Pierre Bonamy
Reinhart Marville Torre, Paris
pierre.bonamy@rmt.fr

In early February, the French Administrative Supreme Court (Conseil d’Etat) issued a favourable ruling regarding the tax regime for BSPCEs, a particular type of stock options. The author of this analysis article represents the law firm that brought the matter to court.

What is BSPCE?

No, BSPCE is not an obscure style of electronic music, nor is it a trendy new drug. Instead, BSPCEs (bons de souscription de parts de créateur d'entreprise) could be described as a type of stock options.

The BSPCE regime was introduced in 1998. It is a legally regulated employee share ownership scheme, the aim of which is to build loyalty and involve employees and managers in the performance of young companies.

BSPCEs can only be issued by unlisted limited companies (or companies whose capitalisation on a European market is less than €150m), subject to corporation tax in France, at least 25 per cent of whose capital is directly and continuously held by individuals or by legal entities that are themselves at least 75 per cent directly held by individuals. The issuing company must have been registered with the Trade and Companies Register for less than 15 years. To put it simply, BSPCEs are essentially stock options for startups.

Beneficiaries, who are employees or directors, are granted the right to convert their BSPCEs into shares (subject to certain performance conditions and the length of employment) at a price defined at the time of the grant. In principle, an increase in the company’s value generates a gain for the beneficiary, based on its difference in comparison to the grant value.

The gain on the sale of shares generated due to the exercise of BSPCEs is subject to capital gains tax on the sale of securities, pursuant to Article 163 bis G of the French General Tax Code (CGI). The overall tax rate for the beneficiary upon disposal of the shares is 30 per cent (with a presence of more than three years) or 47.2 per cent (with a presence of less than three years).

Unlike other legally regulated employee share ownership mechanisms, such as stock options or free share allocations (so-called ‘AGAs’), the BSPCE regime does not provide for the taxation of intermediary gain (such as acquisition gain or vesting gain).

What is this ‘sursis’ I keep hearing about?

Article 150-0 B of the CGI allows individuals to benefit from a tax deferral (the so-called ‘sursis’) on the capital gains realised upon contribution of shares to a company subject to corporate income tax, which they do not control after the contribution.

The rational for this deferral is simple: when you contribute shares (sometimes referred to as a share-for-share exchange) you may realise a capital gain (a difference between the acquisition price of the shares contributed and their fair market value upon contribution), but you do not generate any liquidity. Thus, the tax liability is deferred until the sale of either the contributed shares or the shares issued upon contribution. As Pablo Escobar said, ‘no plata, no plomo’.

So, is there a deferral for the contribution of shares issued from BSPCEs?

There has been a debate among practitioners regarding this very question. Some were conservative and did not recommend claiming any type of deferral on the contribution of shares issued from BSPCEs. In substance, they were worried that the hybrid nature of the gain, at least from an economic standpoint, would disqualify it from the deferral. They argued that BSPCEs are granted to employees in consideration of their employment. As such, they concluded that part of the gain (the exercise gain) had a salary-related nature, the remainder being capital gain (disposal gain).

Other practitioners had more of a legalistic approach. They considered that no text prohibited the application of the deferral, notwithstanding the economic nature of the gain. They further argued that the applicable law did not create any distinction within the gain realised upon disposal of shares issued from BSPCEs. They, therefore, concluded that such a deferral was applicable.

As you may have guessed, yours truly was one of the latter group.

In any event, it was what us lawyers like to call a grey area. A source of risk for some, a stream of opportunities for others. The French tax administration had identified this grey area. And they decided to paint it black.

In May 2023, the French tax authorities updated their online guidelines (which we affectionately call ‘le BOFIP’) as follows: ‘Gains resulting from the contribution of shares subscribed in exercise of BSPCEs are not eligible for the tax deferral regime provided for in Article 150-0 B of the CGI’.

At least it was clear. From an economic perspective, excluding the contribution of shares issued from BSPCEs from the deferral means that, in the case of an acquisition or partial takeover, employees would likely be unable to reinvest. Indeed, in practice, reinvestments involve the contribution of shares to a dedicated vehicle. With no possibility of deferral, reinvestment becomes only available to those who have the means to pay, upfront, 30 per cent of the capital gain arising from the contribution.

