Please contact customerservices lexology. Many companies offer equity incentives to their employees in Germany and they are becoming increasingly popular as an important source of income for employees. In Germany, such incentives are typically discounted or free stock options or, as the case may be, shares in the employing company or in another group company. The granting of such incentives are not without issue stock — in addition to areas such as the tax deductibility of financing the grant of these incentives, as recently decided upon by the German Federal Fiscal Court Bundesfinanzhof see belowspecific tax issues in Germany will arise at the level of the employer as well as the employees, which should be borne in mind when planning to provide such incentives for German employees. The following serves as a reminder of some of these particular tax issues, assuming that the beneficiary is an employee resident in Germany. All employees resident in Germany must pay tax on their income in accordance with German tax law. Additionally, a "solidarity surcharge" is payable based on the individual's normal income tax rate 5. The individual's income tax-free amount is EUR 8, and twice that amount for married couples. Church tax may apply for church members. Finally it should be noted that German income tax law offers important deductions and benefits sometimes unknown in other countries, e. Generally, an employer in Germany is obliged to withhold monthly income tax pre-payments "wage tax" and to transfer such prepayments to the German tax authorities. The employer is also obliged to meet this wage tax obligation where a taxable benefit is granted by a group company of the employer. The assessment base for income taxation, as well as the employer's wage tax liability, includes not only cash payments, but also contributions in kind, such as shares in the employing company or in a germany party of the employing company. However, there options still be an exercise process. Typically, these stock options are not transferable. A stock option plan may have complete flexibility surrounding exercise and lapsing criteria and vesting or performance conditions in relation to the exercise of discounted stock options. Such vesting and performance conditions may be time based or relate to corporate or individual performance. The option options be granted over unissued shares or issued shares and may be granted by a company in the employing group or a third party for example, an taxation benefit trust. Additionally, the stock options may taxation granted to such employees as the employer or other entity granting the option may decide in its discretion. It does not have to be offered to all employees, or to all employees of a certain description. Normally, the grant of a stock option should not be a taxable event at the level of the employee in Germany. However, stock and wage tax would arise on the subsequent exercise by an employee stock a stock option whether granted by a German employer company or a related foreign companycalculated on the difference between the fair market value of the shares on the date of exercise and the exercise price if any. Church tax may apply for members of certain German churches and would have to be withheld at source, according to local legislation. However, this general position is subject to the following: The employer would be obliged to withhold the employee's wage taxes on the difference between the fair market value of the shares issued and the exercise price paid by the employee if any. Furthermore, where the granting company is not the employing company, the employing company would need to ensure it is informed about the issue of shares to German employees in a timely manner in order to be able to meet its German withholding tax obligations. The Bundesfinanzhof has recently clarified FN1 that the capital costs of granting free share options to employees based on a contingent increase of the share capital of a German company do not qualify for a tax deduction at the level of the Germany employing company, which could otherwise apply for alternative ways of financing. The Court held that it is the company's shareholders that incur the capital cost, via germany dilution of their existing shareholdings, and that the German company does not actually incur and cannot be deemed to incur such costs. There are very limited income tax exemptions in Germany. For example, if an incentive plan is open to all employees and offers stock benefits separate from the employee's salary, an income tax exemption of EUR may be taxation to the employee. Employees with lower taxable income may claim further, additional tax allowances. Other incentive plans may offer discounted or free shares to employees, instead of stock options. No restrictions may be imposed on the shares other than any which might be contained in the company's Articles of Association or any existing shareholder agreements. Some plans may provide for non-German instruments, such as Restricted Stock Units, although the German tax authorities do have difficulties in correctly classifying such instruments for German germany purposes. While there is no taxable event on the grant of a stock option, there would be a taxable event at the time of award of discounted or free shares. The shares would be considered a contribution in kind and treated as deemed salary income at the options of the award, irrespective of a vesting period. The income tax treatment of such award would then be similar to the tax treatment of the exercise of the discounted or free stock options, i. Any gain on a subsequent disposal of the shares would also similarly be treated for German tax purposes as the sale of shares acquired on the exercise of a stock option, i. The following is a comparison table of the income tax treatment for an employee of a stock option compared with the award of a options share. Germany here to view the table. The above table does not take into account the position of employees who work and live in several jurisdictions and are engaged in cross-border activities for their employer. In these cases, an analysis would always be necessary to determine the risk if any of more than one country seeking to claim the right of taxation in respect of the employee's equity incentives and whether such risk can be dealt with by an applicable double tax convention with Germany. The granting of such incentives at the time of award or exercise would normally trigger a social security liability of the employer and employee in Germany as well, subject to any social security ceiling. Social security contributions if any are split equally in Germany between an stock and employee and the employee's germany would also be withheld by the employer. Companies engaged in Germany should consider the structure of any equity incentive plan carefully from a tax perspective, particularly to ensure that potential wage tax liabilities are properly observed. If you are interested in submitting an article to Lexology, please contact Andrew Teague at ateague GlobeBMG. Chris Heaphy General Counsel The Taubman Company. We use cookies to customise content for your subscription and for analytics. If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy. Newsfeed Navigator Analytics Track Discover. Share Facebook Twitter Google Plus Linked In. Follow Please login to follow content. Register now for your free, tailored, daily legal newsfeed service. Germany March 1 General income tax principles All employees resident in Germany must pay tax on their income in accordance with German tax law. Income taxation of a stock option Normally, the grant of a stock option should not be a taxable event at the level of the employee in Germany. Tax obligations of the employer The employer would be obliged to withhold the employee's wage taxes on the difference between the fair market value of the shares issued and the exercise price paid by the employee if any. Tax deductibility issues The Bundesfinanzhof has recently clarified FN1 options the capital costs of granting free share options to employees based on a contingent increase of the share capital of a German company do not qualify for a tax deduction at the level of the Germany employing company, which could otherwise apply for alternative ways of financing. Employee's shares Other incentive plans may offer discounted or free shares to employees, instead of stock options. Risk of double taxation The above table does not take into account the position of employees who work and live in several jurisdictions and are engaged in cross-border activities for their employer. Social taxation The granting of such incentives at the time of award or exercise would normally trigger a social security liability of the employer and employee in Germany as well, subject to any social security ceiling. Conclusion Companies engaged in Germany should consider the structure of any equity incentive plan carefully from a tax perspective, particularly to ensure that potential wage tax liabilities are properly observed. Patrick Sinewe and Dr. Popular articles from this firm Legal Update: Food and drink sector hot topic: Real Estate Germany Ireland Peru More Back to Top RSS feeds Contact Submissions About. Testimonials Cookies Disclaimer Privacy policy. Login Taxation Follow on Twitter Search.
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