Macron Law: New Opportunity to Award Free Shares to French Resident Employees in a Tax-favourable Way

Caught in the French fiscal storm which struck stock-options, free shares had become less and less appealing for both employers and employees. Now that the storm has passed, the Macron law may bring back the appetite of companies for this incentive tool.

Originally very favourable when it was introduced in 2005, the free shares' regime provided for a full exemption from social security contribution for the employer and a fixed rate of 41 per cent (including social contributions) for employees levied on the "gain on acquisition" (equal to the market value of the shares on the date of vesting of the award).

The tax benefits for employees had however decreased over the years, in particular with the creation of a specific employee contribution (which rate rose to ten per cent). The cost to issue free shares had on the contrary drastically increased. A sui generis employer social contribution was also created (which rate eventually rose to 30 per cent) and this was notably payable within the month following the grant of the award and was not refundable, even if the award never effectively vested.

Free shares eventually ceased to benefit from a fixed tax rate and the gain on acquisition became subject to the normal sliding scale of personal income tax (at rates of up to 45 per cent) for awards made on or after 28 September 2012.

With free shares being subject to social contributions, taxed as additional employment income and subject to a non-negligible formalism, employers and employees alike had lost interest in this type of instruments.

The tax and social security advantages of the "Macron Free Shares"

The so-called Macron law intends to render free shares once again attractive. It was published in the official gazette of 7 August 2015 and the new free shares regime it introduces will apply to awards of free shares authorised by shareholders after the enactment of the law. For awards made under foreign plans which do not require shareholder approval under local laws, it should apply to plans adopted by the relevant corporate bodies after 7 August 2015.

For employers:
The rate of the employer social contribution is reduced from 30 to 20 per cent and is only due at – and subject to – vesting of the free shares.

The positive effect is that this social contribution will only be due if the participants effectively acquire the free shares. If the vesting of the award is subject to performance conditions, the contribution will not be due if these conditions are not met. The downside is that the effective cost of the awards for employer will be uncertain at time of grant because the employer contribution will be assessed on the market value at vesting. In case of significant increase in the market value of the shares between grant and vesting, the actual cost may be higher than under the previous regime.

For employees:
Free shares will no longer be subject to the ten per cent employee social contribution.

In addition, the "gain on acquisition" (equal to the market value of the shares on the date of vesting of the award but taxable only at time of sale) will now follow the same tax regime as the "gain on sale" (equal to the difference between the sale price and the market value of the shares on vesting). As a consequence, on sale of the shares, the employee will be subject to the normal sliding scale of personal income tax, at rates of up to 45 per cent (excluding the exceptional contribution on high earners), levied on the sale price of the shares. The basis of assessment of the income tax may however be reduced by 50 per cent if the employee effectively holds the shares for at least two years after vesting and by 65 per cent if the shares are held for at least eight years.

Social contributions, levied at a rate of 15.5 per cent (out of which 5.1 per cent is deductible from the basis of assessment of income tax due in respect of the year during which such social taxes are paid) will continue to be due on the total gain, without any reduction.

This preferential tax and social security regime will apply provided the award is made in accordance with the provisions of the French Commercial Code and specific disclosure requirements are fulfilled.

In practice, the difference between the tax treatment applicable before the Macron law and the one applicable after may be summarised as follows:

The requirements of the French Commercial Code

The above regime applies to free shares granted under French plans and also to free shares granted under foreign plans provided that they fulfil the requirements of the French Commercial Code. If changes to the foreign plan are required to make it compliant with the requirements of the French commercial code, these would generally be embodied in a sub-plan.

The main requirements of the French commercial code, as interpreted by the French tax authorities, are summarised below. Except for the duration of the vesting and holding periods, these have not been significantly amended by the Macron law.

1. The foreign company making the grant must be comparable to a société par actions (i.e. a société anonyme, a société par actions simplifiée or a société en commandite par actions). The French tax authorities have indicated in their guidelines that it is not possible to draw up a list of foreign entities that compare to sociétés par actions – a case by case analysis therefore needs to be performed to determine whether or not a foreign company making a grant is comparable to a société par actions. In practice, a foreign company which is listed on a regulated stock exchange should be comparable to a société par actions.
2. The French tax authorities have specified that the shares to be allocated upon vesting may be preferred shares, provided however that they constitute actual equity rights with no guaranteed return.
3. The company awarding the free shares must hold, directly or indirectly, at least 10 per cent of the share capital or voting rights of the company employing the French resident participants. Where the issuing company is listed, however, it may also grant free shares to employees and officers of both its parent and sister companies.
4. An individual participant cannot hold more than ten per cent of the share capital of the company making the award at the time of grant and the award itself cannot result in that participant holding more than this percentage.
5. The total number of free shares awarded can generally not exceed ten per cent of the issuing company's share capital (15 per cent if the company is an unlisted small- or medium-size company within the meaning of EU law).
6. Shares transferred to the participants may either be newly issued shares or reacquired shares – if reacquired shares, the company making the grant must repurchase its own shares prior to the date on which it is intended that the shares be transferred to the employees.
7. Awards of free shares cannot vest, i.e. the ownership of the shares cannot be transferred to the French resident participants, before the expiry of one year from the date of grant of the awards, save in certain cases such as death or total and permanent disability, provided, in this last case, that early vesting has been authorised by shareholders. If the vesting period is shorter than two years, a holding period of the shares must also be imposed so that the cumulated vesting and holding period is at least equal to two years.
8. Shares must be transferred to the employees without any cash consideration, it being noted that if they are required, under a foreign plan, to pay a nominal amount for the shares, this should not jeopardise the benefit of the favourable tax regime as long as this amount is not significant (i.e. less than five per cent of the market value of the shares according to the French tax authorities).
9. During the vesting period, beneficiaries do not benefit from shareholder rights so that they cannot, during this period, be entitled to dividends even under the form of a bonus of an equivalent amount or by way of a deferred payment at time of vesting. Grants made under foreign plans providing for the payment of "dividend equivalents" should thus, according to the French tax authorities, not benefit from the preferential tax treatment.
10. Heirs of a deceased participant are entitled to require during the six months following the participant's death that the awards be transferred to them. Heirs are entitled to immediately sell the shares, without complying with any holding requirement.
11. If the issuing company is listed on a regulated market, closed windows must be imposed during which the shares cannot be sold by the employees: (i) within the ten market days preceding and the three market days following the date on which the accounts of the company are made public; and (ii) during the period between the date on which the corporate bodies of the company granting the shares are made aware of information which, if made public, could have a significant impact on the market price of the shares, and the date which is ten market days after the date on which such information is made public. These requirements also have to be met for shares awarded by foreign companies unless local law already provides for closed windows which, without matching exactly those of the French commercial code, offer comparable protection.
12. If the share capital of the company granting the award is modified during the vesting or holding period, the awards may be adjusted in order for this change to be neutral for the participants, provided that such adjustment has the sole purpose and consequence of preserving the rights of the participants and that additional shares which could be issued as a result remain subject to the same requirements (including the vesting period and the holding requirement) as those applying to the original award.

