By Laure-Lise GINER, Esq., Partner
Optimizing the compensation of an executive at a company subject to corporate income tax is a significant challenge given the cost it represents for both the company and the executive. For example, the compensation of the president of an SAS is subject to a contribution rate of approximately 65% of his net pay (this rate varies depending on the amount of compensation), to which must then be added income tax at a progressive rate of up to 45%.
However, in companies in the digital sector, executives often work on developing software applications, on creations resulting from innovative methodologies (training, processes, concepts), new designs, or original intellectual creations. This work by the executive may then allow them to claim copyright, granting them favorable tax treatment to increase their net income by reducing tax and social security costs.
In fact, whenever a person, acting as an individual, creates original works protected by intellectual property rights (software, methodologies, concepts, designs, etc.) or files for industrial property rights (trademarks, industrial designs, patents), these works belong to that person as part of their private assets. The income received through Copyright infringement takes many forms:
- Income derived from the creation of a trademark registered by the executive and used by the company
- Income from his work as an independent software developer
- Income derived from “original” creative, conceptual, or design work
If the company founded by the executive, or third-party companies, wish to use these services or original works owned by the executive, the executive could receive copyright royalties in exchange for such use, known as “ license ” or “ concession .”
Benefits of Income from the Licensing of Copyrights
- Copyright royalties can be received in addition to unemployment benefits, as well as in addition to compensation as an employee or executive.
- Royalties enjoy favorable tax treatment: they are deductible for the company paying them and are taxable for the author as follows:
Creation, Concept, Design, Branding
| Taxation | Tax Base |
|---|---|
| Income Tax | Income tax on 66% of revenue (micro-BNC tax regime for revenue up to 72,500 euros in Year -1 and/or Year -2 or Option to file under the actual income tax regime, allowing you to deduct all expenses related to this income |
| Social Security Contributions | Social security contributions for self-employed individuals (overall rate between 30% and 35%). Under the micro-BNC system, the tax base is reduced by the 34% deduction |
Software
| Taxation | Tax Base |
|---|---|
| Income Tax | Fixed rate of 10% |
| Social Security Contributions | Authors’ contributions, generally below 17.2% |
Points to Watch For
- It is important to clearly distinguish between works created solely by the executive and those created by the executive as an independent contractor and then by the company’s employees. Indeed, with the exception of software in certain cases, all works produced by employees will be considered their property. It is therefore necessary to distinguish between work created “before” an individual became an employee and work created “after,” since a freelance creator cannot be compensated for intellectual property work performed by a company employee; the same reasoning applies to any other person involved in the creation of such works (freelancers, interns, etc.);
- Intellectual property protection does not require any formalities, unlike industrial property rights (trademarks, designs, and patents). However, the criteria for intellectual property protection (an original form) can be difficult to prove in the event of a dispute;
- External investors who become shareholders as part of a capital raise often require that the intellectual property be owned by the company. However, in the structure described above, the intellectual property belongs to the executives as part of their personal assets—as independent creators of intellectual property—and, where applicable, to the employees. If such a structure is implemented, the intellectual property should be transferred to the company prior to the fundraising round, which will, among other things, allow the executive to receive a tax-advantaged payment since it is subject to the same tax treatment as the licensing of rights. To do so, assignment agreements must be entered into between the executives and the company, and clauses regarding the assignment of intellectual property must also be included in the employment contracts.
