PLF 2025 Adopted in France

The PLF 2025, definitively adopted by the Senate on 6 February 2025 following a months-long process, is currently being examined by the French Constitutional Council.

The tax team at Morgan Lewis Paris takes a closer look at some of the measures in the French Finance Bill for 2025 (the PLF 2025) that will be of interest to companies: introduction of a specific tax and social security regime for management packages, reform of the tax regime for BSPCEs, introduction of a tax on share buybacks, and strengthening of the anti-dividend arbitrage mechanism.

TAX TREATMENT OF MANAGEMENT PACKAGES (STOCK OPTIONS, FREE SHARES AND BSPCES)

The PLF 2025 provides a legal framework for the tax and social security treatment of management packages and clarifies matters following the 2021 case law (CE, 13/07/2021, n°435452, 428506 and 437498). This project, which also concerns management packages that have not been unwound, has already raised a number of questions.

• When they have been allocated, subscribed or acquired in consideration for the exercise of salaried or management functions in the company issuing the securities (or in a related company), the gain on the sale of these securities is taxed under the capital gains tax regime up to the following limit:

• The fair market value of the issuing company is equal to “the real value of its shareholders’ equity” plus the debts subscribed to a shareholder or affiliated company within the meaning of Article 39 (12) of the General Tax Code.
• It should also be noted that this gain on disposal is subject to capital gains tax provided that the securities concerned involve the following risks for their holders:
  • For free shares/stock options/BSPCEs: Risk of loss of their acquisition or subscription value
  • For other securities: Held for at least two years before sale and risk of losing the capital subscribed or acquired
• Beyond this ceiling: Taxation of the gain from the sale as wages and salaries, plus a specific 10% employee contribution. This contribution is in full discharge of the social security contributions payable by the employee and the employer.
• The new regime applies to schemes that have not yet been unwound, thus introducing a retroactive effect. In addition, the social scheme is limited in time until 31 December 2027.
• Although the PLF 2025 introduces a specific tax and social security system for management packages, its implementation raises a number of new questions:
  • Interpretation of the notion of risk of capital loss (cf. put mechanisms),
  • Interpretation of the concept of “securities allocated in consideration for functions within the issuing company” in relation to the interpretation grid resulting from the Conseil d’Etat rulings of 13 July 2021,
  • The application of the system in an international context which will require the allocation of taxing rights between States according to the nature of the gain.
• Lastly, all shares acquired or allocated to employees/executives as consideration for their duties from the date of promulgation of the law may not be registered in a share savings plan (PEA).

BSPCE

• System applicable to shares subscribed from 1 January 2025: identification of two different types of gain, the gain on exercise and the gain on disposal:
  •  Exercise gain: Gain in the nature of a salary equal to the value of the security subscribed to on the day the warrant is exercised less the acquisition price of the security set when the warrant was granted. This gain is subject to income tax under the following conditions:
    • When the beneficiary has been working in the company for at least three years at the date of disposal: flat rate of 12.8% or, as an option, the standard income tax rate plus social security deductions on income from assets (17.2%).
    • Where the beneficiary has been working in the company for less than three years at the date of disposal: rate of 30%, with no option to opt for the standard rate, plus social security contributions on income from assets (17.2%).
    • Non-residents: Withholding at source in full discharge of income tax (article 182 of the CGI).
  •  Gain on the sale of securities resulting from BSPCEs: Gain of an asset nature equal to the sale price of the security subscribed by means of the warrant less the value of the security on the day the warrant is exercised:
    • Taxed at a rate of 12.8% or, if you so choose, at the standard income tax rate (with possible allowances, deferral and suspension of taxation), plus social security contributions on income from assets (17.2%).
    • Non-residents: Exempt from tax on the gain on disposal unless they hold a substantial interest in the company, subject to international agreements (article 244 of the CGI).
• Prohibition on placing securities received on exercise of these warrants in a share savings plan (PEA).
• By amending the PLF 2025 to specify that the new regime applies not to warrants but to securities subscribed from 1 January 2025, the Joint Committee is creating legal uncertainty by allowing its measures to be applied to existing plans.

TAX ON SHARE BUY-BACKS

• Scope of application:
  • Companies concerned: Companies headquartered in France with sales in excess of €1 billion.
  • Transactions covered: Capital reduction by cancellation of shares resulting from a company's repurchase of its own shares on or after March 1, 2025.
  • Transactions excluded: Capital reductions carried out to offset a capital increase carried out under employee share ownership schemes or carried out to facilitate a merger or demerger by buying back and cancelling shares representing no more than 0.25% of the share capital, or by buying back and cancelling shares under the conditions provided for by equivalent foreign regulations.
• Calculation:
  • Basis: Total amount of capital reductions and a fraction of sums which, for accounting purposes, have the character of premiums linked to the capital - total amount of capital increases through the issue of shares.
  • Rate: 8%.
• This tax would also apply retroactively to all capital reductions through the cancellation of shares carried out between March 1, 2024 and February 28, 2025. The taxable event would be February 28, 2025.
• As it stands, unlike in the United States, the tax would apply to the nominal value and not the redemption value of the cancelled shares. The tax should therefore have a more moderate fiscal impact than previously envisaged.

ANTI-ARBITRAGE DIVIDEND SYSTEM

The PLF 2025 reinforces the dividend “anti-arbitrage” mechanism set out in article 119 bis A of the CGI by extending the list of transactions covered by the mechanism.

• Establishment of the concept of “beneficial owner”: Application of a withholding tax, as a matter of principle, when the beneficial owner of the dividends is located abroad and the recipient is resident in France.
• Anti-abuse mechanism that deems certain temporary sales of securities to constitute distributed income extended to any agreement or financial instrument (including derivatives) that has a similar economic effect.
• Anti-abuse mechanism extended to dividends and similar income paid to residents of a State that in principle benefits from a treaty exemption, by means of a conservative withholding tax: combating external cumcum, which consists of the temporary transfer of ownership of securities to a non-resident who is not subject to withholding tax by virtue of a tax treaty or his status.