Management incentive plans in France – Finance Law for 2025

The French Finance Law for 2025, dated 14 February 2025 and published in the French Offical Journal on 15 February 2025, provides clarification regarding the nature of capital  gains derived from management incentive plans (MIPs), which had been a matter of uncertainty following the decisions taken by the French Administrative Supreme Court on 13 July 2021.

• As a reminder, the French Administrative Supreme Court had established the principle that a capital gain derived from a MIP (the “Gain”) would be taxed as employment income if this Gain was the consideration for employee functions or officer’s functions.
• The Finance Law introduces Section 163 bis H into the French Tax Code (FTC), which relates to gains from the sale of securities subscribed to, acquired by, or granted to employees or managers (the Securities) in connection with their roles as employees or managers of the issuing company of the Securities (the Company) or an “affiliate”. The definition of “affiliate” requires a shareholding relationship.
• The measure is particularly focused on schemes that enable shareholders to obtain higher returns than ordinary investors in a company (e.g., ratchet shares, sweet equity). However, it should be noted that the scope of the rules is not limited to LBO transactions and may also include industrial groups or investors involving employees in their financial investments. 

 

Taxation of the Gain as employment income

The new measure introduces the principle that the Gain on Securities realised by employees or managers in return for their functions is taxed as employment income in the year in which the Securities are sold.

The Finance Law does not specify the conditions under which a Gain on Securities may be considered to be received in return for the exercise of employment functions. It will therefore be necessary to refer to the case law of the French Administrative Supreme Court (for example the existence of good leaver/bad leaver provisions will be an indicator to consider).

A Gain exceeding three times the financial performance ratio of the Company is taxed in accordance with the normal rules applicable to employment income when the beneficiary disposes of, sells, converts or leases his securities (disposals include any rollover transactions referred to in Article 150-0 B of the FTC).

 

Taxation of the Gain as capital gains for the portion of the Gain that is less than three times the financial performance ratio of the Company

As an exception, the Gain will be taxed under the capital gains regime, up to a ceiling determined by applying a multiple equal to three times the Company’s financial performance (over the holding period of the Securities) to the price paid for the subscription or acquisition of the Securities (or, in the case of free shares, to their “acquisition value” at the end of their vesting period).

• The new measure applies to all Securities, regardless of whether they were acquired under a statutory regime (for example free shares, stock options, “BSPCE” – ie stock options for start-up companies).
• The exemption is subject to two conditions: firstly, the existence of a risk of loss, and secondly, a minimum holding period of two years for shares not governed by statutory regimes.

The tax treatment of the Gain is now based on a ratio related to the performance of the Company, which is determined as follows:

 

$3x\frac{\mathrm{Value\; of\; the\; Company\; on\; the\; date\; of\; the\; sale\; (including\; any\; rollover\; transaction)}}{\mathrm{Value\; of\; the\; Company\; on\; the\; date\; of\; acquisition,\; subscription,\; or\; allocation\; of\; the\; Securities}}$

$$

• The value of the Company is determined by the fair market value of its equity, in addition to any debts owed to shareholders or related companies. This valuation may be subject to adjustments to reflect capital operations that have occurred during the holding period of the securities. In the event of a sale of ManCo shares, the fair market value of the underlying company in which ManCo is invested should be considered.
• The Gain is calculated separately if the Securities were acquired or subscribed for on different dates. Therefore, care should be taken in the case of employee subscriptions that occur after the closing of a transaction, particularly if the instruments subscribed are different (for example ordinary shares and preference shares acquired on different dates, purchase of securities “warehoused” by a financial investor).
• The portion of the Gain which is taxed as employment income (the part that exceeds three times the financial performance ratio of the Company) is excluded from the base for the employer’s social security contributions. However, it is subject to a 10% employee contribution, which is final and paid with the income tax. Therefore, the standard social security contributions do not apply.

The table below provides a summary of the tax and social security regime introduced by the Finance Law for 2025:

 

Fraction of the Gain	Tax Regime	Social Regime	Maximum Effective Rate
≤ 3 times the financial performance ratio of the Company	Taxation as capital gains (i) Income tax at the rate of 12.8% and (ii) CEHR1 at the rate of 4% (excluding CDHR2)	Social contributions (17.2%)	34%
≥ 3 times the financial performance ratio of the Company	Taxation in the category of employment income (i) Income tax at the progressive rates (up to 45%) and CEHR at the rate of 4% (excluding CDHR)	Employee contribution of 10%	59%

 

These measures will apply to transfers (including all exchange transactions), sales and leases conducted from 15 February 2025, including securities acquired, subscribed or granted prior to that specified date.

However, it should be noted that the 10% employee contribution applicable to the portion of the gain exceeding three times the ratio is currently temporary and will apply to transactions carried out no later than 31 December 2027 (subject to possible extension by a future Social Security Financing Law).

These measures will apply to transfers (including all exchange transactions), sales and leases conducted from 15 February 2025, including securities acquired, subscribed or granted prior to that specified date.

However, it should be noted that the 10% employee contribution applicable to the portion of the gain exceeding three times the ratio is currently temporary and will apply to transactions carried out no later than 31 December 2027 (subject to possible extension by a future Social Security Financing Law).

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¹Exceptional contribution on high incomes (CEHR)
²Differential contribution on high incomes (CDHR)