The French Budget Law for 2025 Introduces a Tax Regime for Certain Gains from Management Packages

The taxation of gains realized under management packages has long been a source of litigation and legal uncertainty. For several decades, the tax authorities and the courts have debated the legal nature of such gains, oscillating between classification as capital gains and reclassification as employment income.

The French Council of State’s landmark decision of July 13, 2021 marked a turning point by confirming that the assessment of taxable gain should not be based solely on the risk assumed at the time of acquiring the securities but on a set of indicators determined at the time of their disposal. The decision emphasized that if the circumstances surrounding the realization of the gain demonstrated that it was derived from the performance of functions rather than a capital investment, it should be taxed as employment income.

In a subsequent ruling on January 28, 2022, the Council of State further reinforced this approach by stating that a mandatory disposal clause in the event of departure from the company, often included in shareholder agreements, could constitute an indicator that the gain is linked to employment functions, thereby subjecting it to income tax as salary.

Heavy Tax Consequences of This Jurisprudence

This case law has had significant tax consequences:

• A progressive tax rate of up to 49% applies to gains classified as employment income, compared to a maximum of 34% under the capital gains regime.
• Social security contributions apply, with both employer and employee charges, potentially raising the total tax burden to more than 85%.

These rulings have led to extensive litigation, as companies and beneficiaries sought to demonstrate that their gains were not remuneration but the result of real investment risk.

The 2025 French Budget Law: A New Tax Framework

The 2025 French Budget Law introduced Article 163 bis H into the French Tax Code (CGI). This new provision establishes a default rule of taxation as employment income for gains realized on securities subscribed, acquired, or granted to employees or company executives, when these gains are earned as compensation for their functions.

By exception, a portion of the gain may qualify for capital gains taxation under Article 150-0 A of the CGI, provided it falls within a threshold determined by a statutory formula that considers a performance multiple.

A Dual Taxation Regime

Article 25 bis of the 2025 Finance Act introduces a clear principle:

• By default, a portion of the gain realized on securities subscribed or acquired by employees or executives is taxable as employment income when it is considered compensation for their role in the company.
• A new 10% social contribution applies to the portion of the gain taxed as salary, collected in the same manner as social levies on investment income. However, this portion is not subject to employer social security contributions.
• Exceptionally, a portion of the gain may qualify as a capital gain (Article 150-0 A of the CGI), provided that:
  • The securities carry a risk of capital loss, and
  • They have been held for at least two years in the case of certain financial instruments or acquired under specific schemes such as free shares, stock options, and BSPCEs.

How to Determine the Capital Gains Portion

The law provides a statutory formula for determining the portion of the gain eligible for capital gains taxation:

Where:

• P = purchase or subscription price of the securities (or their value at the time of grant for free shares).
• VR_{Exit} = fair market value of the company at the time of disposal.
• VR_{Entry} = fair market value of the company at the time of acquisition or subscription.

‍

The capital gains regime applies only if:

• For free shares, stock options, and BSPCEs: the securities must carry a risk of losing their acquisition or subscription value.
• For other instruments: they must carry a risk of capital loss and have been held for at least two years.

Strict Framework and Ongoing Uncertainty

While the law establishes a clear tax and social security framework, it fails to address a critical question at the heart of past litigation:
What happens when gains are realized outside the scope of an employment or executive position?

The mere status of employee or executive does not automatically subject gains to this regime. Based on recent jurisprudence and pending administrative guidance, one could argue that gains should not be taxable as employment income if their realization is not linked to a work contract or executive mandate.

Cross-Border Implications and Coordination with Tax Treaties

Applying this new regime in a cross-border context raises complex issues, particularly in coordinating with bilateral tax treaties to avoid double taxation.

When an employee or executive resides in a country other than France but realizes a gain from a management package subject to the new rules, the question arises as to which country has the right to tax the gain.

Under tax treaties, employment income is typically taxed in the country where the work is performed, while capital gains are taxed in the taxpayer’s country of residence. However, the hybrid nature of this regime creates uncertainty.

For example, a foreign country might classify the portion of the gain taxed as salary in France as a capital gain, invoking Article 13 of the OECD Model Tax Convention, which assigns exclusive taxing rights on capital gains to the country of residence. Meanwhile, France would still tax the gain as salary under its new rules.

This mismatch in classification could lead to double taxation risks and complications in applying tax treaty mechanisms for relief.

A Fragile Balance to Monitor

While this new regime brings clarity, it remains subject to potential changes. The exemption from employer social security contributions until 2027 could be revised by future social security financing laws. The French tax administration’s interpretations will be crucial in shaping its practical application.

Managers and executives must now exercise greater caution in structuring their investment packages and properly documenting their capital risk to optimize their tax position.

TaxLhab is available to assist business leaders and investors in assessing the impact of these new rules on their financial structures and ensuring compliance with the applicable tax and social security framework.

‍