Stock options in an international context: treatment of an indemnity for waiving stock options, received by a corporate officer within the meaning of the tax treaty between France and the United Kingdom
In its October 4, 2013 decision, no. 351065, Mr. Clive Worms, the French Administrative Supreme Court reiterated that, under domestic tax law, an indemnity received by a French tax resident in compensation of his cancelled stock options qualifies as a compensation for work.
On the day the options were granted, the beneficiary was the manager of a limited partnership with shares “gérant” (and, therefore, he was eligible for the stock option grant). Then, he became the chairman of the supervisory board after the company was converted into a société anonyme (public limited company). He received an indemnity for the waiver followed by the cancellation of his stock options, the granting company being the target of a takeover bid. When this indemnity was received, he was a UK tax resident and did not declare it in France, considering that, in any event, the indemnity was not subject to taxes in France.
Under French domestic law, for some time now case law has held that an indemnity for waiving stock options was deemed wages and taxed as such since options were granted in the capacity of employee. Since, in this case, the indemnity was paid to a corporate officer who, in such capacity had received the cancelled stock options, the tax authorities argued that the indemnity was indeed subject to taxes as a corporate officer’s compensation, i.e., as wages, and that it should have been declared in France.
Several days after its October 1, 2013 decision, Merck (see our November 2013 Newsletter), the French Administrative Supreme Court confirmed that the legal basis for taxing an indemnity for a stock option waiver is Section 80 bis of the French Tax Code and that the indemnity qualifies indeed as a compensation income, whether it be paid to an employee or a corporate officer.
However, as the indemnity was paid to a UK tax resident, the UK-France Tax Treaty of May 22, 1968, was supposed to determine the state where the indemnity was taxed, depending on how the indemnity was categorized under the treaty. The French Administrative Supreme Court made a literal interpretation of the treaty, resulting in taxing the indemnity in the beneficiary’s state of residence, and not in the state where he worked, work which was the reason for the grant of the stock options.
Indeed, Article 15 of the treaty governs the taxation of compensation only for “income from employment” and, therefore, it cannot be used to determine the taxation of sums paid to a corporate manager, even if, under French tax law, a payment made to a corporate officer is taxed as wages. Similarly, Article 16, which gives to the state of residence of the company of which an individual is a member of the board of directors or of its supervisory board, the right to tax any amounts he receives, did not apply because the relevant indemnity was paid to him in his capacity as corporate manager “géranté, the position he held when the stock options were granted, which position was not covered by Article 16. Article 22 of the treaty provides that income items not covered by another treaty provision are subject to taxes in the state of the beneficiary’s tax residence.
Although the treatment of stock option income in an international context was settled by the French Administrative Supreme Court’s decision of October 1, 2013, it will still be important to verify the application of treaties to each specific case in order to correctly qualify the income before determining the state of taxation.
