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The legal uncertainty surrounding management packages in France and prospective solutions

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Management packages aim to align the interests of managers or employees with those of shareholders

Further to recent case law, Nicolas Duboille and Hugo Levit of Sumerson, discuss the potential use of alternative legally bound tools in the context of management packages that may be efficient from a tax and social contribution perspective.

Management packages aim to align the interests of managers or employees with those of shareholders. Such schemes are often used in the context of leveraged buy-out operations, which allow managers to partake in the future capital gains generated at the time of sale. 

In general, gains resulting from these tools (typically warrants or share options) are taxed in France under the favourable regime of taxation of gains recognised upon the disposal of shares (taxation at a 30% flat rate including personal income tax and social contributions, known as the ‘flat tax’).

The French Tax Authorities (FTA) may however consider that certain instruments used in the context of management packages may be of a hybrid nature, mixing employee compensation and shareholder ownership.

The FTA could recharacterise applicable gains to tax them under the less favourable tax regime applicable to salaries (at the level of the employee, taxation under progressive income tax brackets, up to 45%, and at the level of the employer, payment of social security contributions on salary income). In cases of recharacterisation, the FTA may even apply penalties of 40% or even 80%. 

Until now, case law seemed to have adopted an analytical approach that made it possible to distinguish between situations where the transaction involved a sufficient risk of capital loss and uncertainty of exit gains for managers (where such gains were taxed as capital gains) and situations where the preferential conditions of acquisition or resale of the instruments made it possible to characterise the existence of a link between their obtention and the functions of the taxpayer as an employee or a manager.

In the latter case, attached gains could be taxed as salaries. 

Case law forces rethink

On July 13 2021, the French Administrative Supreme Court (Conseil d’Etat) handed down three major tax decisions that followed a different analytical approach (case LBO France No. 428506, case G7 No. 437498 and case Financière Derby No. 435452). 

The court retained a very broad application of the aforementioned ‘link’ between the gain and the salaried or management position of the taxpayer in question. Notably, the court held that gains arising from such instruments shall be taxed as salaries when the source of these gains “lies essentially in the exercise, by the taxpayer, of a salaried or managerial position” (LBO France) or when, in light of the conditions under which they were realised, the gains on the disposal of the financial securities at stake should be regarded as consideration for the manager or employee position rather than a gain realised by the seller in his capacity as an investor (Financière Derby and G7).

More recently, the Conseil d’Etat rendered two decisions confirming this broad application of the link between the gain and the salaried or managerial position of the beneficiary (CE, No. 439609, November 17 2021 and CE, No. 433965, January 28 2022). 

In this context of uncertainty, employers may consider the use of legally bound equity compensation tools. Although they are not always appropriate in the environment of management packages, they may be offering efficient solutions from a tax and social contribution perspective.

Stock options and founder share subscription warrants

Although typical stock options are not the most favourable incentive tools from a tax standpoint (as the acquisition gain is treated as salary income for income tax purposes), French and (since 2020) foreign companies can issue specific share warrants (Bons de Souscription de Parts de Créateur d’Entreprise BSPCE) that are similar to stock options and benefit from a very favourable tax and social regime.

BSPCEs are more restricted in scope than stock options. Only small and medium-sized entities (SMEs) registered less than 15 years ago and at least 25% owned by individuals or by legal entities themselves owned at least 75% by individuals are eligible.  

BSPCEs are very efficient from a tax and social contribution perspective: the issuing company does not pay any employer social contribution on qualifying BSPCE, and the beneficiaries are only taxed upon the sale of the underlying shares at a proportional rate.

If the beneficiary has worked for the issuing company or its subsidiary for at least three years at the date of the sale, taxation of the acquisition gain and capital gain will be limited to 12.8%. Otherwise, the beneficiary will be taxed at a 30% income tax on the acquisition gain and on the capital gain (with payment of social contributions at a rate of 17.2% in each case). 

Restricted stock units

Restricted stock units (RSU) or ‘free shares’ (attributions gratuites d’actions) offer employees the opportunity to become shareholders free of charge at the end of a fixed period.

Under French law, the cumulative vesting and holding periods may not be less than two years. RSU may be issued to the benefit of employees and managers who carry out their activity in one of the group’s companies. 

Taxation of the acquisition gain is deferred to the time of sale of the shares. For free shares attributed pursuant to a share plan voted by the shareholders as from 2018, such gain is, for up to 300 000 euros, taxed at the progressive income tax rate (up to 45%) but after a 50% tax base rebate and with a 17,2% rate for social contributions. 

The portion exceeding €300,000 is taxed at the progressive income tax rate without rebate while social contributions apply at an overall 19.7% rate. Furthermore, at the end of the holding period, when the shares are sold, capital gain is taxed at the 30% flat tax.

For the employer, the attribution of free shares is not subject to the usual employer social contributions. However, a specific 20% contribution based on the value of the shares upon vesting is owed (which may be exempted for SMEs under certain conditions). Although this will need to be specified, certain French presidential candidates for 2022 are considering a full exemption of employer social contributions on the attribution of free shares.

In conclusion, given the uncertainty surrounding the tools typically used in management packages, professionals wishing to provide incentives to their managers should consider, when appropriate, the use of more well-defined legal mechanisms such as those discussed here. 


Nicolas Duboille

Partner, Sumerson



Hugo Levit

Associate, Sumerson



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