Overview
On February 5, 2024, the French Supreme Tax Court (Conseil d’État) voided French tax authority guidelines from May 2023 that provided that shares acquired upon the exercise of founder stock options, or Bons de Souscription de Parts de Créateur d’Entreprise (BSPCEs), could not benefit from the tax neutrality regime provided for in Article 150-0 B of the French Tax Code in the case of share-for-share contributions to a company.*
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In Depth
BSPCEs enable eligible companies to grant their employees and managers the right to subscribe shares at a predetermined price. Created to encourage profit-sharing, BSPCEs are subject to an attractive tax and social security regime. The issuing company is exempt from French social security contributions once BSPCEs are granted and exercised. The holder is subject to French capital gains taxation on the gain arising from the disposal of the subscribed shares upon the exercise of the BSPCEs at the aggregate rate of 30% or 47.2% – depending on whether the holder has been employed by the issuing company (or a subsidiary) for more or less than three years at the time of disposal.
Article 163 bis G of the French Tax Code governs the taxation of BSPCEs and references the standard capital gain regime to define the rules applicable to gains that are derived from the disposals of shares acquired upon the exercise of BSPCEs. Based on both a literal interpretation of this article as well as on the parliamentary work leading up to the introduction of BSPCEs into French law, the French Supreme Tax Court voided the French tax authority’s guidelines and held that “the legislator intended to subject the net gain realized upon the sale of shares subscribed upon exercise of BSPCEs to the standard regime applicable to capital gains set out in articles 150-0 A et seq. of the same code, subject only to the specific rules regarding rates that it provides.” This is particularly the case for contributions to a company that are not controlled by the contributor of subscribed shares in the exercise of such warrants, where the contributor benefits from the standard tax neutrality regime provided for in Article 150-0 B.
This decision will significantly impact reinvestments made by BSPCE holders, confirming that any such reinvestment effected through a share-for-share contribution will not give rise to a French dry tax charge. This decision is particularly significant for holders who are compelled to exercise their BPSCEs and roll over their shares because of a liquidity event occurring less than three years after joining the company and would have previously been subject to French income tax on the unrealized gain at the unfavorable rate of 47.2% had the French tax authority’s guidelines been upheld.
This decision also affects the tax deferral mechanism provided for under Article 150-0 B ter, which applies to share-for-share contributions to a company controlled by the contributor. The tax rate applicable to the deferred gain would definitively crystallize (at 30% or 47.2%) depending on the tenure of the contributor at the time of the contribution.
*Joseph Righenzi (trainee) contributed to this article
