Employee participation schemes are an effective tool for motivating and retaining key employees. The tax treatment is complex but offers attractive structuring opportunities.
Employee Participation: Motivation with Tax Benefits
Employee participation programmes are gaining increasing importance in Germany. The tax treatment was fundamentally improved by the Future Financing Act (Zukunftsfinanzierungsgesetz).
Forms of Employee Participation
Direct Participation in Company Capital
The direct transfer of company shares is subject to payroll tax under § 19 EStG. The tax-free allowance under § 3 Nr. 39 EStG has been increased to 2,000 euros per year since the Future Financing Act, provided the participation is open to all employees who have been with the company for at least one year.
Virtual Participations
Phantom Shares grant economic participation without a corporate law stake. For tax purposes, they constitute employment income that is only taxable upon payout.
Stock Options
Stock options give the employee the right to acquire shares at a predetermined price. Taxation occurs upon exercise of the option. The difference between market value and exercise price is subject to payroll tax as a non-cash benefit.
Tax Innovations Under the Future Financing Act
Deferred Taxation Under § 19a EStG
This provision enables deferred taxation for participations in certain companies. The non-cash benefit is only taxed upon disposal or after expiry of a holding period. This resolves the so-called dry-income problem.
Eligible Companies
Deferred taxation applies to companies that are no older than 20 years, employ fewer than 1,000 staff members, and have annual revenues of no more than 100 million euros.
Structuring Options
ESOP Models
Employee Stock Ownership Plans are frequently implemented through a trustee structure. The decisive factor is when the employee acquires beneficial ownership of the shares.
VSOP Models
Virtual Stock Option Plans are particularly popular with start-ups, as they do not require any change to the shareholder structure.
Profit Participation Rights
Profit participation rights (Genussrechte) offer a flexible form of employee participation. They can be structured to provide both profit-sharing and capital participation.
Social Security Aspects
Non-cash benefits from employee participation schemes are generally subject to social security contributions. The tax-free allowance under § 3 Nr. 39 EStG also applies for social security purposes.
Conclusion
Employee participation schemes are a powerful tool in modern compensation design. At compleneo, we provide comprehensive advice on the development and implementation of employee participation programmes -- covering tax, corporate, and employment law from a single source.
