Management Package: Tax Pitfalls to Avoid Before an Investor Enters

A management package gain realised from 15 February 2025 falls under article 163 bis H of the French tax code. The portion below the statutory cap (three times the acquisition price multiplied by financial performance, minus that price) is taxed as a capital gain at the 31.4% PFU. The excess is taxed as salary, plus a 10% employee levy.

When a private equity fund, an industrial buyer or a strategic investor takes a stake in a French company, the management package of the sitting executives is one of the first items reviewed in due diligence. This is not just an HR structuring exercise: it is a tax-sensitive topic, governed since 15 February 2025 by article 163 bis H of the French tax code, created by article 93 of Law no. 2025-127 of 14 February 2025 (Finance Act for 2025), on top of the three plenary rulings of the French Conseil d'État of 13 July 2021 (nos. 428506, 435452 and 437498). That article now draws the line itself between the portion of the gain taxed as a securities capital gain (article 150-0 A of the tax code, 31.4% PFU) and the excess portion taxed as salary, together with a 10% flat employee levy (article L. 137-42 of the Social Security Code).

This article is aimed at executives preparing a fundraising round, a build-up, a LBO, a partial sale or the entry of a strategic investor. The objective is not to give an upbeat view of management packages (their tax efficiency now depends on meeting a precise statutory framework) but to list the concrete pitfalls that can cost dearly when least expected: at exit, sometimes years after the deal.

• A statutory regime has applied since 15 February 2025: article 163 bis H of the French tax code splits a management package gain between a portion taxed as a capital gain (article 150-0 A) and an excess portion taxed as salary.
• The statutory cap equals three times the acquisition price multiplied by financial performance, minus the acquisition price. The excess above it bears a 10% flat employee levy (article L. 137-42 of the Social Security Code).
• Three alarm criteria are systematically reviewed: acquisition price decoupled from real value, close link with employee duties, asymmetric risk (unlimited gain, capped loss).
• Instruments at risk: ABSA, ratchets, sweet equity, executive BSA, put options, leveraged preferred shares.
• The investor pushes the risk to the executive: if the tax authority reclassifies the gain as salary, the executive bears the additional income tax and social charges.
• Best practices: acquisition price at fair value, real risk taking, alignment with other shareholders, rigorous documentation.
• Possible substitution: use BSPCE or AGA when eligibility allows, far safer legally.

A management package is an incentive scheme giving sitting executives access to part of the value created during or after a capital transaction. It usually takes the form of an investment in the company (subscription of shares or derivative instruments) on terms negotiated with the incoming investor.

The core idea: the executive rolls over part of their cash proceeds or subscribes to instruments alongside the new investor, hoping to capture at the next exit (typically 4 to 7 years later) a substantial gain, taxed as a capital gain (31.4% PFU), not as salary.

This logic worked for 20 years. It is now structurally challenged.

<a id="caselaw"></a>

What changed on 15 February 2025#

The three rulings of 13 July 2021 (nos. 428506, 435452 and 437498)#

Sitting in plenary tax formation, the Conseil d'État held on 13 July 2021, in three decisions (nos. 428506, 435452 and 437498), that gains from such schemes must be taxed as salary where they essentially originate in the exercise of employee or director duties. The rule applies both to the advantage obtained on a preferential-price acquisition and to the disposal gain. In practice, three elements are examined:

1. The instrument provides the executive with an economic advantage (acquisition at a price decoupled from real value, privileged financial rights, etc.);
2. This advantage is closely linked to the duties performed in the company;
3. The executive does not bear a real investor risk (capped loss, unlimited gain).

The tax authority can then tax the gain as salary. The top marginal rate of the income tax scale is 45% above €181,917 per share of the family quotient, to which the exceptional contribution on high incomes of article 223 sexies of the tax code may be added (3% from €250,000 to €500,000 for a single filer, or from €500,000 to €1,000,000 for a couple, then 4% above).

The statutory regime of article 163 bis H#

Article 93 of Law no. 2025-127 of 14 February 2025 (Finance Act for 2025) created article 163 bis H of the French tax code, a dedicated statutory regime for management package gains. It applies to securities whose disposal, sale, conversion or letting occurs on or after 15 February 2025, whatever the acquisition date. Gains realised before that date, including those under a deferral, remain governed by the previous rules.

