Executives - Action - New french restricted stock regime

This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.  
 
 As of January 1st 2005 French Corporations have the right to grant free shares (Restricted stock) to employees and directors as long the beneficiary holds less than 10% of the share capital after acquisition of the restricted stocks. The total number of restricted stock issued cannot exceed 10% of the share capital.

The extraordinary shareholder meeting of the company must decide the grant, the length of the acquisition period and the length of the holding period.

The acquisition period starts when the restricted stocks are granted and ends when the ownership of the shares is transferred to the beneficiary. The law provides that the acquisition period lasts 2 years minimum.

The holding period starts the day the ownership of the shares is transferred to the beneficiary and ends the day the beneficiary sell the shares. The beneficiary is the legal owner of the shares during the holding period and is entitled to the dividends. The law provides that the holding period lasts at least 2 years.

As a consequence of the acquisition period and the holding period, the restricted stocks are unavailable during 4 years.

According to French tax law, the capital gain tax related to the acquisition of the restricted stock at the end of the acquisition period (Fair market value of the shares the day of the acquisition) is deferred until the beneficiary will sell the restricted stock (At least 4 years after the grant). The beneficiary may elect to tax the gain as a salary (Highest marginal rate of 49,69% = marginal rate of 48,09% + CSG partially tax deductible + CRDS ) or as capital gain (Flat 41% = Flat rate of 30% + 11% CSG + CRDS + Social contribution).

As provided by the French tax rules, the capital gain on the sale of the shares (Selling price – Value of the shares the day of the acquisition) is taxable when the beneficiary sells the restricted shares. The gain is taxed at a rate of 26% (16% + 11% CSG+CRDS+ social contribution).

When a restricted stock plan complies with the rules above, the related income is exempt from social taxes.