Tax Collection At Source reform: secure the tax treatment of “non-qualified” equity gains

The Tax Collection At Source reform (“Prélèvement à la Source” or PAS, in French), which will enter into force on January 1st, 2019, will be a game-changer for companies that award equity grants not in the scope of the French tax-favoured regime.

Indeed, it falls to employers, may they be French or foreign-based, to: (i) secure the tax treatment of “non-qualified” equity gains recognized by their employees in 2018, so that the latter may claim, where available, the Collection Modernization Tax Credit (“Crédit d’Impôt pour la Modernisation du Recouvrement” or CIMR, in French); and to (ii) ascertain whether they are under obligation to collect French Income Tax at source as from January 1st 2019.

“Non-qualified” equity gains and Tax Collection at Source: how to manage efficiently the implementation?

“Qualified” equity gains are expressly out of the scope of the Tax Collection At Source. However, “non-qualified” and “disqualified” equity gains, taxable as wages, fall into the scope of the Tax Collection At Source.

As a result of the reform, employers will become tax collectors. Indeed:

  • They must collect income tax at source not only on wages paid to employees but also on “non-qualified” and “disqualified” equity gains recognized by them 
  • They must, under penalty of law, keep confidential the personal income tax rate of each individual employee 
  • They will somehow have to manage the legitimate uncertainties and fears felt by employee because of the reform

Because of the complexity of the Tax Collection At Source, it is strongly recommended to employers that award equity grants not in the scope of the French tax-favoured regime to implement a specific procedure to process the Tax Collection At Source treatment of equity gains.

Vesting in 2018 and 2019: how to secure accurate tax treatment of the gains by the French Tax Administration?

The implementation of the Tax Collection At Source is an opportunity for diligent employers with respect to non-qualified awards (“non-qualified” plans or disqualified awards). In order to avoid paying in 2019 both income taxes relating to income received in 2018 and 2019, the French legislator created a tax credit (so-called CIMR) which is intended to apply only to “non-exceptional” income that falls into the scope of the Tax Collection At Source.

In order to secure the application of the tax credit, employers may apply to the French Tax Administration for a tax ruling on the eligibility of non-qualified gains taxable in 2018 to such tax credit (i.e. whether they are “non-exceptional”). The tax ruling procedure has been designed to reduce such uncertainty insofar as:

  • The French Tax Administration is bound by its own ruling
  • Tax treatment in 2018 can be ascertained and communicated to eligible participants
  • Withholding requirements and process can be determined for 2019 vesting.
Nicolas Meurant

Nicolas Meurant, Partner, has over 15 years’ experience providing advice to corporations and individuals in individual tax and Global equity area, in the structuring of shareholding schemes, as well as […]