France Proposes Changes to Tax Laws for Stock Options
(Sunnyvale, CA)- The French government has tabled a draft finance bill, which if passed, would affect the taxes applicable to stock options and also to income from dividends.
The proposed changes, if implemented, would be applicable to qualified stock options and free shares awarded on or after September 28, 2012. The awards made prior to this date, however, will stay under the existing tax system. Other proposed changes include the new 18 % rate of tax on income which will be applicable on income derived since January 1, 2012, and certain other changes like progressive taxation on capital gains will apply 2013 onwards.
Draft of French Finance Bill: Proposed Major Changes
- Hike in income tax rates for any type of income from equity whether qualified or non-qualified:
- Marginal income tax increased from 41 % to 45 %.
- The additional exceptional contribution on high income from 2011, increased from 3 % to 4 %, will be on top of the 45%.
- On incomes exceeding 1 million Euros, a special tax of 18 % will be levied, increasing the tax burden to 75 %. However, the special tax will not apply qualified awards which are subject to employee social contribution and are made on or after 16 October 2007.
- For employees who have not met the holding period requirement, the social charge contribution is increased to 22.5 % from 17.5 %. This will increase total employee social charges to 30.5 %.
- Progressive income tax on dividend starting from January 1, 2012. The maximum rate including CSG and social surtaxes will amount to 42.5 %.
- Capital gains will also be taxed under the progressive income tax rates ranging from 20 % to 40 %, however, the gains in 2012 would be taxed at flat rate of 39.5 %.
- Progressive income tax rates will also apply to acquisition gains awarded under qualified plans on or after 28 September. Following are the details:
- The progressive rate will replace existing flat tax rates of 18 %, 30 % and 41 %.
- The employee contribution will be increased to 17.5 % from 10 %.
- However, total employee social charges will not be impacted because of decrease in the social surcharges (CSG and social surtax) from 15.5 % to 8%.
- Acquisition gain is levied on exercise or on the share value at vesting.
- In case, the holding period requirement is not met, there will not be additional social tax charge and employer will be liable to pay the social tax paid at grant.
Draft of French Finance Bill: No Changes
- There are no proposed changes to the benefits availed by new awardees from deferral of income and social charges till the sale of the shares.
- There is no change to the holding period given to social charges i.e., 4years for grant of options and sale of the shares and, 2 years between grant and vesting in case of free shares, and 2 years between delivery and sale of shares remain the same.
- The rate of employer social charge of 30 % remains payable at grant. A new rate, however, will be applicable from July 11, 2012.
- Full exemption from social charges and taxation on capital gains arising on the sale of shares continue for “Start-up” company stock option plans.
Draft of French Finance Bill: Implication
Companies may need to analyze and consult specialists to understand and adjust to the proposed changes, once these changes are implemented. The impact may vary depending on various income groups of employees.
- High income earners may contemplate leaving the country to avoid the 75 % tax rate.
- Though the new planned changes to the tax and social charges rates decrease financial implications between qualified and non-qualified plans, however, using qualified plans may still be lucrative.
- For majority of cases, the basis the rate that is applied may be optimized by using particular valuation at grant of options and awards.
Therefore, companies doing business in France must pay special attention to estimate the effect of global mobility of employees on tax of equity income. For more information about France taxation laws or organizations expanding business in France please call or email us.
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Published: December 14, 2012. The information provided on this page is intended merely to highlight issues for general information purposes only. It is not comprehensive nor does it provide legal advice. Any information is subject to change without notice. No liability whatsoever is accepted by Nair & Co.