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Editorial

The new French regulation applying to national insurance contributions for managers and shareholders

French insurance contributions on executive and shareholder remuneration (pay + dividends) have been substantially increased by the National Insurance Funding for 2013 Act, No. 2012-1404, of 17th December 2012. Until 31st December 2012, all dividends were subject to national insurance contributions on unearned income but henceforth, under Article L136-3 of the National Insurance Code, amended by Act No. 2012-1404, certain dividends are considered as pay received by executives and shareholders and are therefore subject to the national insurance contributions on pay. The Act also abolished the ceiling on health insurance contributions payable by the self-employed and all this means that businesses must rethink the way that they have been structured until now.

 

I. The national insurance scheme covering executives and shareholders

 

The national insurance scheme to which someone belongs is determined by their national insurance status: salaried workers and those considered as equivalent to salaried workers belong to the general national insurance scheme, while non-salaried workers belong to the self-employed scheme and in some circumstances a shareholder or chief executive may not belong to any compulsory national insurance scheme. [3]

 

a) General scheme membership of salaried workers and equivalent

 

The following belong to the general scheme under the National Insurance Code:

 

·  salaried chief executives of limited liability companies under sole proprietorship that do not own shares personally or belong to a management group with a majority stake;

·  salaried chief executives of limited liability companies with a minority or 50% stake;

·  salaried shareholders of limited liability companies (not chief executives) in the case of a subordinate relationship and no interference in the management of the firm;

·  chairmen and executives of simplified corporations (sociétés par actions simplifiées);

·  chairmen of boards of directors, chairmen & managing directors and managing directors of limited companies (sociétés anonymes);

·  chief executives of general partnerships that do not own shares;

·  chief executives of ordinary limited partnerships or limited partnerships limited by shares that do not own shares.

 

b) Non-salaried workers' membership of the self-employed national insurance scheme

 

The following belong to the self-employed national insurance scheme under the National Insurance Code:

 

·  self-employed individuals (craftsmen, traders, industrialists and professionals) and self-employed individuals with limited liability;

·  sole shareholders working within a limited liability company under sole proprietorship and chief executives who do not own shares personally but belong to a management group with a majority stake;

·  chief executives with a majority stake / salaried shareholders (not chief executives) in the absence of a subordinate relationship with the firm / limited liability company shareholders acting as de facto chief executives;

·  general partnership shareholders;

·  shareholders in ordinary limited partnerships or limited partnerships limited by shares.

 

c) Non-membership of a general national insurance scheme

 

In accordance with case law or the position of national insurance agencies, certain executives and shareholders do not belong to any general national insurance scheme:

 

·  sole shareholders of limited liability companies under sole proprietorship not working within the firm;

·  non-salaried chief executives of limited liability companies under sole proprietorship that do not own shares personally or belong to a management group with a majority stake;

·  non-salaried chief executives of limited liability companies with a majority or 50% stake / non-salaried shareholders (not chief executives) in limited liability companies;

·  chairmen and deputy chairmen of supervisory boards of limited companies (sociétés anonymes).

 

II. National insurance contributions payable on dividends depending on the national insurance scheme [4]

 

The dividends received by executives and shareholders belonging to the general scheme or not belonging to any national insurance scheme are subject solely to national insurance contributions on unearned income and the same applies to dividends paid to members of the self-employed scheme not exceeding 10% of the shareholders' equity of the distributing firm (including issue premiums and shareholders' current accounts) but dividends distributed to executives / shareholders belonging to the self-employed scheme that exceed 10% of the shareholders' equity of the distributing firm (including issue premiums and shareholders' current accounts) are subject to national insurance contributions on pay.

 

a) Dividends paid to salaried workers and equivalent belonging to the general scheme

 

Under Article L136-6 of the National Insurance Code, executives / shareholders with the status of salaried workers and equivalent and therefore members of the general scheme that receive dividends are, irrespective of the amount, solely liable for national insurance contributions on unearned income, [5] which were increased from 13.5% to 15.5% on 1st January 2012 and are formed by the following:

 

·  a general welfare contribution (CSG) of 8.2% (Article L136-8 of the National Insurance Code;

·  a welfare debt reimbursement contribution (CRDS) of 0.5% (Article 19 of Order No. 96-50 of 24th January 1996);

·  a national insurance deduction of 4.5% (Article L245-16 of the National Insurance Code), plus an additional contribution of 0.3% (Article L14-10-10-4.1 of the Welfare and Family Action Code;

·  a solidarity contribution of 2% (Article 1600-0.S of the General Tax Code).

