France: Employee Incentives

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in France.

This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/

  1. What kinds of incentive plan are most commonly offered and to whom?

    It is common practice in France to reward employees through bonuses, in particular in companies belonging to international groups.

    On an individual basis, the most commonly offered incentive plans are bonuses in cash and equity bonuses (free-shares and stock-options). Those plans are usually offered to high level employee (whose work directly influences the company's results) and certain corporate officers (see question 5).

    Stock-options plans allow employees (usually managers) of a company to subscribe or purchase, for a fixed period, shares of their company (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group), at a price fixed in advance, which cannot be modified during the term of the option (except in very specific cases such as a financial transaction likely to alter the value of the security).

    Free-share plans allow to allocate free shares of the company to an employee (generally a manager), (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group).

    Note that on a collective basis, in companies with at least 50 employees it is mandatory to set up a profit-sharing agreement (“participation”). Also, it is very common to have company saving plans (“PEE”) or an optional profit-sharing plan (“intéressement”). These kind of schemes are not “tailor made”, because all employees, and sometimes even company officers, are beneficiaries. We will therefore not mention them in this questionnaire.

  2. What kinds of share option plan can be offered?

    Several kinds of option plans exist, bearing in mind that a share option plan may become an acquisition/purchase plan. The most common are stock-options, which allow employees (usually managers) of a company to subscribe or purchase, for a fixed period, shares of their company (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group), at a price fixed in advance, which cannot be modified during the term of the option.

    The beneficiaries, conditions for granting and exercising options must be defined in the plan.

    The scheme, when it meets the conditions laid down by the French Commercial Code, is subject to a preferential social and tax regime.

    Other kind of option plans exist, such as shares purchase warrants (“BSA” – Bons de souscription d’actions), or warrant to subscribe for shares of a business creator (“BSPCE” – Bons de souscription de parts de créateurs d’entreprise), which also entitle the beneficiary to subscribe, during a specified period, for shares whose price is fixed at the time of grant.

  3. What kinds of share acquisition/share purchase plan can be offered?

    In addition to the free share plans, several kind or share acquisition/share purchase plan exist, notably capital increases reserved to employees.

    Note that under French law, in stock companies having employees, any decision by the extraordinary general meeting of shareholders to increase capital by cash contribution (unless it results from a prior issue of securities giving access to the share capital) must be accompanied by a vote on a draft resolution to carry out an increase of capital reserved for employees, whether or not the company already has set up a company savings plan (if the general meeting votes in favour of the resolution, the company will then have to set up a savings plan, if it does not already have one). In addition, every 3 years, a general meeting must be convened to vote on a draft resolution to carry out a capital increase if the shares held by the employees of the company (and its affiliates within the meaning of the French Commercial Code) represent less than 3% of the capital. The purpose of this regulation is to promote the development of employee share ownership by imposing periodic meetings and thus forcing shareholders to discuss this topic on a regular basis.

  4. What other forms of long-term incentives (including cash plans) can be offered?

    Several kinds of long-term incentives plans can be offered. The most common are the free-shares that may be set up by any company, whether listed or not. Such plan which allows to allocate free shares of the company to an employee (generally a manager), (or, under specific conditions provided for by the French Commercial code, shares of other companies belonging to the same group). The beneficiaries and conditions for granting shares must be defined in the plan. The scheme, when it meets the conditions set out by the French Commercial Code, is subject to a preferential social and tax regime.

    In addition to free shares plans and stock-option plans or incentive bonuses in cash, which are the most common, phantom shares plans or share purchase warrants may also be offered as long-term incentives. In practice, these plans are less frequent.

  5. Are there any limits on who can participate in an incentive plan and the extent to which they can participate?

    Generally speaking, as far as employees are concerned, there are no limits on who can participate. The grant is discretionary. However, note that under French law, the “equal work, equal pay“ principle applies and that discrimination is prohibited. Differences between employees are possible if justified by objective reasons. Accordingly, an incentive plan must in principle be offered to all employees who are in a similar situation in terms of responsibilities and position within the French entity.

