Please contact customerservices lexology. German Federal Fiscal Court allows employee to steer timing of taxation to reduce tax burden on stock option gains. A recent German Federal Fiscal Court decision has opened the door to optimizing the tax treatment of stock options for employees.

Applying the principles of the court decision, employees may steer the timing of taxation to significantly reduce any tax burden arising in respect of stock option gains. Generally, German employees are deemed to receive employment income upon the exercise or similar disposal of a stock option.

Income tax at personal tax rates between 14 percent and 45 percent plus solidarity surcharge and, if applicable, church tax is payable on the difference between i the amount paid by the employee to exercise the option and ii the fair market value FMV of the underlying shares, calculated at the date the shares are booked into the account of the employee the option gain.

In addition, the employer and the employee must pay social security contributions on the option gain, up to certain ceilings specified by German social security laws. In the underlying case, the employee was granted 15, stock options in Shortly after the grant of the stock options, the employee sold the options to a German limited liability company the Company which he fully owned.

German taxation of equity incentives - Lexology

The options were sold at a price well below the then current FMV. The Company was not incorporated in connection with the stock option grant and did not have as its sole purpose the holding of stock options.

The Company exercised the options in ; at this time, the FMV of the options had increased by a factor of nine. The German tax authorities and the local tax court took the view that the employee was subject to wage tax and social security contributions in on the nine-fold increase in value. At that time, the FMV of the shares had only increased by a factor of two, which led to a significantly lower taxable amount.

In particular, the German Federal Fiscal Court declared that the sale of the options to the Company did not constitute an abuse of rights, as the Company was not incorporated in connection with the stock option grant and did not have as its sole purpose the holding of the stock options.

Frank Denneman

The main practical implications are twofold:. Any content of this article should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction. If you are interested in submitting an article to Lexology, please contact Andrew Teague at ateague GlobeBMG. I find the email newsfeed useful and of good quality, and in some cases directly on point with issues of concern to the company.

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Global Employee Equity at a glance: Germany | White & Case LLP International Law Firm, Global Law Practice

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Register now for your free, tailored, daily legal newsfeed service. Germany July 8 German Federal Fiscal Court allows employee to steer timing of taxation to reduce tax burden on stock option gains A recent German Federal Fiscal Court decision has opened the door to optimizing the tax treatment of stock options for employees. Background Generally, German employees are deemed to receive employment income upon the exercise or similar disposal of a stock option.

Facts of the Case In the underlying case, the employee was granted 15, stock options in The main practical implications are twofold: A subsequent increase in value will not be subject to wage tax.

In addition, by transferring the options to a fully owned company, employees may benefit from lower tax rates. Where an employee holds stock options, the option gain is taxed at the personal tax rate of the employee i.

In contrast, holding the options via a corporation leads to a tax burden of only 30—35 percent, as i the capital gain resulting from a sale of the shares is subject to a 95 percent tax exemption for corporate income tax purposes and ii the employee benefits from the partial income taxation regime for dividends distributed by the corporation i.

This case therefore opens up opportunities for tax structuring of employee options that could give rise to significant tax savings and make the participation in stock option programs even more attractive to employees. Popular articles from this firm FCA Regulatory Sandbox Update: International Germany Netherlands Israel More Back to Top RSS feeds Contact Submissions About. Testimonials Cookies Disclaimer Privacy policy. Login Register Follow on Twitter Search.