Management Package: attention to social and tax risks

By François Devedjian, Partner lawyer et Fabienne Kerebel, Counsel Counsel

 

Two recent rulings confirm and illustrate the fiscal and also social risk brought about by the use of capital incentive mechanisms (excluding legal incentive mechanisms) for managers.

 

Submission to social contributions of the capital gain resulting from the sale of BSA

In a recent judgment which takes on all the finery of a leading judgment, the Cour de cassation reclassifies as a benefit subject to social contributions the capital gain realized by managers as a result of the sale of their warrants.

“Whereas it follows from Article L. 242-1, paragraph 1, of the Social Security Code that, when they are offered to workers in return for or on the occasion of work and acquired by them here under preferential conditions, the share subscription warrants constitute an advantage which enters the base of social contributions ”

This case law joins that of the administrative judge in tax matters and confirms the risk inherent in the use of warrants as a support for management packages. According to the Cour de cassation, the capital gain resulting from the sale of BSA is likely to constitute a " benefit that enters the social contributions base "On a double condition:

• that the warrants are offered "in return for or on the occasion of the work",
• that the warrants were acquired on “preferential terms”.

The scope of the people concerned is therefore very wide. The Court specifies in its judgment that “ a link is affirmed (...) between on the one hand the allocation of BSA and their maintenance, and on the other hand, the existence and maintenance of an employment contract or a corporate office ". This covers not only employees but also all persons working within the issuer's group, that is to say exercising a professional activity there, in the first rank of which obviously appear the corporate officers.

The notion of " preferential conditions Is more vague but no less broad, especially since the Court does not give any details on the criteria of these preferential conditions. If the Court of Cassation joins the Council of State in the matter, the absence of a real "shareholder risk" should lead to such a qualification. Mechanisms that exempt - through the acquisition price, the sale price or the specific allocation or exercise terms - the holders of all or a substantial part of the risk of loss would therefore be qualified as preferential conditions.

On the other hand, it is probable that the (low) number and the (managerial) quality of the holders are not sufficient to characterize the “preferential conditions”. These characteristics can nevertheless constitute a clue which, added to others, will lead to the dreaded requalification.

Once the requalification has been recorded, the Court specifies that the operative event for social contributions relating to an advantage is " the effective provision of the benefit to the employee benefiting from it ". In terms of warrants, this effective provision corresponds to the date on which the warrants become exercisable or can be transferred.

This judgment calls for caution when structuring management packages, especially since the principle laid down and the resulting risk of requalification can be transposed to other incentive mechanisms for managers (excluding so-called legal incentives). 

Share-sharing agreement and tax risk

A recent decision of the Council of State (CE 15 Feb. 2019, n ° 408867) confirms the tax risk inherent in the structuring of retrocession of capital gains by contractual agreement.

"When the partners of a company agree that the capital gain that they are likely to realize during the concomitant sale of their shares with those of another partner will be shared with the latter, the fraction of this capital gain which accrues to the latter does not constitute for him a net gain from the sale for valuable consideration of his securities, within the meaning of 1 of I of article 150-0 A of the general tax code. When the sums in question essentially find their source in the exercise by the person concerned of managerial or employee functions, they constitute a financial advantage, within the meaning of article 82 of the same code. "

The Council of State confirms that the “super gain” resulting from a contractual preferential liquidation agreement does not constitute a gain on the sale of securities but a taxable “cash benefit” in the category of salaries and wages insofar as this " basically finds [her] source in the exercise by the person concerned of managerial or employee functions »

According to the high court, this payment had the nature " a payment, of an incentive nature, intended to reward the effective performance of his managerial functions as well as the results and performances resulting from this professional commitment "And not that" compensation for a risk that the latter would have run in his capacity as an investor »

Synthetic

• The capital gain resulting from the sale of BSA is subject to social contributions whether the warrants are offered in return for or on the occasion of the work and have been acquired under preferential conditions
• The "super surplus" resulting from a preferential liquidation concluded with leader is taxable in the category of wages and salaries

These rulings remind us of the necessary caution when structuring management packages, especially since the principle laid down and the risk of requalification which results from it can be transposed to other incentive mechanisms for managers, excluding so-called legal incentives (BSPCE, stock options, free shares, etc.). 

Resorting to alternative mechanisms, in particular through preference actions, can partly resolve these difficulties.