Seeking measures to limit the growing public deficit, the government is considering introducing taxes on share buybacks. The measure, arbitrated during an inter-ministerial meeting on September 23, was transmitted to the Council of State for validation.
A widespread practice on Wall Street and taxed by Joe Biden’s Government since January 2023, share buybacks in the United States reached a record amount of 932.4 billion dollars in 2022 (about 850 billion euros). In France, although this practice grows year after year, we are still far from these amounts.
The CAC 40, that is, the forty largest French companies, broke a new record in share buybacks in 2023 for a total of 30.1 billion euros. TotalEnergies, which posted the biggest profits in 2023, made almost a third of total buybacks in France, or €9.2 billion in share buybacks. This practice also has new followers, including BNP Paribas, Axa, Airbus and Publicis.
What is share buyback?
Share buybacks consist, for publicly traded companies, of acquiring some of their own shares and then withdrawing them from the market. Like dividends, it is in fact a way for the company to redistribute funds among its shareholders. But, unlike dividends taxed at 30% by the flat-rate single tax (flat tax), stock buybacks evade taxes.
By reducing the number of shares outstanding, the “pie” (total shares) is divided into fewer shares, making the remaining shares larger: without doing anything, shareholders own a greater share of the company’s capital. They thus benefit from the revaluation of the price of their securities (as supply in the markets is reduced, demand increases) and from an increase in dividends per share.
“This practice not only aims to indirectly remunerate shareholdershue Jerome Giannesini, Tax lawyer from the Grimaldi Alliance firm. By increasing the value of the stock, it also helps protect the company from a hostile takeover by other companies. »
How does this mechanism work?
Take the example of L’Oréal, which is among the forty largest French companies. The company made a profit of €6.2 billion in 2023 and spent €500 million buying back its own shares.
With the exception of 2020, marked by the Covid-19 pandemic, L’Oréal has repurchased more than one million of its own shares each year for the last five years. This stock is particularly dynamic, with a value that has doubled in five years.
However, stock price volatility cannot be limited to share buybacks and cancellations; The share price of L’Oréal depends largely on the Chinese market. In addition, a considerable number of shares are issued each year.
In December 2021, the company bought back more than 22 million of its shares from Nestlé for €8.9 billion, with the aim of canceling them by the end of August 2022 at the latest. Despite a drop in the share price in 2022 , still remained more dynamic than the entire CAC 40. For its part, Nestlé planned for the funds released by this transaction to participate in a large-scale operation to buy back its own shares, worth 20 billion Swiss francs (21.2 billion euros). , distributed between 2022 and 2024.
A symbol of the excesses of financial capitalism, Emmanuel Macron himself denounced the “cynicism” of share buybacks in March 2023. A year later, it was the turn of former Prime Minister Gabriel Attal to punish companies by denouncing that these buybacks are carried out to the detriment of investments and salary increases, putting back on the table the possibility of taxing share buybacks. A solution, again considered by his successor, Michel Barnier.
How much could this tax generate? How is this tax calculated?
This new tax would only apply to groups with a turnover of more than one billion euros and present on the stock exchanges. Therefore, small and medium-sized businesses would not be affected. Matignon plans to assume 8% of the nominal amount of the capital reduction.
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It is based on the tax that the taxation implemented in the United States fundamentally differs: “The US tax is applied to the actual amount of share repurchases, that is, to the actual value at which the share was sold”points out Jérôme Giannesini.
Therefore, the one foreseen today in France would apply to the nominal value of the securities and not to the purchase value. It is the legal and accounting value of the share, which was arbitrarily set at the time of the company’s creation. Unlike the market value of the share which fluctuates in the stock market, its par value remains unchanged and would require an amendment to the company’s bylaws to change.
In the example above, the withdrawal yield would be extremely limited due to the very low face value of the L’Oréal share. The example of TotalEnergies, with 142.5 million euros in shares repurchased in 2023 for cancellation, would generate a tax of 28.5 million euros, for a nominal value of 2.50 euros per share.
Considering the American system, a tax of 1% of the value of the acquisitions of L’Oréal and TotalEnergies would have contributed 250 and 3 times more respectively. In France, the estimate of tax revenue from this new tax, as currently planned, would be limited to approximately €200 million per year.
