Since the Finance Law for 2005, joint-stock companies (SA, SAS, SCA...) have had the option to award free shares to their employees and directors. This employee shareholding scheme is intended to motivate and retain the company's employees by offering them the opportunity to become shareholders of the company for free. It adds to the existing solutions for profit-sharing in the company's capital (BSPCE, stock options, BSA...).

The tax regime for free shares has been the subject of numerous legislative reforms in recent years. Indeed, the Macron law, which came into effect on August 8, 2015, significantly changed the taxation of free share awards. Subsequently, the Finance Laws for 2017 and 2018 brought new changes. 

Taxation of Free Share Awards

Free shares awarded from 1 January 2018 are subject to new tax rules. Indeed, the applicable tax regime for the awarding company and the recipients of the shares was modified by the Finance Law for 2018.

For the awarding company

The scheme for the free award of shares results, for the awarding company, in the payment of an employer contribution. However, its rate has been revised many times.

The Macron Law of August 6, 2015 initially set the employer contribution rate applicable to free share awards at 20%. The goal was to encourage employee shareholding. Subsequently, the previous rate of 30% was reinstated by the Finance Law for 2017.

Finally, the Finance Law for 2018 lowers the employer contribution rate applicable to free share awards to 20%. This new rate came into effect on 1 January 2018 and applies to all free shares awarded from this date. It is still applicable today.

💡The contribution is payable the month following the acquisition of the shares, that is, at the end of the acquisition period.

For the beneficiaries of free shares

The allocation of free shares leads to a double taxation for the beneficiary, in terms of the acquisition gain and the capital gain made during the sale of the shares.

Taxation of the AGA acquisition gain 

The acquisition gain corresponds to the real value of the shares on the date of their final acquisition by the beneficiary.

The acquisition gain from free shares allocated from January 1, 2018, is taxed according to the rules set out in article 80 quaterdecies of the CGI:

• The acquisition gain of less than €300,000 is taxed according to the progressive scale of income tax after applying a unique 50% deduction, without any holding period condition;

💡 In case of retirement, the leader who sells his shares benefits from a fixed deduction of €500,000.

This fraction of the gain is subject to social contributions (17.2%).

• The acquisition gain exceeding €300,000 is taxed according to the common law rules in the category of wages and salaries.

This fraction of the gain is subject to the CSG and the CRDS at the following rates: 9.2% and 0.5%. The acquisition gain is also subject to the salary contribution at a rate of 10%.

Imposition of the gain from the sale of free shares

The sale of shares results in a capital gain if the value of the title is appreciated. This gain is equal to the difference between the sale price of the free shares and their real value on the acquisition date.

Since January 1, 2018, the beneficiary of free shares is automatically subject to a single flat tax of 12.8% and social security contributions at a rate of 17.2%. They may also prefer to opt for the progressive income tax scale plus 17.2% social security contributions.

In accordance with article 150-0 D of the General Tax Code, the taxpayer who has opted for income tax benefits from a reduction based on their holding period:

• 50% reduction if they have held their shares for at least 2 years and less than 8 years;
• 65% reduction if they have held their shares for at least 8 years at the date of sale.

Furthermore, when they retire, the leader who sells their shares benefits from a fixed reduction of 500,000€. However, this reduction does not accumulate with the reductions applicable under income tax. The taxpayer must thus choose between the fixed reduction or the reduction for the duration of holding.

Reporting obligations

The issuing company of free shares and the beneficiaries are subject to separate reporting obligations.

Obligations incumbent on the attributing company

The share-issuing corporation must make a number of tax declarations after the allocation of free shares and when they are definitively acquired by the beneficiary.

After the allocation of free shares

The issuing company notifies its recovery agency of the identity of the employees or corporate officers to whom free shares have been allocated, as well as the number and value of the shares distributed.

This notification is done through the Nominative Social Declaration (DSN) (formerly DADS) submitted monthly, in accordance with article 39 of Annex III of the CGI, article 87 of the CGI, and L133-5-3 of the Social Security Code.

At the time of final acquisition

Under article 38 septdecies of the CGI, the granting company delivers to the beneficiary an individual statement containing the following information:

• The object for which it is established: free shares;
• The company name and headquarters of the issuing company;
• The identity and address of the beneficiary;
• The number of shares acquired and their unit value at the date of final acquisition;
• The fraction of the acquisition gain of the assigned shares;
• The dates of assignment and final acquisition of the shares.

Furthermore, the joint-stock company is required to transmit to the tax administration in its monthly DSN the following information: the number of shares assigned, their unit value at the date of final acquisition, the fraction of the acquisition gain, and the dates of assignment and final acquisition of the shares.

Obligations incumbent on the beneficiaries

Beneficiaries are required to declare their gains to the tax administration at the time of the final acquisition of free shares and at the time of their disposal.

At the time of final acquisition of the free shares

The employee or director beneficiary is not required to attach the individual statement to his income tax return for the year of the final acquisition of the shares. However, he must retain the individual statement until the expiration of a recovery period and present it to the tax administration if requested. Otherwise, he is liable to a tax fine of €150, as reminded by article 1729 B of the General Tax Code.

At the time of disposal of the free shares

The grantee must report the acquisition gain as well as the capital gain or loss on disposal in the annual declaration for the year of disposal (declarations 2042 and 2042 C).

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For more information on the free share allocation scheme, read our article Granting of free shares (AGA) : what is it ?.