France: Equity warrants and management packages - New decision by the French Supreme Court

Cass. Civ. 2nd, 28 September 2023, No. 21-20.685

In brief

In line with the Barrière case law of 2019 (Cass. civ. 2e, 4 April 2019, No. 17-24.470), the Supreme Court decided on 28 September 2023, that the issuance of Equity warrants (BSA) (from the French, Bons de Souscription d'Actions) to executives or corporate officers generates a benefit that should be included in the basis for social security contributions. In addition, the Supreme Court reverses its previous decision concerning the taxable event, requiring the benefit to be assessed at the date of sale or "realization" of the BSA

In the present case, BSA was issued by the company for the exclusive benefit of the company's directors and executives. The Organizations for the Collection of Social Security and Family Benefit Contributions (URSSAF) (from the French, Unions de Recouvrement des Cotisations de Sécurité Sociale et d'Allocations Familiales), audited the company, which led to a reassessment of social security contributions on the benefit arising from the BSA granted.


In more detail

A benefit subject to social security contributions

In order to include the benefit resulting from the issuance of the BSA in the basis for social security contributions, the Supreme Court applied, in the same way as in the Barrière case law, Article L. 242-1 paragraph 1er of the Social Security Code, implying the following two cumulative conditions: (i) the BSA are offered to a limited number of individuals in consideration for or in connection with their employment status and (ii) they are acquired by such individuals on preferential terms.

According to the Supreme Court, the first condition is met if the opportunity to subscribe to BSA is linked to the existence of an employment relationship as of the date of subscription. The fact that beneficiaries retained and exercised their BSA after leaving their positions within the company is irrelevant.

With regard to the second condition, concerning the preferential terms of the BSA, these would result "both from the status of employees or corporate officers of the beneficiaries and their limited number, and from the terms of issuance and transferability of the BSA, the financial terms of the subscription constituting no more than a mere indicator". The Supreme Court did not specify the conditions of issuance and transferability of the BSA that would have influenced its decision, but it is to be noted the fact that "leavers" provisions allowing the company to request repayment in the event of departure were provided, as well as non-transferability of the BSA provisions. This decision also confirms that the existence of preferential financial conditions at the time of subscription of the BSA is only incidental to establishing the presence of a benefit subject to social security contributions, and thus confirms that the capital risk assumed by the beneficiary is not taken into account, in accordance with the decisions of the French Tax Supreme Court.

Triggering event and basis for social security contributions

In the Barrière case law, the Supreme Court determined that the triggering event for social security contributions was "the effective availability of the benefit for the beneficiary, i.e., the date on which he had free disposal of the BSA".

Noting the difficulties raised by this previous decision, which led to a "theoretical benefit being subject to contributions rather than the actual benefit", the Supreme Court reversed its position, ruling that "the triggering event for social security contributions relating to this benefit is the date of sale or realization of the BSA so that the benefit must be assessed at this date in relation to the gain obtained or the saving made by the beneficiary".

While this reversal may resolve some of the complexities involved in determining the gain and valuing the BSA, it nevertheless appears to be detrimental to the company and the beneficiaries of the BSA, since it (i) shifts the starting point of the statute of limitations to the date of exercise or disposal of the BSA, and (ii) increases the basis for social security contributions in the event of an increase in the value of the underlying shares. Payment of the employee's social security contributions might also remain problematic if the underlying shares are not sold directly after the exercise of the BSA.

In any case, this decision is a reminder that BSA issued to executives are actively scrutinized, both by the social security authorities in the event of a URSSAF audit and by the tax authorities, and that it is now more than ever necessary to prioritize other instruments than BSA when structuring a management package.

Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.