How a new law will help French companies become more competitive in the international job marketplace.

One way international employers compensate their employees is by giving them shares in the company. Prior to the passing of the 2005 finance law in France on 1 January 2005, French companies weren't permitted to use this means of compensation and therefore were unable to compete with companies who use this popular payment method.

For example, before 2005, an American company with headquarters in the US could give employees in their French subsidiary free shares whereas their French-based counterparts could not give free shares to employees in France or in subsidiaries elsewhere; because organisations prefer to own and therefore control their subsidiaries fully, shares are only granted on a company's central office.

The new law provides both a legal and tax framework for the granting of free shares by French companies to its employees, which will allow companies to become more competitive in job marketplace. 

Lower tax on social security contributions

Now, following a plan that satisfies the conditions of the new law, local staff and French expatriates will be exempted from social security payments on the value of the share. Inpatriates, who mostly remain on their companies' global pay scheme, will also be taxed at a lower rate. This is clearly an incentive for both employee and employer as social security contributions are high in France.

The tax incentive mirrors the advantages available for qualified stock option plans. Employees save up to 20 percent on their social security payments and the employer up to 50 percent. Furthermore, the benefit is subject to income tax at a rate of 41 percent (rather than marginal rates up to 48.09 percent), which is deferred until the date of share sale.

Qualified free share plans

When applying the new law to share grants by non-French parent companies to employees of the French subsidiaries, we discovered through working with some of our US- and UK-based clients that their 'restricted deferred share' and 'unit plans' can be adapted to 'qualified free share plans' under the new legislation.

The qualified free share plan can be either a discretionary or collective plan, keeping within the same parameters as its predecessor: the qualified stock option plan.

The shareholders need to provide authorisation, valid up to 38 months, to the board of directors to adopt such plans. They also need to determine the percentage of share capital over which such free shares may be granted without exceeding 10 percent overall.

Finally, the new law requires that the qualified free share plan provides for a minimum two-year vesting period supplemented by an additional sale restriction period of a minimum of two years. While there are other legal requirements, the board of directors retains a large scope of discretion in determining the beneficiaries, and other conditions governing the free share grant such as performance conditions.

An attractive alternative to stock options

Free shares are becoming increasingly popular and many global companies have followed the Microsoft policy, announced on 8 July 2003, to move away from stock options to a broad-based restricted stock programme comprising free shares. As well as diluting a minimal amount company capital, free shares are considered less volatile and thus comprise a dependable element of executive compensation.

This is a golden opportunity for global companies based in France to offer compensation packages, ensuring lower costs for both the employees and companies.

May 2005

Christina Melady is a senior manager, individual tax - global equity at Taj, an independent French tax and law firm serving clients—in coordination with Deloitte tax professionals—outside of France.  She can be contacted by telephone at +33 (0)1 40 88 29 85 or email (cmelady@taj.fr).

Subject: Taxation