Spotlight: taxation of executives in France

All questions

Taxation

i Income tax for employees

In France, executive remuneration is generally included in the overall income of executives, which is thus subject to personal income tax at a progressive rate even if the category of income depends on the form of a company and the interest held by an executive in that company.

Taxable income includes all amounts paid and any benefit in kind available to an executive. It is determined by deducting, inter alia, mandatory social security contributions. Professional expenses are normally taken into account through a 10 per cent deduction capped at a certain threshold, which is reviewed every year, although the executive may elect to deduct the actual amount of professional expenses incurred, provided that such expenses are duly justified.

In France, personal income tax is calculated on the basis of the amounts declared by taxpayers, who are required to file a single return per tax household reporting all income received in the previous year. These amounts are subject to a progressive rate.

The progressive rate (for one part)² applicable to income received in 2020 is as follows.

Portion of taxable income	Rate (per cent)
For the portion below 10,084	Zero
For the portion between 10,085 and 25,710	11
For the portion between 25,711 and 73,516	30
For the portion between 73,517 and 158,122	41
For the portion exceeding 158,123	45

Since 1 January 2019, and the enforcement of the retention of income tax at source, employers have been compelled to collect the withheld income tax every month on the basis of the remuneration they pay to their employees and declare and remit it to the French tax authorities.

In addition, a further temporary tax (an exceptional contribution to high income) is applicable to French taxpayers whose taxable income exceeds a certain threshold. This additional temporary tax is based on the amount of income and capital gains of taxpayers taken into account to calculate their income tax liability, increased by certain expenses that are deductible and other profits that are exempt from income tax or subject to a deferral.

This additional temporary tax is calculated at a progressive rate as follows.

Taxable amount	Rate of the additional temporary tax (per cent)
Single, separated or divorced taxpayers	Married taxpayers or taxpayers in a civil union
Less than 250,000	Zero	Zero
Between 250,000 and 500,000	3
Between 500,000 and 1 million	4	3
Over 1 million	4	4

ii Social taxes for employees

In France, in principle,³ all the benefits granted to executives in consideration or on the occasion of work are subject to social taxes (sickness, retirement and unemployment, etc.). This covers all the elements of, inter alia, fixed and variable remuneration, various bonuses, allowances and benefits in kind.

Given the level of executive remuneration and in view of the capping of the social tax base, social taxes account, on average, for 40 per cent of gross executive remuneration (25 per cent of employer contributions and 15 per cent of employee contributions).⁴

Note, however, that:

1. certain benefits from which executives might profit are subject to a specific social regime, particularly supplementary defined benefit retirement schemes, share subscription and purchase options or allotments of free shares (see Section II.iii); and
2. within certain limits and under certain conditions, other benefits largely escape social taxes. Thus, there are, in particular, employer contributions funding supplementary defined contribution pension schemes, benefit schemes and sums paid under employee savings arrangements (optional profit-sharing, mandatory profit-sharing and savings plans, etc.) (see Section II.iii).

Specific rules apply in favour of executives sent abroad as part of a secondment or expatriation. In this respect, France has entered into various social security treaties with other countries; in addition, a number of EC Regulations must be observed.

iii Tax deductibility for employersPrinciple

Executive remuneration represents staff costs and is therefore deductible from the taxable profit of companies making industrial and commercial profits.

This deductibility covers not only salaries, emoluments, various allowances, employment costs and benefits in kind but also social taxes and various expenses incurred in the interest of executive salaried staff.⁵

General conditions of deduction

Deductibility of remuneration paid to executives is subject to compliance with the following conditions: the remuneration must correspond to an actual and justified cost and may affect only the results for the period during which it is incurred, the remuneration must correspond to actual work and it must not be excessive having regard to the importance of the service provided.⁶

On this last point and in general, the authorities take the view that a payment allotted in favour of its beneficiary in return for the service provided may be regarded as excessive when it exceeds:

1. that corresponding to their professional qualifications;
2. the scope of their activity;
3. their abilities specific to the company’s results;
4. the amount of the company’s salaries;
5. the remuneration allotted to identical jobs in the company or elsewhere; or
6. the employer’s salary policy.

The tax services are particularly attentive to compliance with this latter condition concerning executives who personally have sizeable holdings in the capital or are united by emotional ties or interests in persons holding control of a company. In other situations, the authorities take the view that reintegration of excess remuneration must be pursued solely in exceptional situations, particularly when the remuneration paid is manifestly exaggerated in relation to the service provided, or when factual circumstances make it possible to presume that the benefit granted has not been accorded in the direct interest of the company on account, in particular, of emotional ties or interests uniting the beneficiaries to persons possessing control of the company.

Fiscal year of deduction

In principle, only remuneration of which a company has become a debtor during any determined fiscal year is liable to be deducted from the taxable income for this fiscal year.