    Note that listed companies may only grant free shares or stock options to employees of their subsidiaries, as defined by the French Commercial Code.

    In any event, to benefit from the favourable tax and social regime, no free shares or stock options may be granted to an employee or a corporate officer holding more than 10% of the share capital or if the effect of the grant is to increase his shareholding to more than 10% of the share capital.

    Concerning corporate officers (who do not have an employment contract), the French Commercial Code provides for some limits in the event of free shares or stock options award. The incentive plan must comply with those limits in order to benefit from the favourable tax and social regime.

    More particularly, a restrictive list of officers is provided for by this code:
    - the chairman of the board of directors (“président du conseil d'administration”) ;
    - the chief executive officer (“directeur general”) ;
    - the deputy chief executive officer (“directeur général délégué”) ;
    - the members of the management board (“membres du directoire”)
    - the manager of a joint-stock company (“gérant d’une société par actions”).

    Corporate officers of a subsidiary are eligible only if the granting company is listed.

    In addition, for stock options and free shares granted to corporate officers as of December 2008, a listed company must meet at least one of the following conditions during the financial year in which the allocation takes place:

    - either, granting stock options or shares to all of its employees and to at least 90% of the employees of its French subsidiaries in which it holds at least 50% of the share capital;

    - or setting up an additional profit-sharing agreement for the benefit of its employees and at least 90% of all employees of its aforementioned subsidiaries.

  6. Can awards be made subject to performance criteria, vesting schedules and forfeiture?

    Yes, awards are often subject to performance criteria, vesting schedules (mandatory for free-shares in order to benefit from the favourable social and tax regimes) and presence conditions, which, if not complied with, entail forfeiture.

    As far as presence conditions are concerned, they must not be purely potestative (i.e. dependent solely on the employer's will) and must not correspond to an unlawful financial penalty which is prohibited under French law (the clause providing for the loss of options/shares only in the event of dismissal for misconduct is not valid. On the contrary, a clause provided the loss in case of dismissal whatever its ground, is valid).

    Note that French law prohibits financial penalties. Thus, the plan cannot provide for the loss of the benefit of the plan in the event of the employee's fault.

  7. What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    On a preliminary basis, note that:

    - Cash bonuses or bonuses resulting from phantom shares plans are subject to national social security contributions and income tax (through withholding tax) under the same conditions as salary. Consequently, the developments that follow only concern stock options and free shares;

    - Bonuses in shares (stock options and free shares) are subject to preferential social and tax regime provided that the requirements of the French Commercial Code are complied with (see question 5) and specific disclosure requirements are fulfilled (see question 9).

    The social and tax regime depends on the date of authorization to grant the shares. The rules set out below are those applicable to stock options granted since 28 September 2012 and free shares granted since 31 December 2016.

    a. Tax and social security consequences on grant:

    Assuming that definitive grant is subject to conditions that are not met yet, there are no tax and social security consequences at this stage.

    b. Tax and social security consequences on vesting:

    For stock-options, the added value on vesting corresponds to the difference between the real value of the shares on the date of exercise of the option and the subscription/purchase price.

    If the issuing company is listed:

    - the subscription price cannot be than 80% of the average of the quotation price over the 20 trading days preceding the day on which the option is granted;

    - the purchase price may not be less than either 80% of the average purchase price of the shares held by the company or 80% of the average of the quotation price over the 20 trading days preceding the day on which the option is granted.

    If the company's shares are not listed on the stock exchange the subscription price must be determined in accordance with the provisions of the French commercial code.

    For free-shares, the added value on vesting corresponds to the real value of the shares on the date of vesting.

    As far as tax and social security consequences on vesting are concerned:

    - If the requirements of the French Commercial Code are complied with, a specific tax and social regime applies.

    For stock-options, if the option benefits from a discount of more than 5% compared to the actual value of the share, this excess discount constitutes an advantage that is subject to tax and social security contributions, such as salary, at the time of vesting.

