The first Budget of the newly elected French Government has now been adopted by the French Parliament.
The Finance Act for 2018 (adopted and published in December 2017) includes some of Emmanuel Macron’s most significant promises of tax cuts made during his campaign; the most highly anticipated one being the introduction of a flat rate tax applicable to most investment income. With the objective of simplification, a single flat rate tax of 30% will apply on all savings and investment income and gains – interest, dividends and capital gains realised upon the transfer of shares – realised as from January 2018. The flat tax comprises personal income tax, at a rate of 12.8%, and social security contributions (CSG, CRDS and additional social withholdings), at an aggregate rate of 17.2%.
However, the 30% flat tax is not fully applicable to incentive instruments such as qualifying free shares (RSUs), stock-options and BSPCE (specific stock options for certain companies that have been incorporated for less than 15 years at the time of grant). These shall retain their specific tax treatment, at least for the gain on acquisition.
Stock options: unmodified and still in disgrace
The gain on acquisition realised by stock option holders remains subject to the normal sliding scale of personal income tax, without any tax allowance as a mere cash bonus. Qualifying stock options remain heavily taxed in France and are accordingly rarely used by French companies.
The gain on sale will remain treated as an ordinary capital gain and will therefore benefit from the 30% flat tax.
RSUs: still interesting for employers and employees
For RSUs granted on or after 1 January 2018, the tax treatment of the gain on acquisition is further amended. The taxation will continue to depend on the yearly amount of gain realised by the holder of French RSUs. The fraction of the gain on acquisition which does not exceed an annual threshold of €300,000 remains subject to the normal sliding scale of personal income tax, but after an automatic 50% reduction (applicable without any minimum holding period). The fraction of the gain on acquisition exceeding the annual threshold continues, however, to be subject to personal income tax, without any tax allowance.
For employers, the overall cost of RSUs is slightly reduced, as the rate of the employer social contribution is reduced from 30% to 20%.
The gain on sale will benefit from the newly introduced 30% flat tax. Certain managers may be able to benefit from a new specific allowance of €500,000 if they decide to retire at the time of the sale of shares acquired pursuant to free shares granted under plans enacted on or after 8 August 2015. It may also be possible for the surplus of this new allowance (if any) to be offset against the gain on acquisition.
BSPCE: still attractive to small and young companies
The tax regime applicable to the BSPCE granted after 1 January 2017 is also slightly tweaked, mainly to take into consideration the new 30% flat tax.
The net gain realised by the holder at the time of the transfer of the shares acquired pursuant to the exercise of BSPCE will be fully subject to the 30% flat tax if, at that time, he or she has worked at least three years for the company that issued the BSPCE. The new €500,000 allowance for retiring managers can be offset from the net gain realised, so as to reduce the overall taxation.
If, at the time of the transfer of his or her shares, the holder has worked for the company for less than three years, then the net gain will be subject to an aggregate taxation of 47.2% (30% of personal income tax and 17.2% of social security contributions). In that case, the net gain cannot be reduced by the new €500,000 allowance for retiring managers.
Companies granting BSPCE remain, for their part, fully exempted from any employer social contribution.