The mechanism is a split. The portion of the net gain below a statutory cap falls under the securities capital gains regime (article 150-0 A of the tax code); the portion above that cap is taxed under the ordinary rules for salary income. The regime covers ordinary shares, preference shares, warrants, convertible bonds, free shares, share options and BSPCE, granted to employees and directors performing their duties in the issuing company, its directly or indirectly held subsidiaries, or its parent companies.

Article 24 of Law no. 2026-103 of 19 February 2026 (Finance Act for 2026) amended the regime, in the version in force since 21 February 2026: deferral of taxation available under conditions on a contribution of securities, cash balance capped at 10% of the nominal value of the securities received, a three-year audit window after the contribution, and exclusion of companies whose main purpose is managing personal wealth.

Recent case law: Conseil d'État, 7 May 2026, no. 493083#

The Conseil d'État (8th and 3rd chambers combined) held that contributing management package securities does not prevent taxation of the salary gain. Because the contributed securities correspond to remuneration within the meaning of the 13 July 2021 case law, the contribution, being a transfer of ownership, triggers taxation of the salary gain, with no deferral or roll-over mechanism available. The reassessment follows the ordinary adversarial procedure of article L. 55 of the tax procedure code, without resorting to the abuse of law procedure.

Practical implications#

• Comparisons with deals completed before 15 February 2025 are no longer relevant: those gains follow the previous rules, later ones follow article 163 bis H.
• The reference administrative doctrine is BOI-RSA-ES-20-60, published on 23 July 2025 and open for public consultation from 23 July to 22 October 2025.
• The ruling procedure of article L. 80 B of the tax procedure code gives a formal position of the tax authority, binding on it, on a factual situation under a tax provision. The answer comes within three months of a written, precise and complete request from a good-faith taxpayer. An informal opinion offers no shelter.

<a id="instruments"></a>

1. ABSA (Shares with Warrants)#

ABSA allow the executive to subscribe to a share with a warrant entitling them to a future share at a fixed price. High reclassification risk if the warrant is granted at an undervalued price and conditional on the executive's continued presence.

2. Ratchet#

A mechanism where the executive receives additional shares if the exit value exceeds a threshold. Very high risk: by construction, ratchets are conditional on objectives and tied to executive duties. No published decision names ratchets specifically: the applicable test remains that of 13 July 2021, now combined with the statutory regime of article 163 bis H.

3. Sweet equity#

In a LBO, the executive subscribes to a minority share at a low price, while the fund holds majority via acquisition debt. The leverage works in the executive's favour. Moderate to high risk depending on the price differential between executive and fund shares.

4. Executive BSA#

Classic share warrants granted to the executive. Moderate risk if the strike is at fair value. Higher risk if granted free or at symbolic price.

5. Put options#

The executive has the right to sell shares back to the fund at a guaranteed price, regardless of performance. High risk: it is the antithesis of investor risk (the loss is capped by construction).

6. Leveraged preferred shares#

Share class with enhanced financial rights (priority dividends, enhanced exit gain). Moderate risk if the preference premium is justified by real investment and risk.

Tax risk summary#

<a id="reclassification"></a>

Zone 1: the acquisition price#

If the executive buys shares at a price significantly below their real value, the tax authority may treat the difference as an advantage obtained in return for the duties performed. No numerical discount threshold is set by statute, by the BOFiP or by case law: BOI-RSA-ES-20-60 states on the contrary that a preferential-price acquisition does not automatically evidence a link with those duties, the analysis being made case by case.

Best practice: have the shares valued by an independent expert at acquisition date, keep the report and pay the actual price.

Zone 2: the link with duties#

If the instrument is granted only to sitting executives (and lost on departure), conditioned on minimum presence (good leaver / bad leaver) and calibrated on operational performance, it becomes hard to defend it as a personal investment detached from the salaried role.

Best practice: open the scheme partially to others (former executives, advisors); make leaver clauses proportionate; avoid 100% correlation with executive KPIs.

