Décision de justice

Management package for company executives: The Conseil d'État rules that earnings must be taxed as salary if they are related to the performance of duties

In order to align the interests of their executives or employees with those of their shareholders, many companies offer share acquisition schemes called management packages. The tax treatment of the gains resulting from some of them has not been defined by law. Referred by two taxpayers and the tax authorities, the Conseil d'État has now clarified the rules that should apply. It has ruled that gains from these schemes must be taxed as “salaries and wages” and not as “capital gains from the sale of securities”, if the employees benefited from them in return for the duties they performed in the company.

In order to align the interests of its managers and employees with those of its shareholders, a company may set up share acquisition schemes, or management packages. For a manager who benefits from this scheme, part of his remuneration is directly linked to the company’s performance. Some companies use schemes that are not exclusively reserved for employees and whose tax regime is not regulated by law, such as autonomous stock subscription warrants (BASE) or stock option contracts (COA). 
Two taxpayers challenged the submission to income tax in the “salary and wages” category of the gains they had realized after the sale of their warrants, believing that they should have been considered as capital gains for individuals and therefore taxed according to what they considered to be more favourable terms. The tax authorities, however, contested the classification in this category of “capital gains for individuals” of the gains resulting, for a third taxpayer, from the sale of shares that he had acquired pursuant to a COA.

The Conseil d’Etat first ruled that by acquiring or subscribing to BSAs or COAs at preferential rates, a director or an employee benefits from an advantage. Such an advantage, when granted to an employee because of his functions in the company, constitutes a wage supplement. It is therefore taxable in the year of acquisition or subscription, as “salaries and wages”.
The Conseil d’Etat then recalled that gains from the sale of warrants are in principle taxable as capital gains from the sale of private securities. However, when, given the conditions of the transfer, these gains are the consideration for the functions of an employee or manager, they must also be taxed in the category of “salaries and wages”. 
The Conseil d’Etat follows the same reasoning for cases where a taxpayer confirms a stock option or executes a warrant, with regard to the gain represented by the difference between the real value of the shares and their purchase price. 

Download French Ordinance No. 428506, 435452 and 437498