A Revolution in French Private Equity Management Packages
In this Chambers Expert Focus video, Xavier Petet and Estelle Philippi, partners at White & Case LLP, respond to the way management packages are now structured in France and comment on new market trends one year on from the so-called “French revolution” in tax.
Xavier Petet
Estelle Philippi
However crucial the role and leverage of managers may be in the negotiation of private equity deals in the French market, tax uncertainty continues to surround the implementation of management packages.
This issue is not new, but it has become particularly pertinent during the past year. In July 2021, three important rulings effectively reshuffled the card deck when it comes to the tax treatment of gains arising from French management incentive packages.
"A year ago the French Supreme Administrative Court ruled that the income from management incentive packages will be taxed as salary and not as capital gain if the main source of the gain is the employment function of the manager or employee."
Such case law essentially paves the way for the taxation of gains from the management package as ordinary income rather than capital gains. This will potentially impact the targets as well as the managers – and, as a result, the financial sponsor.
“This is a cultural change that also has a huge impact on the negotiation dynamics."
Since these landmark decisions, Xavier and Estelle have noted a deep shift in the French market as it tries to find pragmatic solutions to mitigate the risk. They consider the main evolution during the past 12 months to be in the contractual framework of the management packages, which they detail in the video.
"The market is definitely trying to take the rules resulting from the case law on board in these new management packages, given the huge impact that a tax requalification may have for all parties."
White & Case LLP