Zone 3: real risk#

The instrument must expose the executive to an effective loss if they buy at fair value. If the loss is capped at zero (free instrument) or a protection mechanism (guaranteed put) cancels the risk, reclassification becomes likely.

Best practice: require a real cash contribution from the executive (or rollover of their existing shares), without unconditional protection put.

<a id="analysis"></a>

1. Management package is no longer the tax sanctuary it was. Expected after-tax returns must be recalibrated by separating two portions: the one below the article 163 bis H cap, taxed at the 31.4% PFU, and the excess taxed as salary. On that excess, adding the three verifiable components (income tax scale up to 45%, exceptional contribution on high incomes up to 4%, 10% flat employee levy) puts the maximum marginal take at around 59%, not the 80% sometimes quoted.

2. Investor due diligence rarely validates the executive's tax risk. The investment agreement systematically transfers the future tax burden to the executive (tax indemnity clause if reassessment occurs post-deal). In practice, the investor protects their IRR, not the executive's net.

3. Prefer regulated schemes when possible. For executives eligible for BSPCE, AGA or a rollover via a personal holding, these schemes provide markedly better legal certainty at the price of marginally less favourable taxation.

<a id="risk"></a>

Retroactive reclassification after exit. The executive thinks they have "passed the test" if no audit occurred within two years of grant. But for income tax the authority may reassess until the end of the third year following the year in which the tax was due (article L. 169 of the tax procedure code). There is no six-year period for fraud: the extended period is ten years and targets undisclosed activity, fictitious residence abroad and certain reporting failures (articles 123 bis, 209 B and 1649 A of the tax code). By then, the executive has often already reinvested the cash and paid tax at the PFU rate.

The mitigation: mentally reserve the reclassification risk in personal planning, keep precautionary cash sized on the differential between the portion taxed as a capital gain and the portion taxed as salary, and document the tax position with a tax lawyer before exit.

<a id="decide"></a>

Reassessment periods that actually apply#

There is therefore no six-year period "in case of fraud": this is a common confusion. The version of article L. 169 in force on 1 July 2026 results from Decree no. 2026-563 of 29 June 2026.

• Ask the incoming investor for the precise structuring considered (instrument, price, terms).
• Have the shares independently valued and keep the report.
• Ensure the acquisition price matches fair value (no unexplained discount).
• Identify leaver clauses and their proportionality.
• Compute the net gain post-reclassification (high and low scenario).
• Obtain a written tax opinion from a specialised lawyer before signing.
• Check possibility of switching to a regulated plan (BSPCE, AGA).
• Reserve precautionary cash post-exit to cover potential reassessment.

<a id="watchpoints"></a>

• Administrative doctrine: the reference is BOI-RSA-ES-20-60, published on 23 July 2025 (public consultation from 23 July to 22 October 2025). To consult before any structuring.
• URSSAF audits: shared jurisdiction with the tax authority; either may initiate reclassification.
• Tax treaties: for non-resident executives, watch the place of taxation (residence at exit ≠ residence at grant).
• A statutory regime now applies: unlike the previous situation, management packages fall under article 163 bis H of the French tax code for any disposal made on or after 15 February 2025. BSPCE (article 163 bis G) and free shares (articles L. 225-197-1 to L. 225-197-5 of the Commercial Code) keep their own regimes, expressly referred to by article 163 bis H.
• Eligibility conditions: the securities must carry a risk of losing the price paid to acquire or subscribe them and must have been held for at least two years. For free shares, share options and BSPCE, the condition is limited to a risk of loss of value at the acquisition or subscription date, with no minimum holding period.
• Social security side: Law no. 2025-1403 of 30 December 2025 (2026 Social Security Financing Act) made the social regime permanent, where it had initially been capped at 31 December 2027, and refocused it on gains on securities meeting the conditions of II of article 163 bis H.
• 2026 Finance Act: article 24 of Law no. 2026-103 of 19 February 2026 amended article 163 bis H (deferral on a contribution of securities, cash balance capped at 10% of nominal value, three-year audit window after the contribution, exclusion of personal wealth management companies).

<a id="faq"></a>