Grant
You will not be subject to tax when the options are granted to you. Vesting
You will not be subject to tax when the options vest. Exercise
To the extent that your options are qualified options for favorable French tax and social security treatment, when you exercise your options, taxation of the spread (i.e., the difference between the fair market value of the underlying shares at exercise and the exercise price) will be deferred until sale of the underlying shares.
However, if the exercise price is less than 95% of the average trading price of the underlying shares for the 20 trading days prior to the grant date or less than 95% of the average purchase price paid for such shares by HP, this “excess discount” will be treated as an additional taxable salary at the time of exercise. This income will be taxed at personal income tax progressive rates for the year of exercise. This amount is also subject to social security contributions.
Sale of Shares
When you subsequently sell the shares that you acquire under the SIP, your gain will be divided into two portions: the spread and any capital gain (i.e., the difference between the sale price and the fair market value of the shares at the time of exercise).
If you sell the shares after the four-year holding period (or the minimum holding period required under French law):
- If the total annual spread is less than or equal to €152,500, the annual spread will be taxed at a maximum rate of 53.5% (30% personal income tax, 15.5% additional social taxes, plus 8% special employee social tax for qualified grants made on or after October 16, 2007).
- If the total annual spread is greater than €152,500, the portion of the annual spread up to €152,500 will be taxed at the rates indicated above. The portion of the spread in excess of €152,500 will be taxed at a maximum rate of 64.5% (41% income tax, 15.5% additional social taxes, plus 8% special employee social tax for options granted on or after October 16, 2007).
Alternatively, you may elect for the total annual spread to be taxed as salary at your marginal income tax rate (up to 41% for 2011 income) plus the 23.5% additional social taxes (the 15.5% additional social taxes as mentioned above and the 8% special employee social tax for qualified grants made on or after October 16, 2007). Please note that this election applies to the aggregate option income realized during a calendar year, and not to each option exercise.
You may receive even more favorable tax treatment if you wait an additional two-year period after the exercise of your options (assuming the four-year or other minimum holding period is met) to sell your shares as follows.
- If the total annual spread is less than or equal to €152,500, the spread will be taxed at the rate of 41.5% (18% income tax, 15.5% additional social taxes, plus 8% special employee social tax for options granted on or after October 16, 2007). - If you sell the shares at least two years after the exercise of the options when the minimum holding period is met and the annual total spread is greater than €152,500, the portion of the spread up to €152,500 will be taxed at the rates indicated immediately above and the portion of the annual total spread in excess of €152,500 will be taxed at the rate of 53.5% (30% income tax, 15.5% additional social taxes, plus 8% special employee social tax for options granted on or after October 16, 2007).
- Alternatively, you may elect for the total annual spread to be taxed as salary at your marginal income tax rate (up to 41% for 2011 income) plus the 23.5% additional social taxes (the 15.5% additional social taxes as mentioned above and the 8% special employee social tax for qualified grants made on or after October 16, 2007). Please note that this election applies to the aggregate option income realized during a calendar year, and not to each option exercise.
Please note that in the event you are eligible for this more favourable tax treatment, the tax authorities provide for specific rules which must be satisfied. Accordingly, you should seek appropriate professional advice to determine whether you can satisfy the rules for this more favourable tax treatment.
In any case, the capital gain will be subject to 19% personal income tax and the 15.5% additional social taxes.
You may realize a capital loss if the net sale price is less than the fair market value of the shares on the date of exercise. With respect to both the 19% personal income tax and the 15.5% additional social taxes, such capital loss can be offset against capital gains realized from the sale of securities during the year in which you sold the shares acquired under the SIP or the following 10 years. A capital loss cannot be offset against any other kind of income (such as salary). The French tax rules for offsetting capital loss are complex. You should review those rules with your
personal tax advisor prior to filing your personal income tax return.
However, if you sell your shares prior to the expiration of the four-year or other minimum holding period, the spread will be taxed as salary income at your marginal tax rate. In addition, employee and employer social insurance contributions will be due on the spread realized at exercise but paid in connection with the sale of the shares prior to the expiration of the four-year, or other minimum, holding period. If the net sale price is less than the fair market value of the shares on the date of exercise, you can offset it on the spread.
Dividends
If you hold HP shares and HP declares a dividend on the shares, you will be subject to income tax (after deduction allowances), or at your election, a reduced flat tax, on dividends that you receive. Any dividends received will be subject to 15.5% French additional social taxes. The dividends will be subject to income tax in France and to U.S. federal income withholding tax. You may be entitled to a French tax credit for the U.S. withholding taxes paid, provided certain conditions are met.
New Surtax
The Finance Bill for 2012 provides for a new additional 3% surtax on all types of income exceeding €250,000 (for single taxpayers) or €500,000 (for married taxpayers), and a 4% surtax on income exceeding €500,000 (for single taxpayers) or €1,000,000 (for married taxpayers). This new surtax will apply to all types of income received in 2012 (including the spread at exercise, any capital gains at sale of the shares and the receipt of any dividends). If you may be subject to the surtax, please contact your personal tax advisor regarding the availability of a surtax reduction (especially if your income met the above mentioned thresholds in 2012, but not in 2011 and 2010).
Withholding and Reporting
Please note that the withholding requirements have changed for gains taxable beginning April 1, 2011. Your employer is not required to withhold income tax when you exercise your options or at the sale of the shares pursuant to qualified options (except if there is an excess discount, as discussed in the “Exercise” section above), provided you remain a French tax resident and work continuously in France from grant to sale. If you cease to be a French tax resident after grant, income tax withholding will apply to the French-source income.
Your employer will send you a statement setting out certain details of the exercise no later than February 15th of the following year and send a copy of such statement to the local tax office for your employer. It is your responsibility to pay and report any taxes due when you exercise your options, sell shares acquired under the SIP and if dividends are paid.
In order to benefit from French favourable tax and social security treatment, you must attach to your income tax return for the year in which you exercise options, a copy of the specific certificate delivered to you by your employer.
Social Security
Your employer will not withhold social security contributions when you exercise your options or at the sale of the shares under the SIP pursuant to qualified options (except if there is an excess discount, as discussed in the “Exercise” section above).
Exchange Controls
You may hold shares issued upon exercise of your options outside of France provided you declare all foreign accounts, whether open, current, or closed, in your income tax return. Furthermore, you must declare to the customs and excise authorities any cash or securities you import or export without the use of a financial institution if the value of the cash or securities is equal to or exceeds a certain amount which is set annually (€10,000 for 2012).