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The tax regime applicable to capital gains on the disposal of securities

The Draft Budget Bill for 2018 will have a profound impact on the tax regime applicable to capital gains on disposals of corporate securities, shares allocated for free or shares acquired through exercising BSPCEs (“Bons de souscription de parts de créateurs d’entreprises”, or founder warrants). Conversely, the tax regime for capital gains on the disposal of shares acquired through the exercise of stock options remains unchanged. In view of the date of entry into force of certain provisions, it is advisable to either take the necessary steps before 31 December 2017 or else defer certain decisions until next year.

Taxation of capital gains on the disposal of securities

As things currently stand, capital gains on the disposal of corporate securities or shares are taxed (i) on the basis of the progressive scale of income tax, to the marginal rate of 45%, (ii) on the basis of the contribution on high incomes to the marginal rate of 4% due by singles whose income exceeds €250,000 and couples whose incomes exceed €500,000, and (iii) on the basis of social contributions (15.5%). The CSG (“Contribution sociale généralisée”, a social security contribution levied on virtually all sources of income) is deductible up to 5.1%.

A rebate applies to the capital gains tax base, whose rate depends on both the nature of the company whose securities are sold and on their length of ownership:

  • The standard rate amounts to 50% where the transferred securities were held for at least two years and less than eight years, and 65% if they were held for at least eight years;
  • Subject to compliance with certain conditions, increased rebate rates applicable to the sale of securities of SMEs “younger” than ten years are of 50% where the securities were held for at least 1 year and less than 4 years, 65% where the securities were held at least 4 years and less than 8 years, and 85% where the securities were held for at least 8 years.

Article 11 of the draft budget bill for 2018 provides for:

  • a taxation of capital gains at a flat rate of 30%, including 17.2% social security contributions and contributions on high incomes at a marginal rate of 4%. The CSG will not be deductible. Thus, the effective marginal capital gains tax rate will be 34%;
  • the possibility of opting for a capital gains tax based on the progressive scale of income tax. In this case, on the one hand, the taxable capital gains can be reduced by the rebates applicable according to the period of ownership mentioned above, provided that the transferred securities are acquired before 1 January 2018 and, on the other hand, the 6.8% CSG will be deductible in full or in part from the taxable income.

The Government plans to adopt a provision enabling sellers who opt for the capital gains regime applying the progressive scale of income tax to enjoy a €500,000 rebate, applicable only once.

These provisions will apply to the sale of securities carried out from 1 January 2018.

It may therefore be more worthwhile to subscribe or acquire securities of companies before 31 December 2017, rather than from 1 January 2018, to be able to choose at the time transfer between a flat rate tax or a progressive scale income tax.

Taxation of gains on the sale of shares granted for free

In the current state of legislation, gains realised by beneficiaries of shares granted for free in accordance with the provisions of articles L 225-197-1 to L 225-197-3 of the French Code of Commerce break down into gains on purchase and capital gains on sale:

  • Gains on purchase is the value of the stock on the date on which it was acquired by the beneficiary;
  • Capital gains on sale is the difference between the sale price and the value of the shares on the date on which they were acquired by the beneficiary.

Gains on purchase is taxed as a salary or wage, based on the progressive scale of income tax, for portions exceeding an annual amount of €300,000. Those portions that are not greater than this amount are taxed as capital gains and rebates apply, whose rate depends on the length of ownership of the disposed shares, which runs from the date the shares were acquired rather than from the date they were granted.

A 10% salary contribution is payable by the beneficiaries for the gain on purchase portion exceeding €300,000.

The capital gains on sale is taxed as such, i.e. using the progressive scale of income tax following application of a rebate whose rate depends on the length of ownership of the shares, running from the date the shares were acquired.

The beneficiaries’ employer must pay a 30% employer contribution based on the actual value of the share at the time of its acquisition by the said beneficiaries.

