required to reinvest their proceeds as part of the transaction.
In practice, the manager may be taxed on a salary portion up to 59 per cent (45 per cent is the maximum rate for income tax purposes, plus a four per cent potential contribution on high income, plus ten per cent special social contribution), even though no cash has been received at the time of the transaction, putting pressure on their ability to fund the reinvestment.
In this regard, another technical uncertainty arises regarding double-taxation risks when the deferral from Article 150-0 B is applied. More specifically, when the previously taxed salary portion is eventually realised upon a second exit, can it be deducted from the capital gain then realised? The law is silent, but fairness would suggest that a mechanism should prevent economic double taxation.
Fortunately, discussions with the French Treasury indicate that the portion of the contribution gain taxed as salary may also benefit from deferral.
At this stage, it is likely that such change would be introduced in an upcoming Finance Bill with retroactive effect from 15 February 2025.
Social security: a manager’s burden and a corporate risk
While the new regime exempts employers from traditional social contributions, it introduces a ten per cent special contribution borne by the manager.
However, if a manager disputes the application of the regime, claiming that the relevant funds are a capital gain instead of employment income and the situation is later reassessed by the tax authorities, the employer could face a full social security reassessment, including back charges, penalties and interest.
As a result, contractual clauses should be introduced in management packages, requiring managers to comply with the new rules and report the relevant employment income portion appropriately.
Conclusion: a welcome step forward
In sum, this reform marks a positive shift for the French tax framework applicable to management incentives. Despite unresolved technicalities, the core philosophy, predictability over subjectivity, should be welcomed by international investors and executives alike.