    For free shares and stock options, the added value on vesting is exempt from social security contributions. They remain subject to “CSG” and “CRDS” (French taxes that aims at financing the French Social protection) and social taxes on assets, the rates of which vary depending on each situation.

    The beneficiary is also subject to a specific contribution amounting to :

    • for stock-options: 10% of the added value on the difference between the value of the share upon exercise of the option and the purchase price of the share;
    • for free shares exceeding 300,000 euros: 10% of the portion of the added value on acquisition that exceeds the threshold of 300,000 euros.

    In terms of taxation, the added value on vesting is taxed in the wages and salaries category. However, for free shares, deductions are provided for the portion of the added value on acquisition lower or equal to 300,000 euros.

    - Otherwise, bonuses in shares (stock options and free shares) are subject to social security contributions under the same conditions as salary on the basis of the value of the shares (stock market price) on the date of grant. There are also subject to income tax (through withholding tax) in the wages and salaries category for the year of grant of the shares.

    c. Tax and social security consequences on exercise:

    For stock-options, the added value on exercise corresponds to the difference between the effective sale price of the shares and the subscription/purchase price.

    For free-shares, the added value on exercise corresponds to the difference between the effective sale price of the shares and their value at the date of vesting.

    - If the requirements of the French Commercial Code are complied with, there are no social security consequences on exercise. In terms of taxation, for free shares and stock options, the added value on exercise is taxed under the same conditions as capital gains on securities (flat tax rate unless the beneficiary decides to be taxed in the wages and salaries category).

    - Otherwise, the added value on exercise is subject to income tax and social security contributions under the same conditions as capital gains on securities (but, due to recent case law, there is currently a debate on whether or not those plans shall be considered as remuneration and, as such, subject to social security contributions and income tax as wages).

    d. With regards to loans offered to participants: note that social security contributions are due from the date of payment, even if it is an advance payment. According to the French tax administration, the company must apply the withholding tax to this advance.

  8. What are the tax and social security consequences for companies operating an incentive plan?

    On a preliminary basis, note that:

    - Cash bonuses or bonuses resulting from phantom shares plans are subject to national social security contributions and income tax (through withholding tax) under the same conditions as salary. Consequently, the developments that follow only concern stock options and free shares;

    - Bonuses in shares (stock options and free shares) are subject to preferential social and tax regime provided that the requirements of the French Commercial Code are complied with (see question 5) and specific disclosure requirements are fulfilled (see question 9).

    The social and tax regime depends on the date of authorization to grant the shares. The rules set out below are those applicable to stock options granted since 28 September 2012 and free shares granted since 31 December 2016.

    a. Tax and social security consequences on grant:

    - If the requirements of the French Commercial Code are complied with, there are no tax and social security consequences for the company on grant for bonuses in shares.

    However, for stock-option, a specific contribution amounting to 30 % of the value of the options granted is due. This contribution is calculated based on:

    • either the fair value of the options ;
    • or 25% of the value of the shares to which the options relate on the date of the decision to grant the shares.

    This contribution is due the month following the grant date. This contribution is therefore due even if the conditions for benefiting from the shares are not met. However, if the conditions are not ultimately met, the company may request reimbursement of the contribution.

    - Otherwise, bonuses in shares (stock options and free shares) are subject to social security contributions under the same conditions as salary on the basis of the value of the shares (stock market price) on the date of grant.

    b. Tax and social security consequences on vesting:

    - If the requirements of the French Commercial Code are complied with, a specific tax and social regime applies.

    For free shares and stock options, the added value on vesting is exempt from social security contributions.
    For free shares a specific contribution is due by the company. It amounts to 30 % of the value of the shares on the date of the acquisition (20 % for shares authorized since January 1st 2018). This contribution is due the month following the acquisition date.

