Taxation of management package income
Newsletter - September 2021
What is a management package?
In order to align the interests of its managers and employees with those of its shareholders, a company can set up share acquisition schemes called “management packages”. These profit-sharing mechanisms are often used in LBO transactions.
This may include, for example, the granting of share purchase warrants (SPW) or share purchase or subscription options (COA).
The manager or employee who benefits from it therefore has part of their income directly dependent on the company’s performance.
What is the taxation system for management packages?
The taxation system for income earned from certain management packages is not defined by the texts, in particular income from SPWs and COAs.
Several case-law decisions and verdicts of the Committee on abuse of tax law, issued in recent years, had led to the belief that compliance with certain conditions in the implementation of these schemes would be sufficient to avoid the risk of reclassification of this income as wages. These conditions were mainly the valuation of the implemented financial instruments at a market price, the realisation of an investment by the beneficiary and the existence of a risk of loss.
As a result of three decisions handed down in a plenary session on 13 July 2021, the Council of State has changed the situation by specifying the rules that must apply:
- Acquisition or subscription
When acquiring or subscribing to share purchase warrants or options at a preferential rate, the manager or employee receives a benefit. If this benefit is granted to the manager or to the employee because of the positions they hold in the company, it constitutes an additional wage that is consequently taxable in the category of “salaries and wages” in the year of acquisition or subscription.
- Assignment or exercise of warrants / exercise of options
When a share purchase warrant is assigned, the Council of State states that the net income earned by an individual is in principle taxable according to the system of capital gains on the sale of securities by individuals (Article 150-0 A of the General Tax Code), including when the warrants were acquired or subscribed from a company in which the taxpayer was a director or employee at that time.
The Council of State specifies that “this is not the case, however, when, with respect to the conditions of realisation of the income from the assignment, this income must be considered as acquired not because of the assignor’s capacity as an investor but in consideration of their position as an employee or manager and thus constitutes taxable income in the category of salaries and wages pursuant to Articles 79 and 82 of the General Tax Code, realised and available in the year of assignment of these warrants.”
When a share purchase option is exercised or a share purchase warrant is exercised, the income earned from these transactions, which represents the difference between the real value of the shares and the purchase price paid, is in principle a capital gain on the sale of a security.
However, if it “derives essentially from the exercise, by the person concerned, of their position as a manager or employee”, it is also taxed in the category of salaries and wages.
- Assignment of shares
When shares are assigned, the income is in principle taxable as a capital gain on the sale of securities. However, in exceptional cases, it constitutes wages when it is acquired not as a result of the assignor’s status as an investor, but as consideration for their duties as an employee or manager.
What are the criteria for establishing that an income would be linked to the exercise of the position of a manager or employee?
The conclusions of the public rapporteur show that the “connection of the income to the employment contract may for example be revealed […] by the fact that the granting of the warrant or option was linked to the duties of the person concerned, that the exercise of the warrant or option is conditional on the person concerned remaining in the company for a certain period of time, or even on their presence in the company on the date of exercise of the option, or by the existence of a link between the conditions under which the option is exercised (exercise price, percentage) and the attainment of certain profitability or result objectives.”
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