Stock Options and Restricted Stock


The exercise of an ISO not followed by a disqualifying disposition is generally a tax event only for purposes of the AMT.

Actions Gratuites Et Stock-Options La Contribution Patronale


Please contact customerservices lexology. The French government has decided to increase taxation of the wealthiest taxpayers, and to align the tax treatment of income derived from employment and from capital. For example, capital gains previously taxed at a 19 percent flat rate 1 are now subject to individual income tax at progressive rates of up to 45 percent.

However, those rules were deemed contrary to the French Constitution 3 and are not currently in force. As a result of the new rules, RSUs and SOs are significantly less attractive methods of remunerating employees and managers in France than before. Consequently, we anticipate French employers will look to other means of remunerating their key employees. Non-qualifying plans are already subject to the same tax and social security treatment as salary, and therefore are not affected by the new rules discussed below.

For qualifying SOs, any acquisition gains and any sale gains are subject to tax in the year the shares are disposed of, not the year in which the options are exercised. This timing is also applicable for RSUs, i. Click here to view table. Again, the exercise of a NQO generally requires the grantee to report the spread upon exercise as ordinary compensation income for the year of exercise. The exercise of an ISO not followed by a disqualifying disposition is generally a tax event only for purposes of the AMT.

If the employee makes a disqualifying disposition, he or she must report the spread upon exercise as ordinary compensation income i for the year of the disposition rather for the year of the exercise and ii net of any amount by which the disposition price is less than the value of the stock as of the time of exercise if the option were a NQO, any such recognized post-exercise depreciation would likely have been a capital loss rather than an offset against ordinary compensation income.

A corporation that grants an ISO reports no compensation deduction with respect to the ISO unless the grantee makes a disqualifying disposition. Upon a disqualifying disposition, the corporation deducts the compensation income reported by the grantee subject to any applicable deductibility limitations and the compliance by the corporation with applicable reporting rules.

Typically, options vest over time. It is possible, however, for options to vest as performance goals are met. If the corporation retains any right to repurchase stock purchased by the grantee by exercising the option, the repurchase price is typically the fair market value of the stock at the time of the repurchase or some formula price intended to approximate fair market value.

Rather than grant an option to a service provider, a corporation could simply issue stock to the service provider at the outset.

Restricted stock can be made subject to the same time or performance based vesting conditions as might apply to options and can also be made subject to repurchase by one or more of the other shareholders in addition to or instead of the corporation.

If a service provider receives stock that is vested i. If a service provider receives restricted stock, his or her tax consequences depend on whether or not he or she makes a Section 83 b election with respect to the stock. No Section 83 b election. If the recipient does not make a Section 83 b election with respect to the stock, he or she reports no compensation income with respect to the stock until the stock vests.

Whenever any of the stock vests, he or she reports ordinary compensation income equal to the excess of the value of the vesting stock at the time it vests over the amount he or she paid for that stock so that vesting is the compensation event, and the appreciation in the value of the vesting stock between the time of its issuance and the time of its vesting is ordinary income at the time of its vesting.

Section 83 b election. If the recipient makes a Section 83 b election with respect to the stock, then, upon his or her receipt of the stock, he or she reports any excess of the then value of the stock without regard to the service related restrictions over the amount he or she pays for the stock as ordinary compensation income receipt being the compensation event for tax purposes.

The recipient then suffers no tax consequences upon vesting. Instead, he or she reports capital gain upon selling the stock equal to the amount he or she receives in the sale less his or her basis in the stock so that all of the post-issuance appreciation is capital gain upon the disposition of the stock. If he or she forfeits the stock by failing to vest, however, his or her loss which is generally a capital loss is limited to the excess, if any, of the amount he or she paid for the stock over the amount he or she receives upon forfeiting the stock thus, he or she is not entitled to recoup any income he or she reported upon receiving the stock by taking a corresponding deduction upon forfeiture.

Tax ownership of stock. If the recipient does not make a Section 83 b election, he or she is not deemed to own the stock for tax purposes until the stock vests, and any distributions made to the recipient with respect to the stock before vesting are treated as compensation payments. It is not unusual for S corporations to require that recipients of restricted stock make Section 83 b elections.

The recipient must also provide the corporation and others in certain instances with a copy of the election. A key factor in determining whether to grant an option or issue restricted stock to a service provider is often the value of the underlying stock at the time of the award. If the service provider is personally liable for the amount due under the note, the note should be included in the amount paid by the service provider for the stock.

Restricted stock awards can be more complicated than option awards. It is not unusual for corporations to limit restricted stock awards to only certain employees. Issues may arise as to the extent to which the service provider is to have voting and other rights with respect to unvested shares.

Employees can receive different numbers of shares so long as the number of shares available to each employee is more than a de minimis amount. The making of a deferral election under Section 83 i with respect to stock acquired by exercising an option would cause the option not to be an ISO.

The deferral provided by Section 83 i does not cause the applicability of Section A. The NQOs discussed in this article are presumed not to have readily ascertainable fair market values, within the meaning of the Regulations under Section 83 of the Code, when granted.

See Code Section 83 e 1 and Regulations Section 1. The consequences of a disqualifying disposition, however, are determined under Section 83 a. See Regulations Section 1. Thus, under the Regulations, the amounts of ordinary compensation income and capital gain reportable upon a disqualifying disposition by the grantee of stock that was received subject to vesting are determined with reference to the value of the stock at the time of vesting rather than at the time of the exercise of the option without the ability of the grantee to make a Section 83 b election.

The portions of the Regulations under Sections and applicable to unvested stock are difficult to comprehend. ISOs are also not subject to the provisions of Section A. Of course, ISOs have their own exercise price requirement, which, as a practical matter, may require the same type of valuation required to ensure that NQOs are not subject to Section A.

It is possible to structure arrangements in which service providers are granted options to purchase shares that are subject to vesting.