France Tax Alert: Tax on bonuses paid to bankers proposed

The French Supplementary Budget Bill for 2010 would introduce a new tax on bonuses paid to bank traders, with the revenue collected being used primarily to "strengthen the security of depositors." The move to tax excessive bonuses follows similar initiatives in the U.K. and the U.S.

According to the proposal, a new company tax of 50% would be assessed on bonuses paid by credit institutions and banks (including branches of foreign banks) to capital markets professionals whose activities are likely to have a substantial impact on the risk exposure of such enterprises. The tax would apply to the portion of bonuses that exceeds EUR 27,500 for calendar year 2009.

The new tax would apply on gross bonus payments made in relation to 2009 in consideration for individual or collective performance, including awards, the payment of or vesting of which are subject to conditions (e.g. stock options, free share awards or deferred compensation). Amounts derived from qualified profit sharing or participation schemes, however, would be excluded from the new tax.

The text of the draft legislation specifies that for stock options, free shares or other securities awards, whether granted by the parent company or a subsidiary of the entity employing the individual, the tax base would be equal to the value of the instruments, as estimated according to IFRS rules (although it is unclear whether the rule known as "IFRS 2" would have to be used).

The combination of the existing employer contribution of 10% applied to grants of qualified stock options or free shares and the new 50% tax that would be due upon the grant of a bonus exceeding EUR 27,500 in the form of stock options or free shares could lead to an overall tax rate of 60%.

The tax would be due on the first day of the month following the date the law is enacted. If all or part of the bonus is awarded after that date, the tax would be due on the first day of the month following the date the award decision is made. The tax would have to be declared and paid within 25 days of the due date and accompany a special tax return to be issued by the French tax authorities.

The current version of the draft legislation does not further define the scope of application of the tax, nor is it clear whether the tax would apply to bonuses paid to professionals on secondment in France or to French individuals on secondment overseas.

The text of the law is still in draft form and could be amended during discussions in the French Parliament and Senate.