France | what are the main modifications for incentive instruments included in the Draft Finance Act for 2018?

The newly appointed French Government, in place since the presidential and legislative elections which took place in the Spring, published its first draft of the Finance Act on 27 September 2017.

This draft has been eagerly awaited as the newly elected French President made significant promises of tax cuts during his campaign, including the introduction of a flat rate tax applicable to most types of investment income.

The aggregate rate of the flat rate tax is set in the Draft Finance Act for 2018 at 30% and includes personal income tax at a rate of 12.8%, and social security contributions (CSG, CRDS and additional social withholdings) at an aggregate rate of 17.2% (including the contemplated increase of 1.7% of the CSG rate included in the Draft Social Security Finance Act for 2018).

The aim of this new flat rate tax is to simplify the taxation of investment income and it is therefore expected to be applicable to most of investment income, including interest, distributions, dividends and similar revenues.

The flat rate tax would, however, not be fully applicable to qualifying free shares (RSUs), stock options and BSPCE (specific stock-options for certain companies incorporated for less than 15 years at the time of grant), which shall keep their specific tax treatment, at least for the gain on acquisition.

Indeed, the gain on acquisition realised by holders of stock options would remain subject to the normal sliding scale of personal income tax, without any tax allowance as a mere cash bonus. Qualifying stock options remain thus heavily taxed in France.

For RSUs, the tax treatment of the gain on acquisition would continue to depend on the yearly amount of gain realised by the French RSUs’ holder. The fraction of the gain on acquisition which does not exceed an annual threshold of EUR 300,000 would remain subject to the normal sliding scale of personal income tax, but after an automatic 50% reduction (applicable without any minimum holding period). The fraction of the gain on acquisition exceeding the annual threshold would continue to be subject to personal income tax without any tax allowance. These modifications, if voted through by the French Parliament, would be applicable to grants authorized by an Extraordinary Shareholders Meeting decision as from the date the Finance Act for 2018 enters into force.

For BSPCE, the flat tax rate will be applicable on the gain on acquisition but only if the BSPCEs’ holder has been working for the company having issued the BSPCE (or a related entity) for more than three years at the time of the sale of the underlying shares. If he or she has been working for less than three years at the time of the sale, the gain on acquisition will be subject to the normal sliding scale of personal income tax, without any tax allowance.

For the gain on sale, the 30% flat tax rate would, however, replace the allowance based on the duration of holding of the shares for stock-options and RSUs and reduce the currently applicable flat tax rate for BSPCE.

The Draft Finance Act for 2018 is currently being debated in the French Parliament and is expected to be adopted at the end of December.