Management incentive plans in France – Guidelines from the French Tax Authorities

The French tax authorities (FTA) have recently launched a public consultation¹ on its official guidelines regarding the specific tax treatment of gains realised under management incentive plans (MIPs) (BOI-RSA-ES-20-60-20250723), introduced by the Finance Law for 2025 and codified under Article 163 bis H of the French Tax Code (FTC).

The key elements of this publication are summarised below. For a detailed overview of the new regime, we invite you to refer to our previous newsletter (MIPs – Finance Law 2025).

 

A. Clarifications regarding the scope of the new specific tax regime

Securities covered

The FTA have confirmed that the regime applies to securities whose disposal, sale, conversion or lease occurs on or after 15 February 2025, the day following the issuance of the Finance Law for 2025 in the French Official Journal².

This regime applies to securities or securities granting access to the share capital of the issuing company, regardless of their nature (for example ordinary shares, preference shares, convertible or redeemable bonds, share warrants), with the express exclusion of pure debt instruments such as plain vanilla bonds³. Only securities issued by joint-stock companies are expressly mentioned, thereby excluding, for example, units in private limited companies (SARL).

In addition, the securities must carry a risk of capital loss. The FTA have clarified that securities acquired under statutory regimes must present a risk of loss of their acquisition or subscription value⁴. Accordingly, the regime under Article 163 bis H of the FTC does not apply where the employee or manager benefits from contractual mechanisms (such as a put option) guaranteeing the resale of their securities at a price at least equal to their subscription or acquisition value.

Lastly, except for securities acquired under statutory regimes, the securities must have been held for a minimum period of two years at the date of disposal. The FTA specify that where the securities disposed of were acquired or subscribed on different dates, it is necessary to (i) consider the holding period of each individual security and (ii), where the securities are fungible or non-identifiable, apply the first-in, first-out method (FIFO)⁵.

Gains covered

The guidelines clarify that the gains falling within the scope of this regime are not determined by the terms of allocation, acquisition or subscription of the securities, but rather by the conditions under which the net gain is realised upon disposal, sale, conversion or lease of the securities. These conditions must demonstrate that the net gain was obtained not in the capacity of an investor, but as consideration for the individual’s role as an employee or manager⁶.

In particular, the FTA specify that:

• The fact that the securities may have been acquired at a price below their fair market value at the date of acquisition or subscription does not, in itself, establish that the gain subsequently realised – particularly upon disposal – was received in return for the exercise of employment or management functions. A discount at the acquisition or subscription date is therefore not conclusive evidence⁷.
• Neither the mere status of employee or manager at the time of acquisition / subscription, nor the duration of the holding period, is sufficient to characterise the existence of consideration. Similarly, the revocation of contractual undertakings (for example vesting provisions) during the holding period does not exclude the FTA from taking such undertakings into account⁸.
• Gain on securities realised by employees or managers in return for their functions may be evidenced by the following evidences:
• the achievement of performance thresholds (for example in the case of ratchet preference shares or benefits linked to sweet equity arrangements)⁹.
• the requirement for the employee or manager to comply with specific contractual provisions (for example non-compete clauses, exclusivity and loyalty obligations, transfer restrictions, or tag-along rights in the event of a sale by majority shareholders).

B. Clarifications on the method for determining the taxable gain under the capital gains regime

For reference, the threshold for taxing net gains under the capital gains regime is determined using the following formula:

3 × price paid for the acquisition or subscription of the securities × financial performance of the company over the relevant period – price paid for the acquisition or subscription of the securities

Administrative tolerance regarding the acquisition date of securities

As a matter of administrative tolerance, securities acquired, subscribed or allocated within a short timeframe as part of a single transaction – notably pursuant to a framework agreement, a set of contractual arrangements or a single allocation decision – may be deemed to have been acquired on the same date.

However, this tolerance does not justify the creation of a single pool of securities that combines both eligible and non-eligible instruments under the specific tax regime provided for in Article 163 bis H of the FTC¹⁰.

