On
May 25, 2011, the French tax authorities issued a ruling that reverses
and replaces a July 6, 2010 ruling that had potentially negative
consequences for US issuers granting French-qualified stock options
under a plan with a term in excess of 38 months.
In
the July 6, 2010 ruling, the French tax authorities determined that
options granted by a US corporation to employees of a French subsidiary
would not qualify for the favorable French tax regime if the options
were granted under a plan approved by shareholders for a term as long as
10 years. The decision was based on the requirement
applicable to French companies that shareholders must authorize the
grant of qualified options, but for a period of no longer than 38
months. While the tax authorities permitted the grant of
qualified options by non-French issuers under shareholder-approved plans
with a term in excess of 38 months, they stipulated that such plans
must have a fixed and reasonable duration, and expressly found that a US
corporation's 10 year plan term was not reasonable.
This
ruling was received with surprise by US issuers and their advisors as,
taken literally, it meant that US issuers could not grant
French-qualified options under plans with a 10 year term or with no
fixed term, as had been their long-standing practice. To
avoid this outcome, our French partner, Agnès Charpenet, has been very
active in lobbying the French tax authorities to reverse the July 2010
ruling, by explaining the shareholder approval and disclosure
requirements applicable under US and UK law and defending the basis on
which non-French issuers have been granting qualified options.
As a result, on May 25, 2011, the French tax authorities issued a new ruling replacing the July 2010 ruling. The
new ruling expressly confirms that corporations subject to the U.S.
Securities Exchange Act of 1934 whose shares are traded on the New York
Stock Exchange or the NASDAQ may grant French-qualified options under a
plan approved by shareholders for a period longer than 38 months
(including plans without any fixed term limit). The tax
authorities based their decision on the fact that the shareholder
control and transparency objectives of the 38 month limit set forth by
French law are sufficiently met when options are granted by US listed
issuers, regardless of the term of the relevant plan.
The new ruling does not extend its exemption from the plan term limit to other non-French companies or to private companies. However,
the new ruling is still helpful to such companies because it finds that
a plan approved by shareholders for a period of up to 76 months has a
sufficiently limited and reasonable duration for purposes of granting
qualified options. For avoidance of doubt, companies not
covered by the ruling's exemption from the plan term limit should
consider obtaining shareholder approval of their equity plans at least
once every 76 months to ensure their ability to grant French-qualified
options.
Neither the July 2010 nor the May 2011 ruling address French-qualified restricted stock units ("RSUs"). However,
the French tax authorities have indicated that they will confirm that
the favorable May 2011 ruling applies to RSUs by means of a reference in
pending tax guidelines on the grant of French-qualified RSUs by
non-French issuers.
We
will continue to monitor this situation and lobby the French tax
authorities to ensure that draft laws and guidelines are prepared with
the needs of our US and other international clients in mind. If
you have questions about how these rulings impact your French-qualified
option or RSU grants, please contact your GES attorney.
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