    - Otherwise, bonuses in shares (stock options and free shares) are subject to social security contributions under the same conditions as salary on the basis of the value of the shares (stock market price) on the date of grant.

    c. With regards to loans offered to participants: note that social security contributions are due from the date of payment, even if it is an advance payment. According to the French tax administration, the company cannot deduct the advance payment from the result of the current financial year.

  9. What are the reporting/notification/filing requirements applicable to an incentive plan?

    The French issuing company is bound by reporting obligations towards the beneficiaries, the administration (tax and “URSSAF”) and, where applicable, the institution holding the securities account.

    More particularly, the preferential tax and social regime is subject to reporting obligations:

    - on grant, the employer must inform the “URSSAF” (French agency in charge of collecting the national social security contributions) of the beneficiaries’ identity;

    - on vesting, the company must issue an individual statement for each employee having acquired shares and send such statement to the employee no later than March 1 of the year following vesting.

    Information relating to the awards must also be reported by the employer on its annual wages declaration (DSN) to the “URSSAF”. In the absence of such notification, the employer would have to pay all social security contributions, including employee’s share.

    Beneficiaries must inform tax administration on the added value on vesting as well as, where applicable, the added value on exercice.

    Note that additional reporting requirements are applicable for incentive plans benefiting to company officers, in particular in listed companies.

  10. Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?

    a. In principle, assuming that the plan does not state otherwise, employees have no right to compensation for loss of their awards when their employment terminates regardless of the reason for the termination.

    Note that a clause depriving the employee from the benefit of the plan only in the event of dismissal for misconduct shall be deemed unwritten. Such a clause constitutes a pecuniary sanction, prohibited under French employment law.

    b. However, as an exception, an employee has a right to compensation in the event of a dismissal ruled unfair by judges. In that case :

    - for “cash bonuses”, the bonus would be due even if the employee does not meet the attendance condition;

    - with regard to stock options and free shares, the employee may be awarded damages for loss of opportunity to exercise the option. Note that some judges have decided on the total allocation of the shares or their equivalent value in such a case.

  11. Do any data protection requirements apply to the operation of an incentive plan?

    Implementation of an incentive plan generally involves the collection and processing of some personal data of the beneficiaries. As such, this requires compliance with the European General Data Protection Regulation (GDPR) and declaration requirements with the French Data Protection Authority.

  12. Are there any corporate governance guidelines that apply to the operation of incentive plans?

    French bodies such as the Tax administration, the Financial Markets Authority (“AMF”), the French Institute of Administrators (“IFA”) or the national association of joint-stock companies (“ANSA”) issued guidelines on these specific matters, which are regularly updated.

    In addition, for companies whose securities are admitted to trading on a regulated market, the AFEP-MEDEF Code provides for some recommendations that applies to incentive plans offered to company officers.

  13. Are there any prospectus or securities law requirements that apply to the operation of incentive plans?

    a. Some provisions relating to securities may have an impact on incentive plans.

    Insider trading and misconduct are prohibited in France. To limit this risk, “black out” periods have been set up, during which there are restrictions on certain actions. Accordingly, pursuant to the French Commercial Code, in a company whose securities are admitted to trading on a regulated market, stock options may not be granted and free shares may not be transferred:

    1° Within ten trading days before and ten trading days (for stock-options) or three trading days (for free shares) after the date on which the consolidated accounts, or failing that, the annual accounts, are made public;

    2° Within the period between :

    - the date on which the company's corporate bodies become aware of information which, if it were made public, could have a significant impact on the price of the company's shares,

    - and the date which is ten market days after the date on which such information is made public.

    b. Concerning prospectus regulations, the Financial Markets Authority (“AMF”) stated that free shares allocation plans and stock option plans are not subject to the requirement to produce a prospectus.

    Nevertheless, the admission to trading of shares resulting from the exercise of options constitutes an offer to the public. It may be exempted from the requirement to draw up a prospectus if it concerns a limited number of securities or if information is available to interested parties.

  14. Do any specialist regulatory regimes apply to incentive plans?

    There is no specialist regulatory regime on incentive plans.

