Voluntary profit-sharing is an employee savings plan and completes mandatory profit-sharing (which we discussed in a previous article). This mechanism allows companies to give employees a stake in their company’s performance, while benefiting from tax incentives. The recently adopted PACTE law confirmed the willing of the government to make voluntary profit-sharing more attractive. We offer you some insight into this plan.

What is the difference between voluntary profit-sharing and mandatory profit-sharing?

Voluntary profit-sharing and mandatory profit-sharing are very similar in the way they work. Generally speaking, it must apply to all employees with the same restrictions related to seniority (maximum 3 months), the same distribution rules (proportional to working time or salary, uniformly or a combination of both) and the same allocation rules (payment within 5 months of the closing, to an employee savings plan (PEE) by default or paid directly to the employee if he/she requests it within 15 days of being informed by a voluntary profit-sharing bonus form).

However, the main difference is the non-mandatory nature of this plan. Thus, the implementation procedures are different. A voluntary profit-sharing agreement has to be negotiated separately from the mandatory one. The draft agreement is negotiated between the company head and the staff representatives or is subject to a referendum among employees. The agreement, valid for 3 years, must specify the rules for calculating the bonus, its allocation and management and must be filed with the DIRECCTE (social and working control administration).

Unlike mandatory profit-sharing, the formula for the bonus computation is not defined in the law. It may include different financial or non-financial performance criteria on an infra-annual (3, 4 or 6 months) or annual basis. For example, Corporate Social Responsibility objectives may be taken into account. Nevertheless, the total amount of profit-sharing bonuses must not exceed 20% of the total wages paid by the company during the year. Besides, like the mandatory plan, the individual bonus must not exceed 75% of the annual ceiling of social security contributions, i.e. €30,393 in 2019.

Changes in voluntary profit-sharing introduced by the PACTE law

The PACTE law wanted to give greater flexibility to companies, simplifying the administrative follow-up of agreements.

The law allows profit-sharing agreements to take multi-year objectives into account, in addition to annual or infra-annual objectives. For example, it is now possible to index a portion of the bonus on the improvement of the quality or gross margin over three years. The concept of project profit-sharing has also evolved. Previously, this type of profit-sharing was reserved for projects involving several companies of the same group or not. From now on, it is possible to set it up for a project involving only one company. Such an agreement allows to index a bonus on the performance of a particular project and may concern only some of the company’s employees.

Regarding administrative formalities, a company is still due to fill its profit-sharing agreement with the DIRECCTE. From now on, without any answer from the administration within 6 months, tax exemption is taken for granted for the duration of the agreement.
Finally, like mandatory profit-sharing, since the adoption of the PACTE law, a company must have fewer than 250 employees strictly for the company head and his/her spouse or civil partner to benefit from profit-sharing.

What are the key elements for the profit-sharing agreement to be eligible for tax and social benefits?

As mentioned above, tax and social incentives support the profit-sharing agreement. Your company can deduct the voluntary profit-sharing bonus from the tax profit. Your employees are not liable for income tax on these amounts if they have respected the 5-year lock-up period. These amounts are not subject to social security contributions and are exempt from the 20% employer contribution if your company have fewer than 250 employees. To receive these benefits, the drafting of the profit-sharing agreement must comply with some rules. Here are a few points to keep in mind.

Before beginning such a bargaining, you must fulfill your obligations regarding the staff representatives, i.e. the Social and Economic Committee. Then, you have to ensure that the formula is variable and uncertain, i.e. the factors on which the bonus is indexed must be able to evolve and there is a risk that it will not be paid. Finally, you have to file your agreement with the DIRECCTE during the first half of the calculation period specified in the agreement. In concrete terms, for an annual reference base, agreement must be concluded within the first 6 months.

Furthermore, do not implement a voluntary profit-sharing plan to replace a current bonus. In case of a tax or social audit, the profit-sharing bonuses could be qualified as salary and you would be liable to pay social security contributions on these amounts and penalties.
About tax relief, you should know that the Social Security Financing Act for 2020 has renewed the Macron bonus for next year, for employees earning fewer than €3,603 net per month and capped at €1,000. We remind you that this bonus is exempt from social security contribution and income tax. However, an amendment adopted on October 24, 2019 makes harder the access to this bonus. The companies that would like to benefit from tax relief will have to implement a voluntary profit-sharing plan before June 2020.

To conclude, voluntary profit-sharing is a fiscally advantageous mechanism for SMEs while allowing to financially motivate their employees. Its implementation requires strictness to be eligible for tax relief. We advise you to be assisted by experts.