USA – Section 409A deferral saved?
A week is a long time in politics. In our newsletter on Monday (here), we reported that the US finance bill, currently under negotiation by US law makers, proposed the repeal of section 409A (the section in the tax code which allows US taxpayers to defer the payment of tax on cash and shares until the point when actually received). In the amended version of the finance bill released on Thursday, the clause dealing with the repeal of section 409A has been removed entirely. So, at least for now, it looks as if section 409A will remain intact.
The other change reported in our newsletter, the elimination of the performance-based compensation exception to section 162(m), was not amended by the revised finance bill.
This is a very welcome development, however the bill is still under negotiation and further changes are possible. We will update you again as the Bill progresses and once it becomes law.
France – Tax-favoured ‘Macron’ free share awards – and now it’s Macron 3!
The 2017 Finance Bill, which is currently being discussed by the French Parliament, will introduce several important changes affecting the taxation of individuals, including the tax treatment of free share plans – the so-called Macron regime.
What are ‘Macron’ awards?
Macron awards are tax-qualified free shares. The regime was introduced in 2015 by the current President Macron while he was the Economy Minister. The rules changed at the end of 2016 (heralding the Macron 2 regime) and are due to change again under the current Finance Bill.
The rules to qualify for the tax benefits are tricky, and many non-French companies have struggled with the rules governing the implementation of these plans.
What’s going to change?
There are several key changes which will, directly or indirectly, affect the tax treatment of free shares. The two key changes are:
Abolition of holding period for tax-qualified free shares:
- Current position: the shares are taxed on sale, with the acquisition gain (the value of the free shares at grant) taxed separately from the sale gain (the difference between the acquisition gain and the amount that the employee receives on the sale of the shares). Where the acquisition gain is under EUR300,000 in a year, the employee pays progressive tax and social security on the gain (that is, up to 45% income tax and up to 15.5% social security) and is entitled to a rebate of 50% or 65%, depending on how long the employee has held the shares. For the annual portion of the acquisition gain above EUR300,000, the employee pays income tax and social security and is not entitled to a rebate on that amount.
- Sale gain: the sale gain is taxed as a capital gain and will be subject to a new flat rate capital gains tax (discussed below).
- Macron 3: under the new rules, the acquisition gain under a qualifying free share plan, up to EUR300,000 per annum, will benefit from a 50% deduction, irrespective of how long the individual has held the shares. The other rules are not changed, so the portion of the acquisition gain over EUR300,000 will not benefit from the 50% deduction.
New flat tax for investment income:
- Current capital gains regime: currently there is a specific tax treatment for each type of investment income (dividends, capital gains and interest).
- Current tax rate: in effect, investment income is currently subject to progressive income tax (up to 45%) and social security taxes (currently up to 15.5%), although rebates apply to the tax payable on dividends and capital gains. Individuals are also able to take a tax deduction for part of the social security tax.
- Flat tax rate: the 2017 Finance Bill propose a flat 30% tax (EPU) for all investment income The flat rate is a combination of income tax at 12.8% and social taxes of 17.2% (the increased social security tax rate discussed below). Under the new flat rate, the rebates for holding periods no longer apply and there will be no tax deduction for social security.
- Impact on taxable amount: for higher rate tax payers, the flat rate seems likely to result in a reduction in the amount of tax payable. For lower rate tax payers, there is an option to elect to have the income taxed at progressive rates.
Increase in social security rate
The government has also announced an increase in the rate for CSG. CSG is a social tax levied on gross income and is set at 7.5% for salary income (which includes non-qualified share awards) and 8.2% for other income (which includes investment income and qualified free share awards). Under the 2017 Finance Bill, CSG will increase by 1.7%. As a result, the combined social security tax rate applicable to investment income and qualified free shares will increase to 17.2%.
The Finance Bill proposes scrapping the current wealth tax and replacing it with a tax on real property. Currently, all French tax residents are liable to pay a tax on world wide assets valued at above EUR1.3million as at 1 January each year. Rates are progressive from 0.5% to 1.5% (the higher rate applies to net wealth above EUR10million). Shares acquired under a share plan would be included in net wealth, although they can be eligible for certain allowances. Under the 2017 Finance Bill, only real estate assets would be liable for the tax. As a result, shares would no longer come under the asset tax from 1 January 2018.
Has there been any change to the tax treatment of the employer?
Currently the employer pays social security on the value of the free shares at vesting. This contribution rate was increased from 20% to 30% in the 2016 Finance Bill. We understand that there has been a proposal to reduce the employer contribution back to 20% but this is subject to on-going discussion.
When do these changes start to apply?
The Macron 3 regime will only apply to grants that are authorised by shareholders after publication of the French Tax Bill (which is expected to happen no later than 31 December 2017). The other changes (investment flat tax, increase in social security and abolition of wealth tax on shares) are due to apply from the start of 2018.
For both employers and employees, the regular changes to the tax treatment of free shares in France is frustrating. Each change requires additional time and expense to ensure compliance with the rules. Some take the view that these plans are more trouble than they are worth – however the tax benefits are considerable and French employees continue to push for them.
If you have any questions, please do get in touch – we are delighted to help!
Bob, Sally, Jordan and Emma