 

Dividends paid to salaried workers and equivalent are not subject to national insurance contributions on pay.

 

b) Dividends paid to non-salaried workers belonging to the self-employed national insurance scheme

 

Act No. 2012-1404 introduced a distinction in respect of the contributions due for dividends paid to executives / shareholders with the status of non-salaried workers and therefore belonging to the self-employed national insurance scheme, whereby such dividends not exceeding 10% of the shareholders' equity,[6] including issue premiums [7] and shareholders' current accounts, [8] are considered as investment income and are subject solely to national insurance contributions on unearned income at a rate of 15.5% (Article L136-6 of the National Insurance Code), while those exceeding 10% of the shareholders' equity (including issue premiums and shareholders' current accounts) are considered as pay (Articles L136-3 and L131-6 of the National Insurance Code) and accordingly subject to self-employed national insurance contributions on paywhich are formed by the following:

 

·  a general welfare contribution (CSG) of 7.5% on work and replacement income (Article L136-8 of the National Insurance Code);

·  a welfare debt reimbursement contribution (CRDS) of 0.5% (Article 19 of Order No. 96-50 of 24th January 1996);

·  health / maternity insurance contributions of 6.5% on all taxable professional income +0.7% (for traders and craftsmen) up to a limit of five times the annual national insurance ceiling; [9]

·  basic / supplementary pension insurance contributions at rates varying according to the type of work;

·  contingency insurance contributions at rates varying according to the type of work;

·  vocational training contributions at rates varying according to the type of work.

 

Note that Act No. 2012-1404 removed the ceiling on health insurance contributions for non-salaried workers: previously there were rates of 6.5% applying to the band of income up to the annual national insurance ceiling, 5.9% for income between the ceiling and five times the ceiling and zero thereafter but now the 6.5% rate applies to all pay received so the health insurance contributions of non-salaried workers earning more than €185,160 per annum will significantly increase.

 

c) Dividends paid to executives and shareholders not covered by any national insurance scheme

 

Dividends paid to people not covered by any general national insurance scheme are subject to unearned income contributions of 15.5% on all distributed dividends (Article L136-6 of the National Insurance Code).

 

Conclusion:

 

The new tax and national insurance treatment of dividends is significantly penalising small and medium-sized businesses because the executives and shareholders of firms structured as limited liability companies, limited liability companies under sole proprietorship and general partnerships, plus self-employed individuals, are the ones bearing the brunt of the reform of the national insurance treatment of dividends introduced by the National Insurance Funding for 2013 Act, whereas the executives and shareholders of firms structured as limited companies (sociétés anonymes) and simplified corporations (sociétés par actions simplifiées) are barely affected. 

 

Contributions will increase sharply for executives and shareholders belonging to the self-employed national insurance scheme. Previously the tax and national insurance treatment of executives' and shareholders' remuneration (pay + dividends) could be optimised by distributing some of the profits in the form of dividends but this no longer works since the National Insurance Funding for 2013 Act came into force so, to reduce the impact of the new national insurance treatment of remuneration on firms and their shareholders and executives, EJA recommends that executives and shareholders covered by the self-employed national insurance scheme should either increase the share capital, notably by incorporating reserves, or change the corporate form so that they have the status of salaried workers and equivalent, enabling the distribution of dividends not subject to national insurance contributions on pay, though the expediency of any such conversion must be examined extremely carefully on a case-by-case basis.

For full article with examples : www.saintbarth-attorney.com © Emmanuel Jacques Almosnino Law Firm


[1]  National insurance contributions on unearned income were increased from 13.5% to 15.5% on 1st January 2012.

[2]  See Appendix V for the fiscal definition of dividends.

[3]  See Appendix I for a summary table.

[4]  See Appendix II for a summary table.

[5]  See detailed example in www.saintbarth-attorney.com.

[6]  Shareholders' equity includes capital increases approved during the corporate term and the capital contributions made by the shareholders upon the firm's incorporation, though taking account solely of contributions in kind (excluding intangible assets not valued by an auditor or not the subject of a cash transaction) and fully paid-up capital contributions.

[7]  Issue premiums not incorporated in the share capital, i.e. paid to new shareholders and assigned to a specific account.

[8]  Taking account of the annual average balance on the account concerned, i.e. the total average monthly balances divided by the number of months in the accounting period in accounts held on a full ownership or usufruct basis by a non-salaried worker, his/her spouse or civil partner or their non-emancipated minor children (Article L131-6 of the National Insurance Code).

[9]  The annual national insurance ceiling is €37,032 in 2013.

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