Paris Administrative Court of Appeal, 20 May 2026, No. 24PA03598
The Paris Administrative Court of Appeal has confirmed that a non-resident may be taxed in France on a stock option exercise gain without being able to offset the capital loss realised on the subsequent sale of the shares. The judgment calls for particular vigilance from companies, directors and beneficiaries of stock option plans in situations of international mobility.
In a judgment of 20 May 2026, the Paris Administrative Court of Appeal ruled on two important issues concerning the international taxation of share options: the tax treaty classification of the gain on the exercise of options under the Franco-Dutch tax treaty, and the possibility for a non-resident taxpayer to set off the capital loss realised on the disposal of the shares against the gain on exercise.
In this case, the taxpayer, the chairman and chief executive officer of a French company, had been granted share options in 2011. He exercised them in 2015 and 2016 whilst he was a tax resident of the Netherlands. He subsequently sold some of the shares in 2020 whilst residing in Lebanon. He sought a refund of the French withholding tax levied on the gain from exercising the options, arguing that this gain was not taxable in France or, at the very least, that it should be reduced by the capital loss realised on the disposal of the shares. The Montreuil Administrative Court dismissed his claim, and that decision was upheld on appeal.
1. Application of the treaty rules relating to salaries and wages to an exercise gain of share options realised by a company director
With regard to the taxation in France of the gain on the exercise of share options, the Court confirms that, pursuant to the interpretation clause provided for in Article 3 of the treaty, the rules applicable to the gain on the exercise of share options must be determined by reference to the classification of the income under domestic law. In France, stock option exercise gains are treated as employment income for French tax purposes. Furthermore, remuneration paid to chairmen and chief executive officers (PDG) is taxable under the category of salaries and wages. Consequently, the Court confirms that it is indeed Article 15, relating to employment income, that should apply to the gain from the exercise of options. Since the executive duties had been performed in France, the gain remained taxable in France and was therefore subject to withholding tax in France. This ruling is in line with recent case law of the Conseil d’Etat which favours an interpretation of tax treaties based on the classification adopted by domestic law where the treaty does not contain an independent definition.
2. Why can the capital loss on disposal not be offset in France?
The second significance of this judgment lies in its confirmation of the French tax authorities’ position regarding the set-off of capital losses on disposal against gains on the exercise of options.
The Court first points out that, under domestic law, a capital loss on disposal is, in principle, deductible from the gain on the exercise of an option subject to withholding tax. Article 182 A ter of the General Tax Code (CGI). It thus acknowledges that the provisions applicable to non-residents theoretically permit such a deduction.
However, it refuses to draw the necessary conclusions in the context of the application of the Franco-Dutch tax treaty. In its view, since this treaty exclusively grants the State of residence the power to tax capital gains on the disposal of shares, France cannot, either, take the corresponding capital loss into account when determining the basis of assessable income in France. The Court thus enshrines a principle of ‘symmetry’: the absence of the right to tax the gain also implies that the loss cannot be taken into account.
A questionable endorsement of the treaty-based symmetry used by the tax authorities
The judgment thus confirms the long-standing position adopted by the tax authorities, whose official guidance (paragraph 390 of BOI-RSA-ES-20-10-20-60) provides that where the taxpayer is a non-resident, ‘any capital loss realised may only be set off in the taxpayer’s country of residence and is not allowed as a deduction from the taxable gain in France’.
However, the solution adopted is not entirely convincing. Indeed, given the wording of Article 182 A ter of the CGI, it must be considered that the offsetting of the capital loss is in fact unrelated to the treaty-based allocation of the power to tax capital gains, since the latter is merely a factor in calculating the taxable gain on the exercise of the option in France. It could therefore be argued that taking this into account did not amount to disregarding the treaty provisions relating to capital gains, but merely to determining the net amount of employment income falling within French tax jurisdiction. In her submissions—which the Court unfortunately did not follow—the rapporteur public, the independent adviser to the court, noted that the asymmetry rejected by the tax authorities and the first-instance decision was in fact “intended by the French legislature”.
What are the consequences for internationally mobile employees and directors?
Apart from the technical issues it raises, this judgment is not good news for employees and directors in situations of international mobility. Indeed, it endorses an interpretation of treaty law that penalises non-residents holding shares whose disposal would result in the recognition of a capital loss. As a result, unless this capital loss is set off against gains on exercise or acquisition, the disposal of the shares may in certain cases result in the taxation of a gain, which is fixed at the time of exercise or definitive acquisition but never actually realised by the taxpayer. In certain situations, this approach may even lead to taxation on an amount greater than the salary-related gain that would have been recognised by a resident taxpayer.
Pending a change in case law, we can only recommend that those responsible for international mobility and compensation and benefits within companies inform the employees and directors concerned of the unfavourable treatment to which their capital losses will be subject if they decide to sell whilst residing outside France.