Subject to possible censure by the French Constitutional Council, Article 25 bis of the 2025 Finance Law introduces a new taxation regime applicable to gains made by employees and directors on securities subscribed to or acquired in connection with their function within the company or a group company.
The decisions of the French Supreme Court (« Conseil d’Etat”) on July 13, 2021, established the principle that management package gains should be taxed as salaries when they primarily arise from the exercise of director or employee functions, rather than as capital gains. Without claiming to be exhaustive, the French Supreme Court had proposed a guideline to determine whether the gains had the nature of a salary or not.
However, these decisions did not eliminate uncertainties about the French tax and social qualification of gains, particularly due to the variety of investment schemes offered to shareholder managers. Legal insecurity persisted due to the difficulty in distinguishing what constitutes capital gains (currently subject to a flat tax of 30%/34%) and what would constitute income taxable as benefit in kind (i.e. as salaries) (up to 45%/49%).
The legislator’s stated aim is to “clarify the applicable law regarding investment plans for directors and employees.” This regime will apply to capital gains realized from the day after the law is promulgated, which includes sales occurring from the effective date of the 2025 Finance Law, provided that such an immediate application would not deprive shareholder managers of the legal guarantees conferred by the current legislation.
Scope of the Law
- All types of securities will be concerned (ordinary shares, preference shares, warrants, etc.), whether they are paid, free, issued within a French qualified plan or not.
- The securities must have been acquired or subscribed by employees or directors in connection with their functions within the group.
- Irrespective of whether the securities are held directly or indirectly.
Tax and social scheme
The law specifies the conditions under which the « net gain » will be taxable, on the one hand, as capital gains and, on the other hand, as a remuneration.
The tax regime of the net gain will depend on a certain limit, defined as three times the ratio between the « actual value » of the issuing company at shares sale and its “actual value » at acquisition/subscription.
Below this limit, the gain will be considered a capital gain, and therefore taxed at a maximum rate of 37.2%, provided that:
- The securities sold have been held for at least two years, and
- The securities present a risk of loss of their acquisition or subscription value.
Beyond this limit, the gain will be taxed as a salary up to 49% income tax. However, this fraction of the gain should be exempt from employee social security contributions, but would be subject to a new tax employee contribution of 10%, resulting in a maximum rate of 59%. This exemption will be limited in time to sales made before December 31, 2027.
It should be noted that the PEA exemption does not apply to capital gains under this new regime. From the effective date of the law, the securities concerned by this new regime cannot be acquired or subscribed through a PEA.
Expert Opinion
The technicality and innovation of the tax and social legislation defining this new regime will necessarily lead the tax administration to position itself on the articulation between these texts and other applicable legislations, as well as on its compatibility with the principles established by the French Supreme Court decisions of July 13, 2021. Given the remaining gray areas, it is necessary to assess the impact of this new regime on each investment scheme implemented before the effective date of the 2025 Finance Law.