Multinationals that offer stock options or restricted shares — to either expats or French employees — need to understand how France taxes these forms of equity compensation. Anne Vaucher and Christina Melady Morin of Deloitte & Touche explain.

France, with its high level of income tax (top marginal rate 49.58 percent) and social charges (about 20 percent for the employee and up to 50 percent for the employer), is a country that requires specific attention in planning for equity compensation.

Stock options

Favourable tax rates and exemptions are available for stock option income. For example, for options granted after 27 April 2000, there is:

• Total exemption from social security charges for the employee, increasing net-in-pocket, and also for the employer, reducing costs.
• A flat rate income tax for employees of 26 percent or 40 percent (above threshold).

In order to benefit from the favourable rates, the plan needs to respect conditions for “qualification”; and the beneficiaries need to satisfy holding periods. Almost all French-based plans are designed to "qualify" and impose satisfaction of holding periods on the beneficiaries.

Non-French based plans can benefit from similar treatment with slight amendments to the rules applicable to beneficiaries who are French tax resident. Our clients are often relieved to learn that this process requires neither official procedure nor correspondence with any government authorities.

The largest obstacle for non-French companies is in tracking the share sale date when the beneficiary exercises options and holds onto the shares. This is due to the taxable event being the share sale date, necessitating reporting and social security withholding where the holding period is not respected.

To reduce costs (ie, obtain exemption from social security charges) and facilitate reporting, we recommend to our non-French clients (employers) imposing contractually in respect of the holding periods.

As such, this requirement may in some cases go against company policy of a unique global plan, and about half of our clients choose to impose the French tax specific holding period, with the other half leaving the choice with the option beneficiary.

While definitely some effort is required in redrafting and managing the qualified plan in France, it would be a pity not to avail oneself of such significant savings.

Most non-French-based companies have come to the same conclusion and have either adapted, or are in the process of adapting, their plans for France.

Additional complexities arise in the context of international assignments. For international assignees into France, their options are most probably granted under the global plan instead of the French specific plan. Consequently, a risk exists that option income realised in France will not benefit from the favourable tax provisions.

Moreover, as stock options are part of the tax-equalised package, assignees are often not sensitive to the French holding periods. When share prices are high, the result is significant stock option gains for employees with even more significant costs for the company in tax equalisation.

One solution is to request that assignees respect tax favourable holding periods. Such requests, however, may require companies in exchange to protect employees from falling share prices, certainly a difficult decision for management to make.

The good news with respect to assignees in France is the fact that they are exempt from the expensive French social security charges.

For French employees assigned outside of France, it is important to ascertain whether they are equalised (not always the case) and whether stock options are part of the equalisation package. Lack of clear policy may lead to individual case-by-case negotiations.

French employees remaining within the protective French social security system will need to respect the French holding periods for social security exemption, even though tax resident outside of France.

Restricted shares and units

The recent growing popularity of restricted shares and units as an alternative to stock options is not, to great dismay, matched with any favourable tax or social security provisions in France.

The major probable rationale behind the lack of any specific legislation for restricted shares at all (let alone tax incentives) is the fact that French company law does not, generally speaking, provide for free share grants as a part of equity compensation.

We have seen many French employees of international companies granted free shares and fail to understand the reason for implementing a type of equity compensation that bears the full cost of high income and social security taxes.

Such employees often compare their equity packages with those of their French-based company counterparts, who are more likely to receive stock options or other specific equity compensation (see below).

Restricted shares present even more complex issues linked to the fact that under some plans (US type plans, for example) share ownership occurs at grant, giving rise to debate as to whether taxable income arises at grant or at vesting.

Funded plans, popular in the UK via employee benefit trusts, could also trigger French social security at grant. Either income tax or social security charges at grant on unvested restricted shares can increase employee frustration, and backfire in terms of a motivation tool.

For these reasons, we recommend units over shares, which, although not allowing for any particular savings, can clearly defer tax and social security until vesting or later release date in some cases. In any event, communication is the key for delivering and managing expectations for this type of plan in France.

French-specific equity incentives

Major tax incentives exist in France for specific types of compensation tools. It is not uncommon to find such tools among compensation packages of French-based companies. A flat rate tax of 8 percent - 10 percent for employees only replaces full income tax and social security charges on the following items:

• Obligatory profit sharing;
• Voluntary qualified profit sharing;
• Stock option income financed through company savings plan (“PEE”);
• Free shares (or discount on shares subscribed) through increase of share capital reserved for employees adhering to the PEE;
• Employer contribution to the PEE invested in shares.

These particular French incentives should be taken into account when considering decisions on equity compensation delivered to French subsidiary employees of multinational groups.

French assignees abroad participating in these plans will expect similar favourable treatment abroad. In some cases, they will no longer be able to participate in the plans. In both cases, expectations and equalisation issues should be correctly managed prior to assignment abroad.

August 2003

Anne Vaucher is a Partner with Deloitte & Touche France. Christina Melady Morin is a Senior Manager with Deloitte & Touche France.