The allocation of free shares is a legal system regulated and secured, which allows individual incentive and profit-sharing schemes to the benefit of the employees or the executive officers of a company.
For several years, the allocation of free shares was rarely used due to an unattractive tax and legal regime.
The “Macron bill”, adopted on August 6th 2015, has softened the tax and legal regime of free shares, which should give a new impetus to their use by the companies.
The company making the grant must be a société par actions (i.e. société anonyme, société par actions simplifiée or société en commandite par actions).
The French Commercial Code defines a formal procedure to be followed by companies for the grant of these awards. It is mainly involving a decision of the extraordinary shareholders’ meeting, which must define the proportion of the share capital which may be awarded and the vesting and holding periods, and which then authorizes the board of directors to determine the other conditions of the awards and to actually make the grants during a period which cannot exceed 38 months.
– Grants to employees
Pursuant to Article L.225-197-1 of the French Commercial code, the allocation of free shares is « for the benefit of the salaried personnel members of the Company or some of them“.
– Grants to corporate officers
French law limits the cases where corporate officers, who do not have an employment contract, can be awarded free shares.
Only a defined list of officers can receive free shares. This list includes the chairman of the board of directors (président du conseil d’administration), the chief executive officer (directeur général), the deputy chief executive officer (directeur général délégué), the members of the management board (membres du directoire) and the manager of a joint-stock company (gérant d’une société par actions).
Regarding the President of an SAS, the French tax authorities have indicated in their guidelines that an individual who is the President of an SAS should be regarded as an officer entitled to receive free shares. The chief executive officer (directeur général) and the deputy chief executive officer (directeur général délégué) of a SAS are also entitled to receive free shares.
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Note: An individual participant cannot hold more than ten per cent of the share capital of the company making the award at the time of grant and the award itself cannot result in that participant holding more than this percentage.
The procedure may involve three phases:
First step: The decision of the allocation is made by the extraordinary shareholders’ meeting.
Second step: Once the beneficiaries are identified and the shares are allocated by the Board of Directors, the beneficiaries have to respect a vesting period. They may become the owners of the shares at the end of this term. Currently, employees that have been granted free shares receive the shares after a vesting period of at least one year (instead of two years before the new system).
Third step: At the end of this vesting period, the free-shares allocation is finally operated.
The beneficiairies are therefore submitted to a holding period. It is only at the end of this term that the beneficiaries may have the right to sell the shares granted.
Under the terms of the bill, companies are now subject to a single condition: the cumulative duration of the vesting and holding periods would have to be a minimum of two years.
There is more freedom in how companies can structure their vesting and holding periods and it now include:
– a minimum one year vesting period followed by a minimum one-year holding period; or
– a minimum vesting period of two years with no holding period.
Article 34 of the bill maintains the principle of applying a progressive rate of income tax on gains on acquisition and sale.
However, such gains would benefit from the same tax relief for the holding period (running from the acquisition date) as that which applies to capital gains on securities.
Under the favorable regime of the Macron Bill, both the acquisition and sale gain are subject to capital gains tax treatment at progressive income tax rates. Therefore, acquisition and sale gains benefit from a 50% reduction for a holding period between 2 and 8 years and 65% reduction above 8 years.
Note: The tax allowance might be increased in case of retirement: fixe allowance amounting to € 500.000 and allowance on the balance, amounting to 50% between 1 and 4 years / 65% between 4 and 8 years / 85% above 8 years.
– For employees :
The gains on acquisition would be subject to the same regulations as those for capital gains on securities, at the rate applicable to investment income, 15.5%, payable on the date of the sale of the free shares.
– For employers :
Under the bill’s provisions, the employers’ social insurance contribution rate applying to the grants of free shares is 20% (30% under the previous regime), and is now due in the month following the date of acquisition by the beneficiary.
Moreover, the Macron law provides with an exemption for small and medium size companies up to a certain threshold (38.040 EUR for FY 2015) per beneficiary provided that no dividend distribution has been made since the incorporation of the company.