The French Commercial Code also defines a formal procedure to be followed by companies for the grant of these awards, involving a decision of the extraordinary shareholders' meeting, which must define the proportion of the share capital which may be awarded and the vesting and holding periods, and which then authorises the board of directors to determine the other conditions of the awards and to actually make the grants during a period which cannot exceed 38 months. The French tax authorities have specified in their guidelines, that this formal process could be adapted to take account of the foreign company's own legislation. In practice, for awards made by foreign companies, the authority to grant free shares must be given and the actual awards made by the relevant corporate bodies of the foreign company which are entitled to do so under local law. As regards the authority given by the relevant corporate body to make awards, it may be granted for a duration longer than 38 months provided that it is given for a determined and reasonable time period. In this respect, the French tax authorities confirmed that an authorization given for a 76-month period is considered as reasonable. The French tax authorities also consider that a longer duration is acceptable where the issuing company is subject to laws which offer guarantees similar to those offered under French commercial laws in terms of shareholder protection and transparency of the board. Companies which are subject to the US Securities Exchange Act of 1934 and whose shares are listed on the NYSE or NASDAQ are deemed subject to such laws.

Grants to corporate officers

French law limits the cases where corporate officers, who do not have an employment contract, can be awarded free shares.

Only a defined list of officers can receive free shares. This list includes the chairman of the board of directors (président du conseil d'administration), the chief executive officer (directeur général), the deputy chief executive officer (directeur général délégué), the members of the management board (membres du directoire) and the manager of a joint-stock company (gérant d’une société par actions). Furthermore, the French tax authorities have indicated in their guidelines that an individual who is the President of an SAS should be regarded as an officer entitled to receive free shares.

Additionally, a specific holding period is imposed on officers. Where an officer has received free shares, the board must prohibit the sale of all or some of those shares for as long as the officer holds his office. However, the French tax authorities specified in their guidelines that this rule only applies to officers of the issuing company and would thus not apply to officers of a French subsidiary receiving shares of the foreign parent company.

Finally, when officers hold their corporate office in a French subsidiary or branch of the issuing company, a grant of free shares will only be possible if the issuing company is listed and meets one of the following conditions: (i) all its employees and at least 90 per cent of the employees of its subsidiaries or branches receive qualifying free shares or stock options; or (ii) an employee profit sharing plan offering benefits above the minimum required by law is in place at the level of the company and benefits at least 90 per cent of the employees of its subsidiaries. In its guidelines, the French tax authorities indicate that this restriction also applies to foreign companies granting free shares to officers of their French subsidiaries although only employees of French subsidiaries and branches will be considered. Accordingly, grants of qualifying free shares can be made to officers of a French subsidiary if at least 90 per cent of all employees of the group's French subsidiaries or branches receive qualifying free shares or options or benefit from an improved profit sharing plan.

These rules being complex, specific care must be taken when a company wants to grant free shares to corporate officers.

Disclosure requirements

Specific disclosure requirements are imposed on the employer.

The employer notably has to issue, following the date of vesting, an individual statement for each employee having acquired shares and send such statement to the employee. This statement has to be sent by March 1 of the year following vesting.

Information relating to the awards must also be reported by the employer on its annual wages declaration (DADS) to inform the URSSAF. Failure to do so would result in regular employer and employee social security contributions applicable in relation to employment income being payable by the employer.

Withholding requirements

There is no withholding obligation for the employer, except for income tax when the employee is not a tax resident of France. Income tax must be withheld at the time of sale of the shares by the individual, if he or she has become a non-resident of France at the time he disposes of the shares. The withholding tax only applies to that portion of the sale price which corresponds to the "gain on acquisition" which is regarded as being "from French source". The French tax administration has issued guidelines explaining how the gain "from French source" must be determined when the individual has transferred his residence between grant and vesting.

The obligation to withhold falls on the person/entity "which distributes to the employee the proceeds of the transfer of the shares acquired via the plan". According to the guidelines published by the French tax administration this would be either the company if the plan is managed internally, the broker which the company has designated to administer the plan or the broker which holds the employee's share account.