Illustration of an abuse of rights and taxation of management package gains21/02/2022
The tax team would like to draw your attention to a recent decision of the French supreme administrative Court of January 28, 2022 which expands its case law of the recharacterization as salaries and wages of gains realized in the context of a management package.
In this particular case, WI had set up a rather complex management package mechanism aimed at associating certain of its senior executives with certain of its sales operations.
In the context of this transaction, one of the executives acquired shares in Manco, which he immediately resold to a Belgian company created on this occasion with his wife and children. Subsenquently, this Belgian intermediary company sold the Manco shares tax-free under Belgian tax law, which exempts capital gains on the sale of shareholdings held by Belgian holding companies.
The French administrative supreme Court dismisses the interposition of the Belgian company as lacking economic substance. It noted that the company had no permises, technical resources or staff and that the Manco shares, over which it had no management autonomy, had constituted its only assets between its creation and their sale.
The creation of the company was artificial and its sole purpose was to avoid paying the tax that the manager would have had to pay if he had sold the Manco shares himself. The French Court therefore concluded that there was an abuse of rights.
In addition, the Court’s decision provides a new illustration of the reclassification as wages of gains from the sale of shares, when, having regard to the conditions of realization of the gain from the sale, this gain must be considered as acquired, not by virtue of the investor’s status, but in consideration of his functions as an employee or manager.
The present decision thus applies the new tax interpretation grid applicable to management package gains given by the French supreme administrative Court in its rulings of July 13, 2021 and followed by that of November 17, 2021 in the context of the transfer of warrants or stock-options, to those realized in the context of a transfer of shares.
By the tax law team