From a legal standpoint, the justification brought forward by the administration seemed very weak, if not entirely unfounded. In essence, the BOFIP claims that the reference made in the article of the CGI dealing with the BSPCEs (Article 163 bis G) to the article dealing with the regime of capital gains arising from the disposal of shares (Article 150-0 A) merely deals with the determination of the basis but does not include the rest of the regime regarding capital gains, and certainly not the deferral (determination of the taxable event).

I will not go into the details for fear of losing those who are not intimate with the French tax system. But, let me tell you just two things.

First, Article 150-0 A does not deal with the determination of the tax basis. Thus, one is entitled to wonder how a reference to an article can be limited to tax basis rules when the said article does not contain any such rules.

Second, Article 150-0 A is a point of entry into the tax regime of capital gains arising from the disposal of shares. In other words, it is the gateway to a vast realm which encompasses the fabled land of deferrals. The legislator said so when the BSPCEs were voted into existence (granted, they may have used less colourful language).

At dawn, we ride

Convinced that the BOFIP was illegal, my team and I decided to bring the case to the Conseil d’Etat, which is the French Supreme Court for administrative matters. Many law firms introduced similar claims. However, ours was the only one which was heard and gave rise to a decision.

We argued that the BOFIP carved an exclusion into the law, instead of merely commenting on it and clarifying it. The guidelines, thus, had to be cancelled, for only the lawmaker can make the law. The Conseil d’Etat followed our argument and cancelled the incriminated BOFIP (Conseil d'Etat, 5 February 2024, n° 476309).

Based on the preparatory work to the relevant finance bills, the judges concluded that the reference to Article 150-0 A could only be understood as a reference to the entire system of capital gains on share disposal, and not as a reference to the terms of this article alone. They further ruled that, absent any exclusion expressly provided by law, the deferral was to apply.

We were vindicated and, as we rode into the sunset towards a better tax system, we knew that the implications of this decision go further than the mere deferral of Article 150-0 B of the CGI.

Into the sunset, we rode

The cancelled BOFIP dealt only with one type of deferral – the sursis of Article 150-0 B – which applies when shares are contributed to a holding not controlled by the contributor.

So, what about the deferral provided by Article 150-0 B ter, which applies when shares are contributed to a holding controlled by the contributor? The Conseil d’Etat does not mention the Article 150-0 B ter deferral in its decision. However, its reasoning is clear. BSPCEs should be treated as any other securities, unless otherwise provided by the law. Furthermore, it uses the phrase ‘in particular’ to confirm that the sursis is applicable.

There is, thus, no doubt that shares issued from BSPCEs can benefit from both types of deferral, depending on whether the contributor controls the holding after the contribution.

Furthermore, we can also conclude that other favourable tax schemes apply to the shares issued from BSPCEs. For instance, the operation involved when an individual gifts shares to their children right before the said shares are sold. The gift triggers a tax-free step up, resulting in no capital gains tax. The gift tax applies, but there is a tax allowance up to €100,000 (one for each child, renewed after 15 years). Based on the decision we obtained before the Conseil d’Etat, such operations should become available to those who own shares issued from BSPCEs.

Before concluding, we should also note that, in a recent decision, the Conseil d’Etat ruled that shares issued from BSPCEs can be put into a Plan d'Epargne en Actions (PEA) (Conseil d’État, 8 December 2023, n° 482922).

A PEA is a French investment scheme aimed at encouraging individuals to invest in stocks, primarily in European companies. It is a tax-advantaged savings account that allows individuals residing in France to invest in equities and enjoy beneficial tax treatment on the returns, under certain conditions. The main advantage of the PEA is the tax exemption on capital gains after a certain period, typically five years.

This decision by the Conseil d’Etat did not, however, clarify how the tax regime involving the shares issued from BSPCEs combines with that of the PEA. Some feared that the salary-related share of the gain (ie, exercise gain) could not benefit from the PEA exemption on capital gains.

However, in its latest decision, the Conseil d’Etat did not distinguish between salary-related gains and capital gains. During the hearing, the rapporteur public delivered an opinion on the case, and he outlined in no uncertain terms that the gain arising from the sale of shares issued from BSPCEs forms an indivisible whole. In our view, this means that shares issued from BSPCEs should benefit from the PEA favourable tax regime, just as any other securities.

In conclusion, we are very happy to have obtained, before the highest administrative jurisdiction, a victory which brings clarity to all employees and directors who hold shares issued from BSPCEs. The Conseil d’Etat’s decision widens the tax horizons of those holding such shares, putting them on a par with ‘plain vanilla’ shareholders.