NEWS

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09-01-2018

 

A social levy of 65% on the capital gains of managers?

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The tax administration is traditionally hostile to the investment of managers in the capital of the companies they manage when this investment is not part of a regulated regime proposed by the legislator.

 

It most often attempts, without always being followed by the courts, to requalify the capital gain as remuneration that is more heavily taxed at the progressive rate of income tax.

 

Over the past few years, court decisions and the positions of the tax authorities have allowed a better understanding of the tax risk of reclassification of earnings received by managers.

 

On the other hand, in practice, the social risk relating to a requalification of these gains in remuneration seemed more moderate.

 

A recent judgment of the Paris Court of Appeal dated July 6, 2017 could lead to a reconsideration of this position.[1].

 

In this case, as part of an LBO takeover, six managers had invested alongside the investment fund, by subscribing to stock warrants (BSA) issued by the company, for a total amount of 900,000 euros, warrants allowing their holder to subscribe to shares in the takeover company.

 

Upon exiting the LBO, the managers realized a capital gain on the sale of around €2.7 million under these BSAs.

 

Following a check carried out by Urssaf on the company that issued the warrants, this capital gain on the sale was reintegrated into the base for social security contributions.

 

After unsuccessfully contesting this adjustment before the Urssaf amicable appeals commission and before the social security court, the company appealed to the Paris Court of Appeal for the latter to determine whether the subscription of BSA constituted (a) a benefit granted in return for or in connection with work, subject to employee and employer social security contributions on the basis of Article L. 242-1 of the Social Security Code or (b) a simple financial investment.

 

In an unprecedented solution, the Parisian magistrates have :

 

• 1. considered that the character of advantage is "unquestionably" deduced from the "reduced number of people" who can subscribe to the capital increase,

 

• 2. judged that this advantage "only materializes and is quantified at the time of the transfer, by la        difference between the purchase price and the sale price",

 

• 3. noted that under the terms of the investment contract, the benefit granted to the directors of the company was granted in consideration of their corporate offices, the sales commitments granted provided in particular for the sale "of all of its BSA in the event of departure of the manager concerned".

 

[1]CA Paris, Pole 6, 12th Ch., 06/07/2017, n° 14/02741

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It therefore deduces that the existence of a benefit reserved for managers or employees falling within the scope of Article L. 242-1 of the Social Security Code[1], and subjects all of the capital gains made on the sale of the warrants to social security contributions.

 

However, the solution is open to criticism, particularly in its foundations.

 

Firstly, we will not follow the reasoning of the Court of Appeal according to which the reduced number of beneficiaries is sufficient to qualify the issue of BSA as a benefit within the meaning of the Social Security Code.

 

The Court would have seemed to us to be better advised to find out whether the subscription to the BSAs had been carried out under justified and consistent valuation conditions, or on the contrary under preferential conditions.

 

It is only in the event that the conditions for allocating the BSAs were preferential (regardless of the number of beneficiaries) that a benefit should have been qualified. In which case    the advantage should logically be equal to the difference between the actual value of the BSA and its issue price. It should not be determined by reference to the capital gain on sale (which may reflect an increase in the value of the BSA after issue).

 

Secondly, the possible advantage should not be assessed on the date of transfer of the BSAs (or of the securities subscribed by the exercise of the BSAs) but on the day of the subscription of the BSAs. Indeed, the triggering event for social security contributions must correspond to the day of the allocation of the benefit, ie the date of issue of the BSA, and not to the date of the transfer which may take place many years later.

 

An appeal has been filed against the judgment of the Paris Court of Appeal and we will therefore await with interest the position of the Court of Cassation.

 

The judgment of the Paris Court of Appeal confirms, however, the need to build with rigor and caution the profit-sharing plans for managers and in particular the "management packages".

 

Fabrice Segurel

Lawyer Artlex Nantes

 

[2]Article L. 242-1 paragraph 1 of the Social Security Code : "For the calculation of the social security contributions due for the periods for which the income from activity is attributed, are considered as remuneration all sums paid to workers in return for or in connection with work, in particular wages or earnings, paid holiday allowances, the amount of deductions for worker contributions, allowances, bonuses, gratuities and all other monetary benefits, benefits in kind, as well as sums received directly or through a third party as tips (…)”.