On July 23, 2025, the French Tax Administration released its initial draft guidance in the BOFiP (Bulletin Officiel des Finances Publiques) (the “Tax Comments”) on the new tax regime for Management Packages introduced by the 2025 Finance Act (Loi de Finances) (the “MIP New Tax Regime”).
As a reminder, the 2025 Finance Act provides that the gain made on securities subscribed for, acquired, or granted to employees or managers “as consideration for their professional duties as employee or manager” (the “MIP Securities”) is subject to capital gains tax treatment up to a cap (three times the project multiple applied to the initial value of the MIP Securities) (the “MIP Capital Gain”), and as salary for the excess. Gains qualifying as MIP Capital Gain are taxable at a rate of up to 34% (or up to 37.2% in certain circumstances), whereas gains qualifying as salary are taxable at a rate of up to 59% (including social contributions).
While the Tax Comments bring some helpful clarifications on the new regime, they also fall short of addressing all the practical issues and questions raised by practitioners – notably regarding the reinvestment by managers across successive LBOs.
Clarifications as to the Scope of the MIP New Tax Regime
- Type of Securities: The Tax Comments specify that only equity securities, or securities giving access (immediately or in the future) to share capital, can qualify as MIP Securities under the MIP New Tax Regime. Therefore, while shares (ordinary or preferred), warrants and convertible bonds may qualify as MIP Securities, pure debt / debt-like securities (such as straight bonds) are excluded from the MIP New Tax Regime.
Note: This clarification is notable as, for the purpose of determining the maximum cap for capital gains treatment, the Tax Comments allow the pooling of returns made over several classes of securities qualifying as MIP Securities under the MIP New Tax Regime (instead of calculating a cap for each separate instrument – see below), but not the return made on securities which do not qualify as such.
- Risk of Loss: Under the MIP New Tax Regime, MIP Securities can only qualify as such if they bear a “risk of loss”. The Tax Comments specify that such requirement would not be met, and the favorable tax regime therefore not apply, if managers benefit from “a mechanism guaranteeing them, either from the outset or subsequently, a sale price for their shares at least equal to their acquisition or subscription price” (or, in the case of free shares, at least equal to the so-called “acquisition gain” on such shares).
Note: The Tax administration has taken a restrictive stance of the concept of “risk of loss”, which would potentially impact the leaver call and put option mechanisms that are often used on PE deals, especially those with a floor at cost. However, there remains some uncertainty as to what “mechanism guaranteeing (...)” actually means in practice, particularly in situations where the managers concerned are only bound by a call option and not a put option, or benefit from a put option only in very limited instances. In addition, the Tax Comments do not provide any substantial commentary as to the extent of the loss exposure required to qualify as MIP Securities.
- Holding Period: Under the MIP New Tax Regime, MIP Securities can only qualify as such if they are held for at least two years. The Tax Comments clarify that (i) this does not apply to free share awards (AGA), which are already subject to their own specific regime, nor does it apply to stock options or shares subscribed for upon the exercise of founders’ warrants (BSPCE); and (ii) in calculating the two-year holding period for fungible or non-identifiable shares acquired or subscribed for at different dates, a first-in, first-out (FIFO) approach is applied.
The MIP Capital Gain made on MIP Securities can only qualify as such if it has been realized “as consideration for” employees’ or managers’ professional duties
The Tax Comments specify that only the gain made on MIP Securities “as consideration for” employees’ or managers’ professional duties performed for the issuer (or an affiliate thereof) can qualify as MIP Capital Gain.
Therefore, the benefit of the MIP New Tax Regime does not depend on the circumstances surrounding the acquisition, subscription or grant of the MIP Securities, but rather on the conditions under which the gain is realized upon the disposal of these securities (and whether such gain is made by the relevant person in their capacity as investor, or “as consideration” for their professional duties as employee or manager). In other words, it is the link between the gain made on the securities and the individual’s professional functions that determines whether the MIP New Tax Regime applies, regardless of how and by whom the securities were originally acquired.
The Tax Comments indicate that the existence of a “consideration” may be determined in light of:
- the fact that the value of the MIP Securities depends on certain performance targets being achieved by the other investors or the company (measured, for example, through a minimum IRR); or
- the existence of certain contractual provisions evidencing such a connection, such as non-compete, duty of loyalty or exclusivity clauses, lock-up or transfer provisions such as drag along or tag along rights, or the existence of call and put option mechanisms in case of leaver or breach by the concerned manager of their undertakings.
Based on the above, the Tax Comments confirm that mechanisms allowing the managers to receive, at exit, a greater part of capital gain than what they would otherwise have received as a “pari passu” investor, such as ratchet schemes as well as “sweet equity” schemes (where the manager’s holding is over-weighted into shares vs. fixed-rate instruments compared to other investors), would qualify as MIP Capital Gain under the MIP New Tax Regime. However, the gain made by an employee or manager through securities for which such “consideration” (i.e., the link between their duties and the returns made) cannot be established, would not qualify as MIP Capital Gain.
Note: Whilst the gain made on the ratchet scheme qualifies as MIP Capital Gain, the treatment of the gain made on the “pari passu” securities (when the MIP is composed of a ratchet component and a pari passu strip), and the ability to “pool” the return made on such securities with those made on the ratchet scheme (to determine the capital gains maximum cap), may be more fluctuating and is likely to require a case-by-case analysis (depending notably on the other provisions of the MIP, notably contractual provisions (lock-up, leavers, etc.) applying to such pari passu securities).
