New free shares acquisition gain regime (so-called “Macron II” regime)
The free shares tax and social regime has been modified by the 2018 Finance Tax Act (adopted on December 30th, 2017). This new regime (so-called “Macron II”) only applies to awards authorized after the enactment date of the new legislation (as from December 31st, 2017)
The new Macron II regime has implemented the following changes:
- A decreased employer social contribution at a fixed 20% rate due at vest instead of a 30% fixed rate for awards authorized after December 30th, 2017 (formerly 20% also for awards authorized between August 8th, 2015 and December 30th, 2017). On the contrary, non-qualified awards are subject at vest to regular social security contributions ranging between 47% and 26.5%;
- A flat 50% taper relief on the portion of the acquisition gain below EUR 300,000 for income tax purposes regardless of the holding period of the shares; taxation remains at share sale;
- A flat tax of 30% for any capital gains derived from sale of equity shares, including social surtaxes;
- No requirement to hold shares if the length of the vesting period is of at least 2 years;
- In most instances, shares retained will fall out of the new wealth tax regime which is limited to certain real estate assets.
This is a welcomed news for companies granting qualified awards for cost efficiency and for companies to consider shifting between non-qualified and qualified schemes given a simplified administrative process as qualified awards fall out of the scope of the withholding tax mechanism that will be applicable for residents as of January 1st, 2019 as opposed to non-qualified awards. The implementation process has been clarified by the tax authorities BOFiP from June 2017 for awards authorized by the corporate bodies of non-French companies.
Taxation of investment income and capital gains: now subject to a 30% flat tax
As from January 1st, 2018 (2018 Finance Tax Act), a 30% flat tax (so-called “Prélèvement Forfaitaire Unique” or “PFU”) replaces all current different tax regimes for investment income. The rate includes 12.8% of income tax and 17.2% of social surtaxes.
The 30% flat tax applies, among other types of income, to dividends and capital gains. French-source investment income will be subject to withholding at source, with the tax withheld by the payer if the payer is in France. Note that taxpayers with investment income paid outside of France will be personally responsible for monthly filing and payment, unless tax was withheld by the payer. The withholding and monthly filing/payment rules apply as from January 1st, 2018.
Employer with employee share schemes (qualified and non-qualified) should anticipate and engage to ascertain whether withholding can be implemented by their share plan administrators and in any event manage communication and expectations of share plan participants.
Implementation in 2019 of french income tax withholding for residents
A major change to how France collects tax will take place on January 1st, 2019. To date, French resident taxpayers have paid their income taxes with a one-year lag. Tax is payable upon an assessment issued by the tax authorities to the individual in the year following the tax year. As from 2019, almost all types of taxable income will be subject to current-year withholding, and employers need to prepare for this change.
Note that individual withholding tax rates will be applicable to non-qualified schemes rolled in France hence this will impact sell to cover/net settlement process. Qualified schemes are however currently out of the scope of the French income tax withholding for French tax residents.
As French taxpayers currently pay their income taxes in the following year, certain income realized in 2018 and in principle taxable in 2019 will benefit from a tax credit to avoid taxpayers having to pay in 2019 taxes on 2018 and 2019 income. This will be heavily scrutinized by the French tax administration and should not concern share-based payments.
No sourcing of social security charges due on the acquisition gain of non-qualifying free shares
The 2017 Social security Finance Act had brought uncertainty on a potential sourcing of social security on non-qualified equity acquisition gains. A recent French circular dated December 19th ,2017 detailing notably the interpretation of the social authorities tends to confirm that the law does not intend to introduce a sourcing of social security charges and that consequently French social security remains due only if the employee is liable to French mandatory social security at the taxable event (all or nothing approach). As usual, a case by case analysis should be conducted in case of conflicting situation.
Steps to follow/recommended actions
French companies or subsidiaries of foreign companies making qualified awards should review ahead of coming awards their process to secure eligibility to the decreased employer contribution at 20% at vest.
Companies rolling non-qualified schemes in France should reconsider their practice and assess whether the advantages of qualified schemes outweigh their non-qualified awards practice considering the simplified implementation and administrative process of the new Macron II regime and its tax efficiency in France.
All companies rolling qualified and non-qualified share schemes in France should review their compliance process given multiple changes that occurred recently and which will occur in 2018 and 2019.