Earn-out taxation: how the price supplement is taxed

Quick answer. An earn-out (price supplement) is taxed as a capital gain on the sale of securities (Article 150-0 A, I-2 of the French Tax Code), in the year you receive it, at the 31.4 % flat tax (12.8 % income tax plus 18.6 % social levies). The exceptional contribution on high incomes may apply on top.

You have sold your company with an earn-out clause: part of the price depends on future results, and a supplementary payment will arrive in two or three years. One question comes up in every sale meeting: how will this supplement be taxed, and when? The answer drives your net cash and the security of the deal. It hinges on one point: how the supplement is characterised, capital gain or salary.

At Hayot Expertise, a firm registered with the Ordre des experts-comptables of Île-de-France, we handle this mechanism on the seller's side. This article focuses on the tax treatment of the supplement received. For drafting and securing the clause itself, see our dedicated analysis of how to structure the earn-out clause and its pitfalls.

An earn-out is a price supplement: a portion of the sale price that is neither fixed nor vested on the day of the sale. It is calculated later, based on an activity indicator (turnover, EBITDA, profit, achievement of a target). It is paid if, and only if, the agreed indicator is reached.

For the favourable price-supplement regime to apply, the French tax guidance (BOI-RPPM-PVBMI-20-10-10-20) sets one central condition: the supplement must be uncertain at the date of the sale. In other words, the clause must index payment to an objective measure of the activity whose outcome is unknown at signing. A price merely spread over time but certain is not an earn-out: it is a deferred payment, taxed under the regime of the initial gain.

This distinction is not academic. It is what attaches the supplement to the capital gain on the sale and spares it, in most cases, the far heavier treatment of salary.

Article 150-0 A, I-2 of the French Tax Code treats the price supplement as a capital gain on the sale of securities. Two practical consequences follow.

First consequence: the triggering event is receipt. The supplement is not attached to the year of the initial sale, but to the year you actually receive it (BOI-RPPM-PVBMI-30-10-10). If you sold in 2024 and the earn-out is paid in 2027, it is declared and taxed for 2027 income, regardless of how much time has passed since the sale.

Second consequence: there is no need to recompute a gain with an acquisition cost. The supplement is taxed in full as a gain, without re-allocating any fraction of the cost basis of the shares (already used on the initial sale).

This time lag is a planning advantage: it spreads the taxable base over several years. It is also a cash-flow trap when the taxpayer has forgotten the deadline. More on that below.

By default, the supplement falls under the flat tax: 12.8 % income tax and 18.6 % social levies, i.e. 31.4 % in 2026. You may opt for the progressive income-tax scale if your marginal rate is low or you have residual allowances; this option is global and applies to all your investment income and capital gains for the year. In every case, the 18.6 % social levies remain due.

The holding-period allowance now applies only in a residual case: shares acquired before 2018 with the option for the scale. In 2026 it is marginal for most sellers. Our approach, in cases where personal taxation matters, is to model both scenarios (flat tax and scale) before the year of receipt, as part of tax support for company directors.

The CEHR may apply#

A large earn-out can cross the thresholds of the exceptional contribution on high incomes (Article 223 sexies of the French Tax Code). It is computed on the reference taxable income:

• 3 % on the fraction of reference income between 250,000 € and 500,000 € (single person), or between 500,000 € and 1,000,000 € (jointly taxed couple);
• 4 % above those thresholds.

This is why "31.4 % plus CEHR" is accurate: for a large payment, the effective burden exceeds the headline flat tax. Understanding the taxation of a sale of securities as a whole helps anticipate this threshold effect in the year of payment.

This is the point we flag most to sellers who stay on as directors or employees after the sale. If the supplement actually rewards the seller's future activity, rather than the value of the shares sold, the tax authority can reclassify it as salary (or as non-commercial profits). The consequence is heavy: taxation on the progressive scale and social contributions, instead of the 31.4 % flat tax.

What the tax authority looks at#

The case law of the Conseil d'État brings a decisive nuance. The seller's mere presence in the company after the sale is not, on its own, enough to characterise remuneration. However, the following set of indicators tips the characterisation:

• the supplement is reserved for the seller who stays in office and would be lost on departure;
• it is indexed to the seller's personal performance rather than the company's value;
• its amount is disconnected from the quantity of shares sold or their value;
• the director's presence is decisive for obtaining the supplement.

The central test: is the supplement consideration for the shares, or consideration for work? The more the clause ties payment to staying in post and to individual performance, the more real the risk.

Our reading#

The security of the regime is built into the clause, not in the year of an audit. We recommend attaching the supplement to the status of selling shareholder and to a company indicator, payable whether or not the seller stays in office. When the buyer wants to incentivise the director on future performance, separate remuneration (variable pay, profit-sharing, a management package) is safer than inflating the earn-out and jeopardising the capital-gain regime of the whole. We address this interplay alongside wealth management for company directors.

The filing mechanics follow the timing of receipt.

1. Identify the year of actual receipt of the supplement; it determines the year of taxation (BOI-RPPM-PVBMI-30-10-10).
2. Report the gain on the securities capital-gain return (form 2074 where relevant) then on the 2042 return for the year concerned.
3. Check the flat tax applies or, if it is to your advantage, elect the global option for the scale (dedicated box on the 2042).
4. Set aside the cash as soon as the clause is signed, not on receipt: at least 31.4 %, more if the CEHR applies.
5. Keep the sale agreement and the earn-out schedule: these are the documents that prove the uncertain nature and the link to the value of the shares.

Common case#

Recently, a director of an SME approached us after selling a joint-stock company, with an earn-out indexed to EBITDA over the following two years. The buyer had proposed to condition payment on his staying as managing director, with a personal target. The expected supplement, several hundred thousand euros, brought him within the scope of the CEHR. The sticking point was not the rate, but the characterisation: as drafted, the clause exposed him to reclassification as salary. With his legal counsel, we worked to redefine the indicator around the company's performance and to detach payment from his presence, while organising his director's remuneration separately.

• The deferred taxation does not reduce the burden: the supplement is taxed in full in the year of receipt, not spread over the clause period. Anticipate the spike in taxable income for that year.
• There is no payment spreading for the earn-out as such: the mechanism to spread payment of the tax on a gain (Article 1681 F of the French Tax Code), reserved for sales of small companies under conditions, targets the gain on the initial sale, not the future supplement.
• The CEHR triggers on reference income: a substantial earn-out can, on its own, cross the 250,000 € or 500,000 € thresholds.
• The clause prevails over intention: what is written in the agreement overrides what the parties thought they were doing. Have the drafting reviewed before signing.

To place this topic within the overall sale strategy, see our overview of business and corporate taxation and the trade-off between selling the business assets or the shares, which changes the equation upstream.