In three decisions issued during a plenary session on 13 July (1), the French Conseil d’Etat, the highest administrative Court, specified the conditions for the taxation of earnings resulting from the attribution of share purchase warrants (“BSA”) or share purchase options when such earnings result from the interested party’s status as an officer or employee.
This is relative to earnings resulting from mechanisms that are not provided for under law and for which there is, therefore, no legal framework. Accordingly, the tax court judge must determine the nature of the earnings made, ask himself whether they are in consideration of the concerned party’s position as an officer or employee of a company and if they are sourced from such position.
For this purpose, indicators relative to the nature of the earnings can be identified in (i) the financial conditions for the acquisition of the share purchase warrants or options and (ii) the procedure for obtaining the earnings gained during the sale of such warrants or options.
Indicators provided by the financial conditions for the acquisition of share purchase warrants or options
The acquisition price of share purchase warrants or options may reveal an advantage granted to the employee during their acquisition. Hence, as the French Conseil d’Etat specifies: “the circumstances in which share purchase warrants or share purchase options have been acquired or subscribed at a preferential price compared to their actual value on the date of such acquisition or subscription will reveal whether there is the existence of a competitive advantage in the difference between the price paid and such value“.
It is only if the origin of this advantage is to be found in the beneficiary’s activity as an officer or employee of a company that income tax may be applied under the category “benefits and salaries”. The French Conseil d’Etat concludes: “When the origin of such an advantage is to be found in the interested party’s position as an officer or employee, it is considered as a benefit awarded in addition to salary, taxable during the year of acquisition or subscription of the warrants or options under the category “benefits and salaries” according to articles 79 and 82 of the French General Tax Code“.
Hence, to tax the earnings as salary, the administration must prove (i) that the acquisition price constitutes an advantage compared to the actual value of the share purchase warrants or options and (ii) that the origin of this advantage lies in the interested party’s position as an officer or employee.
The earnings made when the options or share subscription warrants are exercised may also reveal such an advantage. Therefore, the French Conseil d’Etat decided that the difference between the actual value of the shares at the date of exercise of the options and their purchase price (increased by the amount paid to acquire the warrants or options) constitutes an advantage that is taxable under the category “salaries” when its origin lies in the interested party’s position as an employee.
Indicators revealed by the procedure for obtaining the earnings gained during the sale of such warrants or options
The French Conseil d’Etat recalls in its three decisions that the earnings made from the sale are, on principle, taxable under the capital gains regime. This regime is applied:
– inclusive of when the warrants were acquired from a company in which the taxpayer was an officer or employee;
– when the initial acquisition price was modest or the risk born as an investor weak.
Nevertheless, the French Conseil d’Etat provides for an exception to this principle when the gain on sale is acquired in exchange for the interested party’s exercise of his functions as an employee or officer of the company and not as an investor.
Two illustrations of indicators allowing us to determine the nature of the earnings were provided by the aforementioned decisions, namely:
– the case in which the sale price of the warrants is guaranteed from the beginning (case n° 437498) ;
– the case of an LBO, when bearing in mind the terms of the various legal documents, the earnings made from the sale correspond to a share of future capital gains provided to the officer by shareholders (case n° 435452).
Hence, these three decisions clarify prior jurisprudence without providing a response to all possible queries.
(1) French Conseil d’Etat plenary session. 13 July 2021 n° 428506, 435452 et 437498.