Restricted securities: french FCPE (Fonds Commun de Placement d' Entreprise)
A French employee shareholding vehicle which is often used in connection with share offers to UK employees of a French-owned group. Known as FCPE (Fonds Commun de Placement d’Entreprise), for UK-resident employees, the securities s are restricted securities within Chapter 2.
There are two types of FCPE, leveraged and non-leveraged, and the precise tax treatment will depend on the arrangements entered into in the particular case. The following examples are illustrations of how the legislation will work in a typical scheme, but the actual liability may vary in an actual case.
Non-leveraged FCPE (or ‘Classic’ FCPE)
The non-leveraged FCPE (or the non-leveraged compartment of an FCPE, depending on how the FCPE is structured) is treated as ‘transparent’ for UK tax purposes. The employee is therefore treated as acquiring the assets of the FCPE (usually shares in the French parent company).
- Market value of the shares at acquisition is £1.
- Shares purchased at 20% discount to the market value. (80p)
- The shares cannot be sold for a 5 year period. This reduces the market value to 75p.
- At the 5 year point, when the shares become unrestricted, their market value is £5.
On purchase of the shares there is no tax charge as the amount paid is greater than the restricted market value.
At the 5 year point there is a charge on the proportion of the market value not previously
charged to tax (20% of £5): £1.
Had an election been made to ignore the restrictions on the shares on subscription, income tax would have been due on the difference between the amount paid (80p) and the unrestricted market value (£1) - i.e. £0.20 - and nothing charged on the later occasion. Any gain on redemption/disposal would then be subject solely to CGT.
The leveraged FCPE (or the leveraged compartment of an FCPE, depending on how the FCPE is structured) is not treated as ‘transparent’ for UK tax purposes. The security which the employee is therefore treated as acquiring is the FCPE unit (which represents a proportion of the assets of the FCPE - usually shares in the French parent company).
Employees are entitled to submit subscription forms during a ‘reservation period’ prior to the setting of the Subscription Price. Employees’ subscriptions are, at this time, revocable.
Units in the FCPE may be acquired by employees making a payment (per unit) equal to the ‘Subscription Price’ which will be at a 15% discount to the ‘Reference Price.
The Reference Price will be set at the average of the opening prices of TopCo SA shares over a twenty day trading period.
TopCo SA will make a share issue directly to the FCPE at the ‘Subscription Price’.
Following the setting of the Subscription Price, employees will have the opportunity to withdraw from their subscriptions during a ‘revocation period’. At the end of this period, subscriptions become irrevocable.
The FCPE will subscribe for new TopCo SA shares, which will be funded partly by employees subscription monies and partly by monies acquired under a swap agreement entered into between the FCPE and a bank. Under the swap agreement the bank will advance four times the amount of employees’ subscription monies received by the FCPE. For each FCPE unit subscribed by employees, the FCPE will have subscribed for 5 TopCo SA shares. Each FCPE unit therefore represents 5 TopCo SA shares.
Employees must hold their FCPE units during a lock-in period of 5 years (the ‘Retention Period’), and may only redeem them early in certain specified circumstances allowed under French law (which may be limited on a country-by-country basis).
At the end of the Retention Period the FCPE units may be redeemed for cash or shares (which may be in the form of ‘Classic’ FCPE units - see above) of an equivalent value, at the election of the employee. For each FCPE unit redeemed the employee will receive his initial Subscription Price plus 50% of any increase in value over the Reference Price of the 5 shares held in the FCPE.
As the units cannot generally be disposed of for a period of 5 years from acquisition, they will constitute restricted securities for the purposes of Chapter 2 of Part 7.
At the time of subscription any difference between the initial restricted market value of a unit and its Subscription Price will be ‘employment income’ (i.e. ‘earnings’ within the definition in Section 62). This amount will be subject to income tax and National Insurance contributions. This will be collected via PAYE.
In valuing the unit, account will be taken of the restrictions on the unit (for example, the lock-in provisions and the early release provisions) and the potential return.
On the removal of restrictions an income tax (and NICs) charge will arise on a proportion of the value (the redemption value) of the unit based on the amount of the discount which was not subject to income tax on subscription. The amount of this charge will be determined in accordance with the formula set out in Section 428(1).
Once the securities cease to be restricted, any further gain on the unit (i.e. the difference between the redemption value and the aggregate of the Subscription Price paid and any amount on which income tax has been paid) may be subject to capital gains tax (CGT).
It will be possible for the employer and employee to enter into elections under Section 431(1) to disregard the restrictions. In such case the initial charge to tax will be on the full difference between the initial unrestricted market value of the unit and the Subscription Price, and any gain on disposal would then be subject solely to CGT.
In some cases the employee has the ability to choose to receive shares (which may be in the form of ‘Classic’ FCPE units - see above) on the redemption of the Leveraged FCPE unit, so taxation under Chapter 5 of Part 7 (securities options) will be appropriate as the Leveraged FCPE unit constitutes a right to acquire shares. Where taxation under Chapter 5 is to be applied there would be no upfront charge, but the whole of the gain on the unit (i.e. the difference between the redemption value and the Subscription Price paid) would be subject to income tax (and NICs) on redemption.
Example of treatment of leveraged FCPE
|Subscription Price of unit:||£0.85 (i.e. £1.00 - 15%)|
|Initial unrestricted market value of the unit||£1.60|
|Initial restricted market value on the basis of restricted sale||£1.20 (£1.60 - 25%, based on a reduction for the lock-in period)|
|Up-front income tax charge on the difference between the initial restricted market value and the Subscription Price:||£1.20 - £0.85 = £0.35|
|Redemption value (UMV)||£5.00|
|On removal of restrictions, income tax would be due on: UMV x (IUP - PCP- OP) - CE||£5.00 x (0.25 - 0 - 0) - 0 = £1.25|
IUP is IUMV - DA divided by IUMV
OP is UMV - AMV divided by UMV
(as there will be no further restrictions on the shares)
CE is | (£1.60 - (£0.85 + £0.35)) / £1.60 = 0.25
nil as there have been no previous events of the lifting of restrictions
= 5.00 - 5.00 = 0
|nil as the employee will not pay anything|
|Capital gains tax (CGT) will be due on the disposal consideration less the total of the Subscription Price, the amounts on which income tax was due on subscription and on the removal of the restrictions.||£5.00 - 0.85 - 0.05 - 1.25 = £2.85|
In the above example, had an election been made to ignore the restrictions on the shares, on subscription, income tax and NIC would have been due on the difference between the Subscription Price and the initial unrestricted market value (i.e. £1.60 - £0.85 = £0.75).
CGT would be due on the disposal consideration less the Subscription Price, less the amount on which income tax was due on subscription (i.e. £5.00 - £0.85 - £0.75 = £3.40
If the employees had instead been taxed under Chapter 5 of Part 7 there would have been no upfront income tax (or NIC) to pay but on redemption the employee would have been subject to income tax (and NIC) on the full gain, i.e. £5.00 - £0.85 = £4.15.