Increase in social contributions on capital income (first amended Finance Act 2012)
Social contributions will increase by 2 percent, from 3,4% to 5,4% as of 1st January 2012 for capital income (real estate income, capital gain on sale of shares) and 1st July 2012 for investment products subject to withholding social security tax (interests, dividends, capital gains on real estate).
The overall rate for social contributions will therefore increase from 13,5% to 15,5%.
However, for income for which the taxable event is the book-entry or the withdrawal, buy-back or conclusion of a plan or contract (for example a PEL or life insurance), only the share of the income acquired and, where applicable, recorded from 1st July 2012 onwards will be taxed at the 5.4% rate.
Only incomes derived from saving accounts will be excluded from this measure: “livret A” [savings account], “livret jeune” [Savings account for young people], “livret développement durable” [savings account for sustainable development] etc.
Abuse of law in registration of unlisted shares in a PEA account (Instruction 21-01-2012, 13 L-1-12)
The outline of the operation submitted to the committee for the prevention of abuse of law (CADF) was as follows:
- Free acquisition (by donation and inheritance) of a company’s shares,
- Then selling the shares received,
- Finally acquisition on the same day of an equal number of shares for the same price, taking place within a family group, the acquired shares then being registered in a PEA account.
Beneficiary would in such a scenario be taking advantage of both the favorable tax regime of the PEA account on dividends, and the capital gain derived from disposal of shares.
The CADF considered these operations as lacking in economic, financial or patrimonial substance, artificial in character, and realized with the sole intention of benefitting from the exemption on capital gain for the later disposal of shares.
Thus, shares transfer operations from taxpayers’ personal assets to a PEA account are not eligible to take advantage of the favorable tax regime related to disposal of shares through a PEA account.
Transfer of tax residence out of France no longer leads to the closing of PEA accounts (Instruction 8-03-2012, 5 I-3-12)
Transfer of tax residence out of France used to lead to the closing of the shares saving plan (PEA).
Where it occurred before the end of the fifth year following the opening of the account, such closing did not involve any taxation of the gain made since the opening of the plan, whether regarding income tax or social contributions.
When it occurred after the end of the fifth year following opening of the account, net gains realized on the plan were exempt from income tax, but were subject to social contributions, paid by the establishment in charge of the plan management.
The Conseil d’Etat, in a court decision of 2nd June 2006 (n° 275416, 3ème et 8ème sous-sections réunies, Chauderlot), cancelled the previous provisions of the administrative instructions regarding payment of social contributions on the net gain realized at the closing of the PEA account open for more than 5 years due to the transfer of the owner of the plan’s tax residence out of France, since these provisions concerned taxpayers exercising their right of freedom of establishment, transferring their tax residence to another member State of European Union.
The Instruction of March 8th 2012 goes further, transfer of a PEA owner’s tax residence out of France does not involve the automatic closing of the plan, whatever the new State of tax residence (European Union or not), except if such transfer is to a non-cooperative country or territory (ETNC) under the provisions of article 238-0 A of the French tax code (CGI).
Stock-options, free grant of shares (AGA) and BSPCE: nature of the gain and sharing out between States of right to impose tax (Instruction 14 A-3-12) and withholding tax at source on French sourced gain for non-resident taxpayers (Instruction 5 B-10-12)
Instruction 14 A-3-12 sets out the principles that apply in an international context to gains on exercised options, and the tax conditions relating to these gains in France.
In view of domestic law and OECD commentaries, and subject to double tax treaty provisions, gain on exercised options consists of employment income, which is in principle taxable in the State where the activity is performed.
An employee who has exercised share options benefits from an advantage equal to the difference between the market value, or the real value of the shares at the date of the exercise of the option, and the price of the option.
The capital gain on the disposal is equal to the difference between the disposal price of the shares and their real value at the exercise of the options and constitutes a capital gain.
The gains on exercised share options are taxable in the State or States where the activity is rewarded by attribution of the option, by a sharing out of the gain from exercised options between the States.
In order to analyze the portion of the gain on exercised options taxable in each State the following should be carried out:
- First, determine the activity in consideration of which the options were attributed, which also involves knowing if this attribution rewards future or past services ;
- Then, define the State or States in which the activity was performed and in consequence share out taxation of the gain from the exercised options.
Taxation of gain from exercised options must be shared out between States in proportion to the number of days on which the services to which the attribution of the options are related were provided in each of the States.
On the contrary, when the employee exercised his activity in only one State during this period, the gain on exercised options is exclusively taxable in this State.
Instruction 5 B-10-12 specifies the terms of application of taxation at source on gain related to mechanism of shareholding schemes for non-resident.
Taxation at source under the terms of article 182 A ter applies to gain and salary benefits related to legal mechanisms or « unnamed » shareholding schemes:
- Share options , free shares, warrants for subscription to business creator shares (BSPCE);
- Attribution of shares with preferential conditions out of any shareholding schemes mechanisms (concerns gains arising from attributions of share options or free shares where these attributions do not respect the conditions set out in the French commercial code («unqualified plans »)).
Tax at source only applies on the portion of the gain relating to an activity performed in France by a non-resident (see instruction 14 A-3-12).
For the legal mechanisms relating to employee shareholding schemes, the tax at source rate is:
- Depending on the case, 18%, 30% or 41% on stock-options
- 30% on free shares (AGA)
- 50% when the beneficiary of the stock-options or the AGA is domiciled in a non-cooperative State or territory.
For unnamed mechanisms and plans not qualified as shareholding schemes, the tax at source rate is calculated according to a tax scale with three bands, rated at 0%, 12% and 20% (bring to 50% in case of domiciliation in a non-cooperative State or territory)
Laurence Clot, Tax Partner firstname.lastname@example.org
Rébecca Feliman, Tax Lawyer email@example.com
Vaea Pery, Tax Lawyervaea.firstname.lastname@example.org
Edouard Bouscasse, Tax Lawyer email@example.com