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(BFM Bourse) – The Finance bill for 2025 provides for the introduction of taxation on this type of operation. However, the executive only intends to withdraw 200 million euros of revenue from this contribution.
If the former Minister of Economy and Finance, Bruno Le Maire, had refused the measure, the current executive will take the plunge.
The Barnier government has decided to introduce taxation on share buybacks, a form of shareholder return practiced by large groups listed on the stock exchange.
Share buybacks consist, for a company on the stock market, of acquiring a certain amount of its own securities on the market. The company in question then cancels these shares, which automatically increases earnings per share, all things being equal. To give a simple image, this amounts to taking the same cake but cutting it into fewer pieces.
Like dividends, in pure financial theory, share buybacks do not enrich shareholders since the company is in reality only redistributing cash that it already has. However, as a 2005 McKinsey study noted, share buybacks are often well received by the market because they send a signal of confidence on the part of companies.
Companies with more than 1 billion euros in revenue affected
In the Finance bill for 2025, the executive retains a certain scope. Only companies with their head office in France and generating more than one billion euros in annual turnover excluding taxes would be affected by the measure. The levy would concern operations “carried out from the date of presentation” of the bill to the Council of Ministers, this Thursday.
Moreover, the system concerns not share buybacks strictly speaking but capital reductions following these share buyback operations. A company that keeps its securities without canceling them after repurchasing them would therefore theoretically not pay the tax.
Exemptions are also provided for, particularly in the event that share buybacks would facilitate a merger or if these operations would make it possible to compensate for certain capital increases, in particular those carried out within the framework of an employee shareholding plan.
A complex calculation
As for the tax itself, it would constitute, according to the press kit for the Finance bill, 8% “of the amount of the capital reduction resulting from the cancellation of the shares purchased”.
A government source specified that this tax would be based on the sum of the “nominal amount and issue premiums”.
The “nominal” of the capital reduction would be based on what is called the par value of a share. This is the book value recorded in the company’s financial statements and which can differ significantly from its market value of the share (the stock price).
Example: Totalenergies has a stock price of around 62 euros but the par value of its share is 2.5 euros, according to its universal registration document.
Let’s move on to the share premium. A “share premium” corresponds to the difference between the price of a share during a capital transaction and the nominal value. For example, as part of a capital increase, if a company issues new shares at a price of 5 euros but the par value of its share in its accounts is 1 euro, this issue premium amounts to 4 euros per share.
For the final calculation of the tax, we have provided you with a deliberately simplified example at the end of the paper. What must be remembered is that this calculation is complex and that the 8% can result in a significantly lower amount than if it were applied directly to the amount of the share buyback program.
Totalenergies, the CAC 40 company that makes the most use of share buybacks
This complex taxation would not be comparable to the tax on share buybacks in the United States put in place by American President Joe Biden. Introduced in January 2023, this tax was set at 1% of the total share buyback amounts and the American executive considered quadrupling this rate.
Ultimately, the government is only counting on limited or even symbolic revenue from this new contribution. The executive anticipates an amount of 200 million euros.
Barclays’ equity strategists had in any case felt that the executive would introduce this contribution on share buybacks. The bank listed, in a note published last week, around thirty groups listed in Paris which had started share buyback programs with still operations to be carried out to finalize them.
More broadly, according to a study by Janus Henderson, share buybacks represented $33.1 billion (30 billion euros) in France in 2023 compared to $28.9 billion in 2022.
According to the Vernimmen letter, the largest contributor to these share buybacks was, in 2023, Totalenergies for an amount of 9.2 billion euros, ahead of BNP Paribas (5 billion euros) and LVMH (1. 5 billion). And 26 groups had carried out share buybacks of at least 100 million euros.
Simplified example
Let’s imagine a company whose stock price is 20 euros with 1 billion shares in circulation but with a par value of its share of 1 euro. Suppose, then, that the company wants to repurchase 500 million euros worth of shares at a price of 20 euros per share.
It thus purchased 25 million shares. The nominal “capital reduction” on which the tax would be based would thus correspond to 25 million euros (25 million shares multiplied by one euro nominal) and not 500 million euros.
Let’s move on to the other component, the share premium. The premium per share is 19 euros (20 euros of share buyback price less one euro of nominal value. The total premium therefore amounts to 475 million euros (20 euros – 1 euro then multiplied by 25 million shares ).
The executive then intends to apply a fraction of this bonus which corresponds to the existing proportion between the amount of the capital reduction and the amount of capital before this reduction. In our case, this corresponds to 25 million (the reduction) divided by one billion (the total capital). Or 2.5%.
Ultimately, the fraction of the share premium linked to capital corresponds to: 2.5% multiplied by 475 million euros or 11.875 million euros. We then add this amount to the capital reduction (25 million euros) and then apply the 8% tax. Which gives 8% multiplied by 36.875 million euros or 2.95 million euros. Ultimately this amount of 2.95 million euros represents 0.6% of the amount of the share buyback program.
By Julien Marion
Julien Marion – ©2024 BFM Bourse
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