Clarifications on the determination of the acquisition price

As a general rule, the acquisition or subscription price of the securities corresponds to the amount actually paid by the beneficiary. In the case of free shares, this price is deemed to be equal to the value of the securities on their acquisition date.

Where fungible or non-identifiable securities acquired on different dates are disposed of, the FIFO method applies. This rule may result in the application of multiple acquisition prices and, consequently, the determination of several thresholds for the taxation of the net gain under the capital gains regime¹¹.

Furthermore, the FTA have clarified that the acquisition price cannot be increased to cover transaction-related costs, such as fees, commissions, taxes or fees for notaries¹².

Evidence to demonstrate financial performance

The FTA require employees and managers to be able to substantiate the financial performance used to assess the securities under the regime provided for in Article 163 bis H of the FTC. For this purpose, individuals may submit a statement issued by their employer or by the company, which, in principle, corresponds to the issuing company of the securities.

Valuation of the company: rules governing shareholder debts

The fair market value of the company corresponds to the fair market value of its equity, to which may be added any debts owed to shareholders or related undertakings, within the meaning of paragraph 12 of Article 39 of the FTC.

However, the FTA have introduced strict rules governing the inclusion of shareholder loans¹³:

• Debts granted after the date of acquisition, subscription or allocation of the securities are deemed to have been granted on that same date for the purpose of determining the fair market value to be used at the acquisition date;
• Debts repaid prior to the date of disposal of the securities (or a transaction falling within the scope of Article 150-0 B of the FTC) are included in the fair market value of the company at the disposal date, alongside any outstanding amounts.

These clarifications are intended to prevent any artificial manipulation of the company’s valuation, particularly through debt movements that could unduly increase the threshold for taxing net gains under the capital gains regime.

 

C. Clarifications on the tax treatment of gains

Deferral of taxation and abuse of law: safeguards under the regime

According to Article 150-0 B of the FTC, the acquisition price of the securities received in exchange must be adjusted to reflect any amount that has already been taxed as employment income. The objective of this rule is to prevent any potential issues with double taxation on the net gain from the disposal of the securities.

Furthermore, the FTA have stated that they are entitled to invoke the abuse of law procedure to disregard any artificial interposition or structuring of the gain distribution whose principal purpose is to avoid the tax rules set out in Article 163 bis H of the FTC¹⁴. In particular, they have the right to challenge (i) the holding of MIPs through a private holding company or (ii) the structuring of an exit from a package via the payment of dividends or a liquidation bonus (which, in principle, fall outside the scope of the new regime as they are taxed as distributions).

Earn-outs: adjustment of net gain

The guidelines clarify that earn-outs received after the disposal of securities must be taken into account when determining the portion of the net gain taxable under the capital gains regime set out in Article 163 bis H of the FTC. However, the financial performance of the reference company is assessed only up to the date of disposal, and not up to the date the earn-out is paid.

In practice, the portion of the earn-out that does not exceed the gain that is less than three times the financial performance ratio of the company is taxed as capital gains. Conversely, any amount exceeding the threshold is taxed as employment income, in the year in which the earn-out is paid, where such amount is not determinable at the time of disposal¹⁵.

 

D. Pending clarification

Impact of the regime on securities currently held in a share savings plan (PEA)

Securities falling within the scope of Article 163 bis H of the FTC do not qualify as eligible assets for registration in a “PEA” or “PEA-PME”¹⁶.

The FTA have not yet clarified whether the holding of such securities within a PEA would trigger the closure of the PEA, even where the plan also includes eligible securities.

Impact on the gifts

Firstly, it remains to be determined whether the taxable gain in the hands of the donor corresponds solely to the portion of the net gain that is taxed as employment income rather than the entire net gain. Secondly, it remains to be determined whether this taxable gain is assessed on the date of the gift.

International scope of the regime

Clarification is needed as to whether employees and managers not subject to French social security contributions may be exempt from the specific employee contribution.

Withholding tax

It would be helpful if the tax authorities could confirm that gains falling within the scope of the new regime are excluded from the scope of withholding tax on employment income.