French-Style Management Packages: A New Fiscal Regime Between Salary and Capital Gains
Introduced in the 2025 Finance Act, the new Article 163 bis H of the French Tax Code establishes that, as a rule, gains from management packages are taxed as employment income. However, a portion of the gain may qualify for capital gains treatment where the beneficiary has genuinely borne investment risk. This article deciphers the mechanism, explains the legal formula, outlines the eligibility conditions, and highlights cross-border implications.
1. From Judicial Uncertainty to Legislative Clarification
Since the French Conseil d’État’s landmark ruling of 13 July 2021, gains from management packages have been requalified as employment income based on a range of factual indicators, especially where the gain appears primarily linked to functions performed (e.g. mandatory share disposal clauses in case of departure, confirmed again in CE 28 Jan. 2022).
Consequences:
- Personal income tax and social contributions may exceed 49%.
- Employer and employee social charges may push the effective tax burden over 85%.
To provide more certainty, the 2025 Finance Act now introduces a dual taxation framework.
2. General Rule: Salary Taxation + Specific Social Contribution
Salary taxation
The portion of the gain deemed to remunerate the executive or employee’s role (Article 163 bis H, I) is subject to progressive income tax.
10% Specific Employee Contribution
A new 10% contribution applies to this portion, collected like the social surtaxes on investment income.
No employer social security charges (until 2027)
This part is excluded from employer social contributions, at least until further legislation modifies it.
3. Exception: Capital Gains Treatment for a Fraction of the Gain
3.1 Eligibility Conditions
- Genuine investment risk: The securities must be exposed to potential capital loss.
- Minimum holding period:
• At least 2 years for standard financial instruments (convertible bonds, preferred shares, etc.), or
• Granted under legal schemes (free shares, stock options, BSPCE).
3.2 Legal Formula
The law introduces a formula to calculate the fraction eligible for capital gains taxation:
Formula:
(P × (VR_exit – VR_entry)) / VR_entry
Where:
- P = acquisition or subscription price of the securities (or fair market value if granted free shares),
- VR_exit = fair market value of the company at disposal date,
- VR_entry = fair market value at the time of acquisition or subscription.
The resulting amount is taxed under Article 150-0 A (flat tax at 30% or progressive scale + allowances, as applicable).
4. Grey Areas Remain
4.1 Gains Without Formal Employment or Corporate Mandate
The new rule targets "employees or corporate officers." However, investors-managers with no formal role may still argue for capital gains treatment, based on previous case law.
4.2 International Coordination
- Employment income: Usually taxable in the country where work is performed (OECD Model, Art. 15).
- Capital gains: Typically taxable in the country of residence (OECD Model, Art. 13).
A foreign tax authority could classify the French salary-taxed gain as a capital gain, creating double taxation risks unless the treaty resolves this mismatch.
5. Practical Points of Attention
Before investing:
- Document real financial risk: absence of guaranteed buyback clauses, genuine equity exposure, no disguised remuneration.
- Clarify the wealth management objective distinct from compensation.
During the holding period:
- Monitor the company's valuation for performance multiple calculations.
- Retain documentation showing value creation and active involvement (shareholders’ minutes, business plans, shareholders’ agreements).
Upon exit:
- Clearly distinguish income streams:
• salary-taxed portion (e.g. payslip or French DSN reporting)
• capital gain portion (e.g. brokerage statement, IFU). - Confirm consistency in performance multiple inputs (entry vs. exit valuation).
In international scenarios:
- Analyse the applicable double tax treaty.
- Prepare documentation in case of cross-border classification conflicts (e.g. tax certificate, foreign tax credit form).
6. Final Thoughts: A Welcome but Evolving Framework
Article 163 bis H introduces welcome clarity but leaves room for interpretation:
- The exemption from employer social charges is time-limited and could be revised.
- The tax authorities' interpretation will be key, especially in defining fair market values at entry and exit.
I remain available to review your management package plans, assess their cross-border impacts, and help you secure the required documentation.
S.Assogna – sandro.assogna@avocat.fr
