The Finance Bill for 2013 introduces significant changes to the personal income tax rules, leading to a tax increase for the highest earners. The changes bring the taxation of employee share plan gains, capital gains on shares and dividends into line with taxation of employment income. In the light of these changes, employers should consider the effectiveness of these changes, and the structure of their share-based compensation plans employment.
A major change in taxation of Share Options and Restricted Shares Units (RSUs) gains - again
For options and RSUs granted as from 28 September 2012, the acquisition gain is treated as employment income and subject to personal income tax at progressive rates of up to 45%, regardless of the holding period of the shares during which the beneficiary held the shares after grant or vesting of the awards.
However, taxation will continue to be deferred until the date of sale of the shares, provided the holding period set forth by the French Commercial Code (for RSUs only) and reporting obligations are met.
From a social security standpoint, awards granted before 28 September 2012 remain subject to the former regime. Awards granted after 27 September 2012 are subject to social contributions at the rate of 8%, plus the pre-existing special contribution at the rate of 10%.
Removal of flat rate capital gains tax
In 2012, a flat rate of 24% tax (plus 15.5% social contributions) applied to gains realized on the sale of shares. From 1 January 2013 (with some exceptions) this flat rate will no longer apply and such gains are subject to income tax at progressive rates up to 45% (plus social contributions for 15.5%). A rebate will however be applicable after a certain holding period.
Taxation of Dividends
Until 31 December 2012, dividends received by French individuals could be subject either to income tax at progressive rates or to a flat withholding tax rate of 21% (plus 15.5% of social contributions). If the dividend is from a French company or a company resident in a country with which France has a double tax agreement, and progressive tax rates apply, only 60% of the dividend will be subject to tax (a 40% rebate).
With effect from 1 January 2013, all dividends are subject to income tax at progressive rates (after the 40% rebate), plus social contributions for 15.5%. Except for low income households, income tax shall be withheld at source at the rate of 21%, with the amount being offset against the final income tax on such dividends.
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