France revises its most popular employee stock option scheme and increases its attractiveness towards startups: What’s left for Switzerland?
Just on one of the last days in 2019, France’s Secretary of State for Digital Economy Cédric O has made public a revision of the law code governing the French stock option regime “Bons de souscription de parts de créateur d’entreprise (BSPCE)”. The presented changes include more favourable valuation principles for the grant of stock options to employees as well as the extension of the BSPCE regime to non-French companies employing staff in France.
What are BSPCE ?
The BSPCE are a particular category of stock options under the French law which can be granted to employees and directors of stock companies (SA, SAS, SCA). The eligible company must have been incorporated no longer than 15 years ago, be subject to French corporate income tax and privately held by individuals with a minimum shareholding quota of 25%.
The beneficiary of a BSPCE is entitled to purchase a pre-defined number of shares of the issuing company (i.e. the employer) for a pre-defined purchase price. Therefore, the BSPCE fall into the class of employee equity incentives and allow for a mutual alignment of interests between the employee and its employer as well as serving as a very effective means of retaining key human resources in the company.
If the beneficiary of a BSPCE stays for at least 3 years with its employer, the beneficiary is entitled to a reduced flat tax treatment (incl. social security charges) of 30% on any gain accruing from the exercise of the stock option right (i.e. BSPCE) upon a sale of the shares in the company.
What has been changed ?
The recent changes to the BSPCE law which have become effective on 1 January 2020 encompass two key amendments:
Introduction of more favourable valuation rules for the grant of BSPCE by venture-financed startups
The new rule foresees that shares awarded under the BSPCE regime can be purchased by the employees at a reduced price relative to the latest funding round (valuation per share), if the corporate rights attached to such shares awarded to employees are not equivalent to investor shares. This new rule makes it possible to award stock option rights at a preferred price to employees which could eventually increase the positive tax advantage for employees participating in such a regime.
The BSPCE regime can also be applied to stock option grants by non-French companies from EU and other countries as an equity incentive for their French workforce
A very powerful move has been to extend the scope of the BSPCE regime beyond French stock companies (SA, SAS, SCA). In detail, it can be expected that any similar company regime governed by the laws of another EU member state or any country with which France maintains a double tax treaty (incl. mutual administrative assistance clause) should be entitled to qualify for the BSPCE treatment in view of their French employees. This has been a very meaningful step especially in the context of Brexit.
What should Switzerland do?
The French amendment of its most popular stock option regime is certainly a very important step into the direction of making employee equity ownership more attractive and relevant. This also further fuels the attractiveness of startups towards talented human resources in the midst of the current war for talent. Given the fact that France belongs to the economic powerhouses in Europe, this certainly boosts Europe’s attractiveness for tech talent! Last but not least, this is also very much in line with the political changes called by the 2019 “not optional initiative”.
But what do these French measures imply from a Swiss competitiveness perspective?
In Switzerland, generally any shares in the employer acquired by the employees through the exercise of awarded stock options are taxed unlike in France upon exercise. The difference between the exercise price and the fair market value / formula value is taxed as employment income. However, the recognised employment income is subject to ordinary tax rates which can vary significantly depending on the residency of the beneficiary (ranging from 22.4% to 44.8%). After the taxation upon exercise, any additional capital gain generated through a subsequent sale of the shares is considered as a tax-free capital gain for Swiss residents. With this in mind, the parliamentary initiative submitted by Ruedi Noser is worth a consideration since it calls for a 50% reduction on the recognised taxable employment income upon exercise of the stock options. This could certainly contribute to an improvement of the attractiveness of stock options to employees of Swiss startups.
In view of the application of the Swiss tax regime to stock options issued on shares of non-Swiss companies, the good news is that Switzerland already allows for the application of its practice to stock options regimes of foreign companies provided a legal entity comparison proves similarity with a Swiss company type.
Hence, the recent revision of the BSPCE is a well-received refreshment for the European employee equity incentive landscape and could further also positively impact the Swiss lawmakers’ next actions. We are thrilled to observe what follows next.
KSquared is a Zurich-based startup consultancy which helps startups to build sustainable businesses. We specialise in financing and business operations support and have successfully enabled various startups from a wide range of industries.
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