France’s Finance Bill for 2025: management package tax reform

Matthias Heyberger
Operandi, Paris
mheyberger@operandi.co

Sara Kociemba
Operandi, Paris
skociemba@operandi.co

France's Finance Bill for 2025, which came into force on 15 February 2025, introduced a significant reform in regard to the taxation of gains on financial instruments subscribed to or granted to executives and employees in the context of their company.

The background

Without going into the specific details of the saga, it is important to recall that the issue involving the taxation of gains on management packages has led to numerous audits and disputes with the French tax authorities, resulting in a landmark ruling by the Conseil d’Etat (French Administrative Supreme Court) in July 2021 (Conseil d’Etat, Plénière fiscal, 13 July 2021: n° 435452, n° 428506 and 437498). This ruling established an analytical framework to distinguish cases where employees or corporate officers realise gains related to their functions, which are then subject to the salary regime (taxation based on the progressive income tax rate of up to 45 per cent), from cases where they realise gains as financial investors, which are then subject to the capital gains regime (taxation based on a flat tax rate of 12.8 per cent). This exact issue also existed in regard to social security matters, as the classification of such a gain as salary would subject it to social security contributions (both employer and employee contributions).

This dual regime, based on an analysis of the link between the realised gain and the functions performed, created a form of legal uncertainty in regard to the structuring of management packages. In particular, it led to a scarcity of good and bad leaver clauses, exclusivity and non-compete clauses in the legal documentation governing these types of management packages.

The 2025 legislative reform aims to clarify the regime and provide legal certainty for the actors involved.

The reform

The reform maintains the idea of the dual treatment of gains realised by employees and executives when the gain is related to their work-related functions. It, thus, adopts the French Administrative Supreme Court’s formula and, in our view, refers to its analytical framework to qualify this link.

Now, new Article 163 bis H in the General Tax Code provides that gains realised by employees or corporate officers on securities, in connection with their work functions, are classified as salary from a tax perspective. However, as an exception, this gain follows the capital gains taxation rules (a flat tax of 12.8 per cent) within the limit of three times the projected multiple. The excess remains taxed as salary at the progressive rate (up to 45 per cent).

Therefore, it is necessary to verify the equity multiple, ie, the evolution of the company’s equity value between the time of subscription in terms of the instrument (or free allocation) and its sale by the employee.

For example, if the equity value is €1,000 at entry and €2,500 at exit, the equity multiple is 2.5. Within the limit of a multiple of three times this equity multiple, ie, 3 * 2.5 = 7.5, the gain on the sale realised by the employee can benefit from the capital gains regime. If, for example, the employee subscribed to a preferred share for €10 and received €110 as the sale price, their gain is €100. Within the limit of 7.5 * 10 = 75, this gain is considered a capital gain. Beyond that, the gain will be taxed as salary (ie, for a base of 100 – 75 = 25).

This regime applies to all types of financial instruments subscribed to or granted to the employee, including legal plans, such as free share plans, BSPCE (founders’ share subscription warrants) and stock options. However, in regard to these legal regimes, the acquisition or exercise of a gain continues to follow the specific regime defined by law for these plans, with only the sale gain being capped (gain de cession). This allows for much freer use of financial instruments that have been abandoned in practice, such as preferred shares, especially in regard to the inclusion of a ratchet component, particularly in leveraged buyout deals.

However, two conditions must be met:

• the instrument must be held by the employee for at least two years; and
• there must be a risk of capital loss upon subscription to the instrument.

Furthermore, the social security regime has been adjusted. All sale gains covered by this new regime are exempt from employer and employee social security contributions, except for the portion of the gain that exceeds the cap, which would be subject to a ten per cent employee contribution. This is a significant advancement in terms of the new regime, avoiding any risk of reassessment at the employer company level regarding social security contributions. However, this social security regime is currently temporary and runs until 31 December 2027. We are optimistic about its future permanence.

Regarding the tax rate, it is now necessary to distinguish the following aspects:

• the portion of the sale gain below the cap and, thus, subject to the capital gains regime, namely the flat tax of 12.8 per cent plus 17.2 per cent social levies, a total rate of 30 per cent, with no employer cost; and
• the portion of the sale gain above the cap and, thus, taxed as salary, namely the progressive income tax rate up to 45 per cent plus a ten per cent employee social contribution, a total rate of 55 per cent.

Additionally, the exceptional contribution on high incomes may apply to this gain (if the annual income > €500k for a couple or over €250k for a single person), bringing the overall tax rate on this gain to 34 per cent and 59 per cent, respectively.

Finally, financial instruments falling into the scope of this new regime cannot be subscribed to through the specific stocks and shares savings plan (plan d’épargne en actions or PEA) and shares that are already in such a plan cannot benefit from the personal income tax exemption attached to this specific plan.

Some important questions have recently received clarification from the French tax administration, and practitioners are eagerly awaiting the publication of the administration’s guidelines in the coming weeks.

The first area that has received clarification relates to the assessment of the cap when employees subscribe to several instruments of a different nature: typically, ordinary shares (pari passu) in regard to a financial investor and preferred shares with a ratchet component. The French tax administration has confirmed that the cap should be assessed by consolidating the different sale gains when the instruments are subscribed to concomitantly. This position should be confirmed in the guidelines that are shortly due to be published. This would significantly increase the capital gains portion of the gain from the ratchet and allow for a separation of instruments, which would be easier to manage in practice, especially in the case of exits during a deal.

The fate of reinvestments has also been clarified. In the current text, only the portion of the gain taxed as a capital gain can benefit from deferred taxation when it contributes to a new vehicle. In line with the expectations of practitioners, the administration has now confirmed that the deferral should apply to the entire gain, including the portion taxed as salary. However, this may necessitate a change in the law itself.

Other questions remain unanswered at this stage, and practitioners are now awaiting the publication of the French tax administration’s guidelines, which are expected in May 2025. Specific questions remain in regard to the following aspects:

• treatment in regard to the case of employee mobility, namely the question as to how tax treaties will be articulated in regard to this new regime, and whether the gain should be considered employee income for the purposes of interpretation of the treaties; and
• interaction with other tax provisions, namely how the new tax regime for management packages will interact with other existing tax provisions, such as the exit tax.

Conclusion

This new regime allows companies issuing instruments to be clear regarding social security contributions and allows employees and executives to more easily place themselves within a legal regime without the risk of requalification in case of a tax or social audit. However, it has certain limitations, particularly in the case of reinvestments. It leaves some uncertainty regarding its scope of application by maintaining the reference to the French Administrative Supreme Court’s case law to assess the link with the relevant functions. The French tax authorities’ guidelines that are due to be published in May should bring more clarity and comfort.