Article 11 of the Draft Budget Bill for 2018 provides that:

  • the portion of the gain on purchase that does not exceed an annual amount of €300,000 will be taxed using the progressive scale of income tax, following application of a 50% rebate. The CSG will be partially deductible up to 6.8%;
  • the portion of the gain on purchase that exceeds an annual amount of €300,000 is taxed in full as a salary or wage, using the progressive scale of income tax;
  • the capital gains on sale will be taxed in line with the conditions mentioned above, i.e. a 30% flat rate and a 4% contribution on high incomes. The CSG is not deductible. The beneficiary may opt for taxation based on the progressive scale of income tax, and in this case, the CSG will be partially deductible up to 6.8%.

The employer’s contribution, based on the real value of the shares at the date of acquisition by the beneficiaries, could be reduced to 25%, down from the current 30%.

Salary contributions would remain at 10%, payable by the beneficiaries for the portion of the gain on purchase exceeding an annual amount of €300,000.

These provisions would apply to allocations approved by an extraordinary general meeting decision subsequent to the publication of the Budget Bill for 2018.

Taxation of gains on the sale of shares acquired through exercising BSPCE’s

Gains realised by BSPCE beneficiaries equate to the difference between (i) the sale price of the shares acquired through exercising BSPCEs and (ii) their acquisition price, equal to the exercise price. This gain is taxed differently depending on whether, at the time of share transfer, the beneficiary carried out his or her activity in the issuing company or its subsidiary for more or less than three years.

The legislation currently states that:

  • gains are taxed at a 34.5% flat rate, including 15.5% social contributions where, at the time of transfer, the beneficiary had carried out his or her activity for at least three years in the issuing company or its subsidiary. The CSG is not deductible, and no rebate for length of ownership is applicable to capital gains;
  • gains are taxed at a 45.5% flat rate (30% + 15.5%), where, at the time of transfer, the beneficiary had carried out his or her activity for less than three years in the issuing company or its subsidiary. The CSG is not deductible, and no rebate applies.

Article 11 of the Draft Budget Bill for 2018 provides that:

  • gains realised by beneficiaries who have exercised their activity in the issuing company or its subsidiary for at least three years at the time of sale will be subject to taxation at a 30% flat rate, including 17.2% social security contributions, and to a 4% marginal rate contribution on high incomes. The CSG is not deductible. The beneficiary may opt for taxation based on the progressive scale of income tax, and in this case, the CSG will be partially or fully deductible up to 6.8%;
  • gains realised by beneficiaries who have exercised their activity in the company for less than three years at the time of sale will be taxed based on the progressive scale of income tax, as a salary or wage.

This new tax regime would be applicable to BSPCEs awarded from 1 January 2018.

Taxation of capital gains on the sale of shares acquired through exercising stock options

The Budget Bill for 2018 does not impact the regime currently applicable:

  • The rebate awarded to beneficiaries that exceeds 5% of the share value at the time of allocating stock options is still taxed based on the progressive scale of income tax in the year the stock options are exercised;
  • The allocation gain, equating to the difference between (i) the value of the share at the time the stock options are exercised, and (ii) the exercise price of the stock options, remains taxable in full using the progressive scale of income tax;
  • The capital gains on disposal, equating to the difference between (i) the sale price of the shares acquired through exercising the stock options and (ii) the value of the shares at the time of exercising the stock options, will be taxed at a 30% flat rate, including 17.2% social security contributions, and a 4% marginal rate contribution on high incomes. The CSG is not deductible. The beneficiary may opt for taxation based on the progressive scale of income tax, and in this case, the CSG will be partially or fully deductible up to 6.8%;
  • The 30% employer’s contribution, based either on the fair value of the stock option or on 25% of the value of the share, remains due by the beneficiaries’ employer at the time the stock options are allocated;
  • The 10% salary contribution based on allocation gain also remains due by the beneficiaries at the time of share disposal.

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Subject to the amendments that may be adopted during the parliamentary session:

  • it seems preferable to subscribe or acquire corporate securities before 31 December 2017 to be able, at the time of transfer, to choose between a flat rate tax on capital gains or the progressive scale of income tax after application of a rebate whose rate depends on the length of ownership of the transferred securities;
  • any free allocation of shares should be deferred to next year in order to pay a 25% employer contribution (instead of 30% until the end of 2017);
  • there appears to be no difference in allocating BSPCEs before or after 31 December 2017; and
  • the allocation of stock options remains the most expensive solution for beneficiaries.