Taxation of employee share ownership and attractiveness of talents in France
On the occasion of the third edition of the Choose France summit held on January 20, 2020, the government reiterated its desire to promote the attractiveness of France and encourage foreign investment.
Measures to increase the attractiveness of start-ups were announced targeting, in particular, employees and certain managers2.
Since January 1, 2020, foreign companies can, in fact, offer employees of their French subsidiaries an additional incentive to increase their attractiveness and employee retention, previously reserved for French companies, namely business creator share subscription warrants (BSPCEs). Thus, foreign companies can award warrants for which employers, managers and employees will benefit from a specific social and tax regime subject to certain conditions.
In the same way as the allocation of free shares (AGA) and the system of the subscription or purchase of options (Stock options), business creator share subscription warrants (BSPCE) constitute employee share ownership schemes. This concept encompasses all the mechanisms which make it possible, in the medium-to-long term, to involve company employees in its capital.
These mechanisms have a range of consequences – on the one hand, motivation and cohesion within the company, strengthening the involvement, retention and profit-sharing of employees in the development of the company and, on the other hand, increased attractiveness of French employee share ownership.
Since the law for growth, activity and equal economic opportunities of 2015, the so-called “Macron” Law , the social and fiscal regime of these mechanisms and more particularly of the benefits achieved by the employee has been adapted on a number of occasions in order to make them attractive and encourage their implementation within companies.
More recently, since January 1, 2018, the single flat-rate withholding tax (PFU)3 the so-called “Flat tax” at an overall rate of 30% applies to income from capital, i.e. in particular income from dividends and capital gains on the sale of shares.
The PFU is a guarantee of simplicity whereas previously there were different tax rates that could lead to a higher overall tax cost. The aim is to simplify and reduce taxation on savings but also to increase France’s attractiveness in a competitive international context.
Employee share ownership schemes
Advantages of French shareholders
When the taxation applicable to employee share ownership in France is compared to that of other countries, a first significant differentiating factor is that of the tax date of the gain on the acquisition for the employee.
In a large number of countries, the beneficiary becomes taxable on his/her gain on the day on which the shares are delivered to him/her and he/she acquires the status of shareholder of the company, such as in Germany, Canada, the United States (except for certain categories of stock options) and the United Kingdom.
In these countries where the acquisition gain is treated on the social and tax side as a salary, the employee immediately pays income tax through his/her payslip. In practice, the monthly salary received by the beneficiary is therefore impacted because the remuneration is reduced by the amount of the income tax deduction. However, the philosophy of employee share ownership (which is to become a shareholder of his/her company) is therefore impacted in the amount of shares disposed of/sold immediately to finance the tax.
France therefore stands out clearly on this point since each of the three mechanisms studied above (free shares, BSPCEs and stock options) provides for a tax date only on the day of the sale of the shares and therefore on the day on which the employee decides to receive the financial fruit of his/her employee share ownership.
“The French exception” has three major advantages:
- the beneficiary employee is in control of his/her tax since he/she receives all the shares on the day of the effective acquisition or subscription of the shares;
- when he/she decides to sell his/her shares, he/she then receives the sale price that can be used to finance any tax and deductions due;
- with regard to tax rates and the cost of social security contributions and deductions, France remains attractive, particularly in terms of free shares and BSPCEs.
In France, any beneficiary of free shares, whose acquisition gain does not exceed €300,000 , will be subject to a tax rate of approximately 38% (including income tax and social security deductions). This same acquisition gain made by an employee in Germany or the United Kingdom would be subject to taxation at a marginal rate of 45% and in Spain at a rate of 49%.
For BSPCE beneficiaries, the gain realised is taxed at a rate of 30% in France. In Germany, for example, it would be 45%.
Thus, in order to increase the attractiveness of French employee share ownership, reforms have been put in place and “the introduction of the PFU is akin to a “return to normal” in terms of capital taxation compared to our European neighbours, thus improving France’s fiscal attractiveness” . Indeed, for example, the marginal tax rate on income from capital gains on disposals is 25% for our German neighbours. It is 37% in the United States. Finally, a recent illustration of the attractiveness of employee share ownership in France, following the implementation of the PFU, dividends received by beneficiaries increased from €28.9 billion in 2017 to €37.1 billion in 2018, an increase of 28%.
Emeline Dinparast, Tax Advisor
Geoffrey Poras, Attorney at Law / Counsel – PG Tax, Baker & McKenzie A.A.R.P.I
Alisa Sakic Second, Head of Welcome Office, Business France
1 The information is provided in connection with the implementation of employee share ownership schemes, since January 1, 2020, as defined below.
2 The beneficiaries of the allocation of BSPCEs may be employees or managers subject to the tax regime applicable to employees and, since the PACTE Law (Law no. 2019-486 of 22 May 2019), members of the Board of Directors or Supervisory Board or, in simplified joint stock companies, members of any equivalent statutory body.
Law no. 2015-990 of 6 August 2015, the so-called “Macron” Law, for growth, activity and equal economic opportunities.
3 The PFU is applied at an overall rate of 30% which includes both a rate of 12.8% by way of income tax and a rate of 17.2% for social security contributions