Determining the MIP Capital Gain in the event of multiple issuances or instruments
- Aggregating the returns on various instruments: To calculate the maximum portion of the gain on the MIP Securities that qualifies and is treated as MIP Capital Gain under the MIP New Tax Regime, the Tax Comments allow the pooling of the acquisition price of all MIP Securities of the same company, sold by the relevant employee or manager, that are eligible for the MIP New Tax Regime. The Tax Comments clarify that such aggregation is possible even if the MIP Securities are of different nature or confer different rights.
Note: The answer to the question of whether gains realized on securities of different types could be aggregated was eagerly anticipated by practitioners, for MIPs are typically structured with a combination of instruments having different return profiles. In this context, the ability to pool the returns made on the pari passu, or even sweet equity, instruments with those of the “ratchet” instrument is particularly important from an economic perspective, since the return on the ratchet instrument is likely to substantially exceed that realized on the other securities, so that such aggregation should average-down the return made on the most performing instruments (ratchet).
However, the Tax Comments cast a shadow on the extent of such pooling. In particular, the phrase “acquisition price of all securities of the same company” used by in the Tax Comments raises the question of the aggregation of the gains made on free ratchet preferred shares held at Topco level, and those made at Manco level. In addition, the Tax Comments only allow the pooling of the gain made on securities “eligible for” the MIP New Tax Regime, which further emphasizes the question of the inclusion or exclusion of “pari passu” securities in the scope of the MIP New Tax Regime (see above).
- Instruments acquired over different dates: The calculation of the gain made on MIP Securities acquired, subscribed or granted at different dates must be made separately for each of tranche of MIP Securities. However, the Tax Comments confirm the ability to aggregate, on the same date, MIP Securities acquired, subscribed, or granted within a short period of time as part of the same transaction, pursuant to a framework agreement, a set of contractual arrangements, or a single grant decision by the relevant competent body.
Note: The confirmation of the ability to aggregate MIP Securities subscribed or acquired on dates close to each other was also expected. We however regret the rigidity imposed by the Tax Comments, which may require additional red tape to evidence the fact that the MIP Securities form part of the “same transaction”. Furthermore, the Tax Comments do not provide for any specific timeframe within which multiple acquisitions or issuances could be deemed to be part of the same transaction.
Only the gain qualifying as MIP Gain can benefit from Tax deferral in case of roll-over
As expected, the part of the gain made on the MIP Securities qualifying as MIP Gain (i.e., up to the maximum cap of capital gain resulting from the MIP New Tax Regime) is taxable as ordinary capital gains and may benefit from all deferrals and postponements to which capital gains are generally eligible (e.g., tax deferral in the context of a roll-over).
However, the Tax Comments indicate that the portion of the gain on the MIP Securities to be treated as salary (i.e., above the maximum cap of capital gain resulting from the MIP New Tax Regime) is taxable in accordance with the ordinary income tax regime applicable to salary, namely in the year during which the beneficiary disposed of, sold or converted the relevant MIP Securities. In other words, the excess gain taxable as salary will not benefit from the deferrals and postponements to which capital gains are generally eligible, even in the context of a roll-over of the relevant MIP Securities.
Therefore, in the context of management’s roll-over in successive LBO rounds, the “salary” gain would be immediately taxable, thus impairing the managers’ reinvestment capacity (which is typically calculated on a “post-tax” basis) compared to situation preexisting before the 2025 Finance Act whereby tax neutrality in case of roll-over was sought.
Note: This point is a major concern for managers and PE practitioners, which has already been raised at the time of adoption of the 2025 Finance Act. Following consultations with several representative bodies (including notably France Invest), the Tax authorities had reportedly informally confirmed that they should accept tax deferral on the whole gain, including the “salary” gain, in the context of successive roll-overs. Pending a potential legislative amendment to the MIP New Tax Regime, there is however no provision in the Tax Comments of any “policy position” or “tolerance” on this matter, which creates significant uncertainty for ongoing PE transactions.
Other clarifications
The Tax Comments bring certain other clarifications, notably as to how the managers can evidence the calculation of the MIP Capital Gain, the determination of the MIP Capital Gain in case of an earn-out (depending as to whether the earn-out is a “true” earn-out or merely a price deferral), the exclusion of the MIP Securities from the favorable French share savings plan (Plan d’Epargne en Actions – PEA), the determination of the “financial multiple” cap in case of intermediate transactions (e.g., repayment of related-party loans) and the calculation of the MIP Capital Gain in the context of successive LBOs.
However, the Tax Comments fall short on a certain number of practical questions relating to the matters above, as well as on other related matters such as the treatment of donations, and the articulation of the MIP New Tax Regime in a cross-border context.
Next steps
The Tax Comments are not definitive, as the draft is open for public consultation and comments until October 22, 2025. In the meantime, interested parties may rely on such draft Tax Comments in the context of ongoing transactions.
While parties will factor such Tax Comments into their analysis, it is probably too soon to draw definitive conclusions on all the above matters, which remain subject to potential amendments or supplements to the Tax Comments following the outcome of the public consultation, as well as potential changes to be made to the MIP New Tax Regime through legislative amendments.
