Just when we thought French-qualified awards were headed for extinction due to the ever decreasing tax benefits, there is change in the air!
In November, a draft law was presented (the “Loi Macron”) which proposes a number of changes to the requirements and tax treatment of French-qualified RSUs, most of them favorable. The draft law does not propose any changes for French-qualified options.
As currently drafted, the law provides the following:
- Minimum vesting period reduced from two years to one year from the grant date;
- Holding period after vesting (currently minimum of two years for RSUs that vest within four years of grant date) is optional, but shares cannot be sold for a minimum period of two years from the grant date (effectively requiring a minimum one-year holding period for RSUs that vest on the first anniversary of the grant date);
- Employer social tax liability moved to vesting and due at a rate of 20% on the value of the shares issued at vesting (currently 30% on the value of the shares subject to the RSUs at grant – no reimbursement if RSUs forfeited prior to vesting); and
- Gain at vesting taxed as capital gain (currently taxed as salary income).
The draft law is slated for discussion in the French Parliament at the end of January, and it is expected that the discussion of the law (which also proposes other tax changes, not just to the treatment of French-qualified RSUs) will last several weeks. As such, it is quite possible that additional changes will be proposed so do not get too excited yet.
However, it is likely that at least some of the proposals will be adopted, which should make the grant of French-qualified RSUs (again) more attractive.
For many companies, the most welcome change would be the shift of the employer social tax liability from grant to vesting. As mentioned above, under the current law, the employer social tax is due at grant at a rate of 30% on the value of the underlying shares, regardless of whether the RSUs actually vest. Furthermore, for performance-vested RSUs where the number of shares is based on the achievement of performance criteria, the employer social tax at grant arguably has to be calculated based on the maximum number of shares that can be issued pursuant to the PSU, regardless of the number of shares that are actually issued at vesting. In both cases, the employer is not entitled to a refund for the tax paid at grant on shares that are never issued to employees.
These issues have made it very difficult for companies to assess if the grant of French-qualified RSUs could result in employer social tax savings to them (when compared to non-qualified RSUs). Essentially, to determine this, the company would need to know how the stock price will develop after grant as well as the number of forfeitures, both of which are of course impossible to predict.
By moving the employer social tax liability to vesting, the assessment will become much easier, as companies can compare the tax rate applicable to French-qualified RSUs (currently proposed to be 20%) with the employer social tax rate that is due on non-qualified RSUs (up to 46%, but exact rate depends on the income level of each employee). If the tax rate will indeed be 20% for French-qualified RSUs, it is almost certain that French-qualified RSUs will result in employer social tax savings (compared to non-qualified RSUs).
In light of the proposed changes, companies that are still granting French-qualified RSUs may want to delay any upcoming grants until the legislation has been adopted. It may then be necessary to amend the existing French sub-plan to reflect the new vesting and holding period requirements (unless the existing sub-plan already provides sufficient flexibility to implement different vesting and/or holding periods) as well as the French RSU agreement.
Companies that have stopped granting French-qualified RSUs may want to reconsider this decision, dust off their old French sub-plan and, if necessary, amend it to reflect the latest requirements. Of course, companies will still need to evaluate whether they want to comply with the remaining requirements of French-qualified RSUs (e.g., accelerated vesting of RSUs upon death) that can make administration of these awards more difficult.
For now, stay tuned until the proposed legislation has been adopted and let’s see if the French legislator will come up with any additional surprises…