France | Qualifying free shares and stock-options: the employer specific contribution is refundable if the conditions under which the free shares and options are granted are not satisfied

Qualifying free shares and stock options benefit in France from a specific tax and social security regime when the rules of the plan under which these equity instruments are granted comply with the provisions of the French commercial code.  For the employer, the main advantage is that qualifying options and free shares are not subject to standard employer social security charges whose rate can be very high in France (between 40% and 45%).

Instead the employer granting stock options and free shares to its French employees is subject to a specific employer contribution (whose rate is currently equal to 30%) which is levied for stock options either on the fair market value of the stock options or on 25% of the fair market value of the underlying shares and for free shares on the fair market value of the shares granted.

For free shares (granted before 7 August 2015) and stock-options this specific employer contribution is payable within one month following the grant of the free shares and options. As plan rules generally subject the final acquisition of the free shares, or the exercise of the option, to continuing employment and/or performance conditions, some companies paid the specific employer contribution on free shares and stock options which have not actually been acquired by the beneficiaries (in full or in part).  However, in such cases, the French social security authorities (URSSAF) have traditionally refused to refund the amounts of specific employer contribution paid on free shares and stock options not finally acquired or exercised.

In this context, a priority question of constitutionality (limited to free shares) was raised to the French Constitutional Court to verify that the timing of the payment of that specific employer contribution was constitutional. The French Constitutional Court confirmed on 28 April 2017 (n° 2017-627/628 QPC) the validity of the regime but clearly specified that the employer must have the possibility to obtain a reimbursement of the specific employer contribution when the conditions under which the free shares are granted are not satisfied.

This decision of the French Constitutional Court is binding on public authorities and on all administrative or jurisdictional authorities. As a consequence, employers shall be entitled to claim for the refund of the fraction of specific employer contribution paid in respect of free shares which have not been effectively transferred to the employees because the continuing employment and/or performance conditions included in the rules of the plan have not been fulfilled. The same refund should also be possible for stock options, when the options granted have not been effectively exercised, notably if the continuing employment and/or performance conditions have not been met.

Companies in this situation need first to determine the amounts of specific employer contribution relating to free shares and stock options for which the continuing employment and/or performance conditions have not been fulfilled. The opportunity to file a claim for these amounts will depend of the amounts at stake, the situation of the company toward URSSAF and whether the period to submit such claims has not ended.