Staff expenses not yet paid at the end of a fiscal year, such as gratuities, bonuses and contractual mandatory profit-sharing, may be deducted from the results for this fiscal year only if a company has taken, in respect of executives, firm commitments as regards the principle and method for calculating the sums owed and if the obligation to pay them during a subsequent fiscal year is therefore certain. This condition being fulfilled, these costs may, when the elements needed for calculating the sums owed are not yet known exactly on the closing date of the fiscal year, give rise to the creation of provisions corresponding with sufficient approximation to their likely amount, or, when the amount of them is determined exactly, to be deducted in respect of the costs to be paid.

iv Other special rulesAllotment of free shares and share subscription or purchase options

Subject to certain conditions, specific social and tax rules apply to the allotment of free shares and share subscription or purchase options. These two tools originally followed a similar treatment. Lawmakers now unquestionably favour allotments of free shares.

In both cases, the benefit is exempt from the social contributions usually owed on remuneration elements. On the other hand, the benefit is subject to specific social contributions. Free shares may also benefit from a more advantageous tax regime. From 2018, benefits derived from the sale of shares acquired under these arrangements are able to benefit from the system of a single flat-rate levy on investment income, making it possible to benefit from a reduced rate of income tax.

The benefits derived from these arrangements are broken down as follows:

1. the discount that corresponds to the difference between the value of the share on the day of allotment of the option and the exercise price of the option (share subscription or purchase option only);
2. the acquisition gain that corresponds to the difference between the value of the shares at the time of their definitive acquisition or exercise of the option, and the exercise price (option) or any reduced mandatory profit-sharing (free shares); and
3. the capital gain on disposal that corresponds to the difference between the value of the shares when they are sold and the value at the time of the definitive acquisition or exercise of the option.

The social and tax treatment of these benefits is marked by great instability. The table below summarises the latest rules applicable, although, depending on the date on which these benefits were authorised or allotted, it is possible to apply different conditions to them.

	Allotment of free shares	Share subscription or purchase option
Social treatment	Tax treatment	Social treatment	Tax treatment
When allotted	N/A	N/A	Specific employer contribution (30 per cent) calculated either on the fair value of the options or on 25 per cent of the value of the shares under option on the date of allotment of the options	N/A
Discount	N/A	N/A	If If >5 per cent: subject to social contributions in the same way as salary*	If If >5 per cent: subject to income tax
Acquisition gain	Specific employer contribution (20 per cent) +specific salary contribution for the share of the acquisition gain >300,000 over the year (10 per cent) +social levies	Share Share >300,000 over the year: subject to income tax without allowance||	Specific salary contribution (10 per cent) + social levies on business income (9.7 per cent)	Subject to income tax in the same way as salary
Capital gain on disposal	Social levies on investment income (17.2 per cent)	Taxation as part of the single flat-rate levy (12.8 per cent) and application, as the case may be, of the exceptional contribution on high income (3 or 4 per cent)||	Social levies on investment income (17.2 per cent)	Taxation as part of the single flat-rate levy (12.8 per cent) and the application, as the case may be, of the exceptional contribution on high income (3 or 4 per cent)||
* Payable when the option is exercised. Payable in respect of the year in which the option is exercised. Payable in the month following definitive acquisition. Payable when sold. If the acquisition gain is less than 300,000 over the year, application of the social levies applicable to investment income (17.2 per cent); the share greater than 300,000 is subject to social levies on business income (9.7 per cent). || Payable in respect of the year of sale.

Supplementary pension schemes

Many companies allow their executives to benefit from a supplementary pension scheme with a view to supplementing the benefits of mandatory schemes, as either a defined contribution or a defined benefit scheme.

In tax terms, employer contributions paid to insurers to finance such schemes are deductible for the company on the double condition that the payments made correspond to a real legal commitment enforceable against the employer and that this commitment is of a general and impersonal nature (i.e., it concerns all staff or one or more determined categories of staff).⁷

In respect of the treatment of the funding of these schemes and regarding income tax and social taxes, it is necessary to distinguish defined contribution schemes from defined benefit schemes.

In respect of defined contribution schemes, the employer contributions that fund them are, within certain limits and under certain conditions, exempt from social contributions⁸ and income tax. This supposes, in particular, that a scheme has mandatory membership and that it benefits an objective category of staff. Otherwise, the contributions that fund them are deemed to be part of the salary and do not enjoy any particular social or tax benefit.

For their part, random defined benefit schemes benefiting from a specific social regime come under a social regime. Funding of these schemes is excluded from the base of social security contributions owed on salaries; on the other hand, an employer pays a specific contribution.

Given the required transposition of Directive 2014/50/EU of 16 April 2014,⁹ the rules applicable to defined benefit schemes and their social and tax treatment have recently been modified.

As a result, the supplementary defined benefit pension schemes set up since 4 July 2019 can no longer make the payment of pension rights conditional on the beneficiaries’ presence in the company at the time of their retirement. In the event of departure from the company before the pension is liquidated, the supplementary pension rights will henceforth remain vested in the beneficiaries. The benefit of the favourable social arrangements attached to these schemes now presupposes that new conditions are met. For example, where the beneficiary is a corporate officer or an employee receiving a remuneration exceeding 329,088 per annum, the vesting of pension rights must be subject to conditions linked to their professional performance. Moreover, the rights acquired annually may not exceed 3 per cent of the beneficiary’s annual salary and the total amount of the pension may not exceed 30 per cent of this salary.

Specific provisions have been adopted with regard to the existing schemes as at 4 July 2019.