After a chaotic process marked by the no-confidence vote of the Government formed by the French Prime Minister Barnier in December 2024 and the absence of a budget vote before the end of 2024, the Finance Bill was finally adopted on 6 February 2025, and mostly validated by the French Constitutional Council on 13 February. Following up on our previous post, this article provides an updated overview of the key tax measures relevant for individuals.

Introduction of a ‘differential contribution on high incomes’ (DCHI) 

A new contribution is introduced for taxpayers whose ‘reference tax income’ exceeds €250k for a single person and €500k for a couple, if they are resident for tax purposes in France. Therefore, French-sourced incomes received by non-French residents should not be in the scope of this new contribution. It will finally apply only to 2025 income.  

For the purposes of this provision, ‘reference tax income’ (RTI) is defined by reference to the one taken into account for the purposes of the already existing exceptional contribution on high income (ECHI), with certain adjustments. It shall be specified that exceptional income (i.e., income that, given its nature, ‘is not likely to be received annually’ and whose amount exceeds the average net income in respect of the previous three years) is taken into account only for a quarter of its amount. This could include capital gains if certain conditions are met.

This contribution is intended to ensure that the relevant taxpayers will be subject to an overall taxation of their annual income at least equal to 20% of their RTI. As a result, it will be equal to the positive difference between: 20% of the RTI as defined above, and the sum of the income tax and the ECHI due in respect of the relevant year (with certain adjustments, such as the addition of certain tax credits and reductions). A mechanism is provided to avoid threshold effects. 

Accordingly, the DCHI would generally apply where the taxpayer receives income which is predominantly subject to the flat tax. For example, for a taxpayer who only receives dividends subject to the flat tax, the DCHI could be equal to 3.2% (calculated as 20% minus 12.8% income tax portion of the flat tax minus 4% ECHI). This rate would be lower for capital gains, provided that they are considered ‘exceptional’ (as referred to above). 

An instalment will be due in December 2025, and the balance to be paid or refunded in 2026. 

Clarification of the interaction between tax treaties and French provisions defining French tax residency

Article 4 B of the French tax code provides a definition of the French tax residency (domicile fiscal) based on several alternative criteria (home or principal place of residence in France, principal professional activity in France, or centre of economic interest in France). A taxpayer may therefore be considered resident in France for tax purposes pursuant to Article 4 B, but non-French tax resident pursuant to the relevant double tax treaty (e.g., a taxpayers having their permanent home in the other country, while having the centre of their economic interest in France). 

In a decision dated 5 February 2024, the French Administrative Supreme Court ruled that the French tax code provisions applicable to non-French tax resident taxpayers pursuant to Article 4 B (e.g., certain withholding taxes) were not applicable when the taxpayer is considered French tax resident pursuant to Article 4 B, even though they are non-French tax resident pursuant to the relevant double tax treaty. The Finance Bill for 2025 overrides this court decision, by providing that a taxpayer who is non-French tax resident pursuant to double tax treaties cannot be considered resident in France for tax purposes pursuant to Article 4B . 

Changes to the tax treatment of management incentive plans 

Changes to the regime of the warrants for business creators (bons de souscription de parts de créateurs d’entreprises – BSPCEs)

Under strict conditions, certain recently created companies may award BSPCEs to their employees or executives. Under the favourable BSPCE tax regime, the whole gain (i.e., the gain recognized on the exercise of the warrants and the capital gain recognized on the sale of the corresponding shares) realized by the BSPCE holder is eligible for the capital gains tax treatment (i.e., taxation at the flat tax rate of 30 %, unless a global option is made for the progressive tax scale). In a decision dated 5 February 2024, the French Administrative Supreme Court confirmed this treatment and that the whole gain was therefore eligible for the tax-free roll-over applicable to contributions of shares. 

The Finance Bill for 2025 overrides this court decision, by establishing a distinction between, on the one hand, the gain realized upon exercise of the warrants, qualified as an employee benefit and, on the other hand, the gain realized upon disposal of the shares received in exchange for the BSPCEs, having the nature of a capital gain. Both gains will continue to be eligible for the 30% flat tax, unless an election is made for the progressive scale, but the exercise gain will not be eligible for the deferral of taxation in the case of a contribution of shares (the exercise gain will only benefit from the deferral in case of cashless exchanges realized in the context of a public offer, merger, demerger, stock split or reverse stock split). 

Introduction of a new tax regime for certain management package gains 

The Bill introduces a new regime to mitigate the consequences of certain case law.

On 13 July 2021, the French Administrative Supreme Court issued several rulings that significantly impacted the taxation of management packages, often used in leveraged buyouts to align the interest of executives and employees with those of financial investors. 

The Court considered that, although capital gains realized by managers should in principle be taxed as capital gains, they shall be treated as salaries, and therefore subject to higher rates and social security contribution, when these gains are earned in consideration for the position of the manager (which is heavily dependant on the contractual arrangements concluded between the manager and the sponsor). The Bill introduces a new regime to mitigate the consequences of these rulings.

It is important to note that the gains which do not qualify as salaries pursuant to this case law are not impacted by this measure and will continue to fully benefit from the capital gains regime. In addition, so called “acquisition gains” (representing a fraction of the total gain) from certain regulated employee share ownership plans, such as stock options and free share allocations, are excluded from the new regime and will continue to be taxed under their specific provisions.

Key Features of the New regime

In substance, the Bill introduces, for the gains qualifying salaries pursuant to the above-mentioned case law, a dual taxation approach allowing, up to a certain limit, the application of the capital gains regime. 

This new regime, which is conditional upon the existence of an exposure to financial risks for the manager and, in most cases, a minimum holding period of two years, is the following: 

• Capital Gains Taxation: A portion of the gain falling within the scope of this article will be taxed as capital gains. This portion is limited to three times the “project multiple” during the holding period. The maximum tax rate (including social levies) for this portion is 34% (subject to the application, as the case may be, of the new DCHI). 
• Salary Taxation: Any relevant gains exceeding this limit are taxed as salaries, and therefore subject to the progressive income tax rates, which can go up to 49%. The new regime exempts this exceeding fraction from employer social security contributions, and subjects it instead to a new 10% flat-rate social contribution, due by the manager.

The new regime applies irrespective of the way the project and the management package is structured (ordinary shares, preferred shares, sweet equity…). It applies to disposals, sales, conversions, or leasing of shares realized as from 15 February 2025. Instruments acquired or subscribed to before the enactment date are also covered, ensuring a broad application of the new rules.

As with any new legislation, further official commentary from the French Tax Authorities will be necessary to address specific situations and ensure smooth implementation (such as notably the treatment of donations and share exchanges).