    Nevertheless, as mentioned above (see question 12), some specific organization that have authority in that matter (such as the Financial Markets Authority (“AMF”) issued guidelines on these specific matters, which are regularly updated.

    In addition, for companies whose securities are admitted to trading on a regulated market, the AFEP-MEDEF Code provides for some recommendations that applies to incentive plans offered to company officers.

  15. Are there any exchange control restrictions that affect the operation of incentive plans?

    Depending on the plans’ provisions, exchange control restrictions may affect the operation of incentive plan. Also, exchange control regulations may require reporting to the French authorities.

  16. What is the formal process for granting awards under an incentive plan?

    a. For employees, the main steps are the followings:

    - Draw up the incentive plan (recommendation to draft or translate the plan into French, to avoid any dispute on it enforceability, even though the French Supreme Court ruled that the plan is enforceable against an employee who was fluent in English and had received communication of the plan that he signed);

    - Consultation of the Works council’s if required (which is the case in particular when the plan concerns a large number of employees or when it may have consequences on a large proportion of the company's share capital);

    - Communicate the plan to the employee at the beginning of the reference period. The way the plan is notified to the beneficiary is key to determine whether the plan is a contractual item or not. Where the plan is deemed to be a contractual item, it cannot be altered or removed unless with prior express consent of the beneficiary.

    b. Special requirements apply for company officers, in particular in listed public limited companies. The plan must first be approved by the Compensation Committee and the Board of Directors and then by the general meeting of shareholders (Say on pay ex ante). Vote of the general meeting of the shareholders is also required at the end of the vesting period (Say on pay ex post). In other words, in listed public limited companies, the principles and criteria for determining and allocating shares to company officers must be approved annually by the general meeting of shareholders.

  17. Can an overseas corporation operate an incentive plan?

    Yes, companies whose registered office is located abroad may grant stock options or free shares to employees working in a French parent or subsidiary entity. The concepts of parent company and subsidiary are defined by the French Commercial Code.

    An overseas corporation may also grant shares to employees employed in France in a permanent establishment (e. g. a branch office) or a permanent establishment of another foreign company related to it.

    The favourable tax and social regime will be applicable provided that such allocation comply with the conditions provided for by the French Code of commerce. These can nevertheless be adjusted but some conditions that are deemed to be essential must be complied with.

  18. Can an overseas employee participate in an incentive plan?

    Yes, an overseas employee can participate in an incentive plan. Also note that by application of the “equal treatment, equal pay” principle, the employer may be forced, depending on the circumstances, to grant the incentive plan to an overseas employee.

  19. How are share options or awards held by an internationally mobile employee taxed?

    The taxation of share options or awards held by internationally mobile employee depends on his or her tax residence and tax treaty concluded between the countries concerned (if any).

    If the employee's sole tax residence is France, share options and awards are taxed in accordance with French law (see question 7).

  20. How are cash-based incentives held by an internationally mobile employee taxed?

    As for share options or awards, cash-based incentives held by internationally mobile employee depends on his or her tax residence and tax treaty concluded between the countries concerned (if any).

    If the employee's sole tax domicile is France, cash-based incentives are taxed in accordance with French law (see question 7).

  21. What trends in incentive plan design have you observed over the last 12 months?

    In France, incentive plan design is highly connected to social and tax regime. Greater use of incentive plans is influenced by government social and tax incentives. Accordingly, as recent law intends to make the free-shares tax and social regime more favourable, this could facilitate such schemes.

    Also, we note a certain development of phantom share plans, in order to implement bonuses connected with the share price.

  22. What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?

    A bill to expand, encourage and simplify employee share ownership in public and private companies is currently under discussion (so-called “PACTE” – Action Plan for Business Growth and Transformation). Its main purpose is to promote collective schemes (profit-sharing, incentive schemes, savings plans) rather than individual schemes (such as stock-option plans and/or free shares). This bill should be adopted in the first half of 2019.