France and Sourcing of Options in Cross-Border Situation
The French tax authorities have never commented officially on the taxation of a stock option gain when an employee had performed duties in different countries between the date of grant of the options and the vesting date.
Formal guidance on the subject was prepared by the French administration and circulated in 2005, but it was never signed . This state of affairs created uncertainty as to the tax treatment of the option gain in cross-border situations. It also led to cases of double taxation for inbound individuals where the authorities sought to tax the whole of the gain or double exemption.
A recent decision by the French State Council (Conseil d’Etat) sets some principles and provides useful guidance.
In February 2000, an employee of a French company who was on assignment to Belgium, but had remained a French tax resident, exercised options awarded to him in December 1995 and sold the shares immediately.
The French tax authorities assessed additional tax on the grounds that the employee had failed to declare the exercise gain in France. They argued that because a holding period of five years1 was not met, the gain should have been included as taxable income in the salaries and wages category for the year 2000.
The taxpayer disputed the amount of the reassessment, on the grounds that the gain was taxable in France only in proportion to the professional activities performed in France during the year in which the options were exercised. The Administrative Court of Appeal of Versailles ruled in favor of the taxpayer, on the basis that the tax being annual, the correct sourcing position was in relation to the year in which the event occurred in the absence of an express provision in the French-Belgian double taxation agreement derogating from the normal French rules.
State Council’s Conclusions
The State Council, in an important decision of 17 March 2010, came to a different conclusion.2 It held that a combined reading of article 80 bis of the French general tax code and of the provisions relating to wages and salaries of the French-Belgian double
taxation agreement led to recognition that the exercise gain is taxable in France insofar as the activity to which the options relate has been performed in France. The period to take into account is that between the date of grant and the date on which the beneficiary is entitled to exercise the option (equivalent to “vesting” in English terminology). If activities have been performed in the territory of several states during this period, the gain will be prorated according to “the number of days worked per person in the respective territory of each State.”
Summary of State Council Decision: Principles
The principles set by the State Council decision can be summarized as follows:
• The acquisition gain resulting from the exercise of stock options should be considered as remuneration for French tax purposes where the shares are sold before the expiration of a five-year period from the date of grant, but only insofar as the activity for which the options have been awarded has been performed in French territory.
• Where the options granted are exercisable after the expiry of a period prescribed by the plan rules or the grant letter, the acquisition gain is taxable in each of the territories in proportion to the number of days worked in the respective territories during the period between the grant date and the date when the beneficiary becomes entitled to exercise the options.
• However, if the shares are immediately exercisable in accordance with the stock option plan or grant letter, the gain is fully taxable in the country in which the taxpayer carried on professional activities when the options were granted.
FIDAL Note: Issues to Consider
Do the new rules end any debate as to the treatment of stock options in a cross-border situation? The answer is clearly ‘no’. The judgment relies on the fact that the acquisition gain was treated as salary income for French tax purposes because the required holding period was not met.
However, the court decision provides some support for sourcing in accordance with OECD principles