Tax Cuts (§ 3 No. 39 EStG)

Tax relief up to 2.000 Euros!

Employees can receive up to 2.000 Euros per calendar year in free or discounted shares in their employer's company.

This is a tax-free allowance (§ 3 No. 39 EStG). Therefore, the tax exemption does not expire if it is exceeded.

This means that no tax is payable on up to 2.000 Euros per calendar year. If an employee receives more than that, tax is paid only on the additional amount.

In general, the employer only has to withhold wage tax and social security contributions on the excess amount (§§ 38-42g EStG, § 1 SvEV).

To qualify for the tax exemption, all employees who have worked for the company for at least one year must be able to participate.

Employers can also be related companies, such as parent companies or sister companies. Tax is payable on the value of the participation. This is the fair market value, also known as the market price.

Utilities and custodial account fees are not wages

The employer may bear the costs of the practical and technical administration of the plan.

According to fig. 12 of the circular of the Federal Ministry of Finance dated June 1, 2024, these do not constitute wages, i.e. no wage tax must be withheld, and the same applies to incidental expenses.

For example, notary fees, registration fees associated with opening an account with a cooperative, and registration fees, as well as custodial account fees for the duration of a contractually agreed lock-up period and account management fees can be borne tax-free by the employer.

Who can claim the 2.000 Euros tax-free allowance?

The tax exemption of up to EUR 2,000 applies to employees with unlimited and limited income tax nexus in Germany (see § 1 EStG and fig. 10 of the circular of the Federal Ministry of Finance dated June 1, 2024).

Using the tax allowance more than once in a given calender year

If the employee is in several successive employment relationships or in several employment relationships at the same time during the calendar year, the tax exemption can be claimed for each of these employment relationships.

Examples:

• Left the company in February and returned to work for the company in May;
• Employment with the Group company and secondary employment with a subsidiary or affiliated company.

No tax exemption for virtual shares or phantom stock options

These are simple contractual bonus promises made by the employer. Like cash, they are not tax-exempt and must be taxed when received (§ 11 EStG). The employer is obliged to withhold wage tax and social deductions from such wages.

Valuation of the employee shareholdings in accordance with the Federal Ministry of Finance Circular dated June 1, 2024

If there is no market value for the shares/stakes, they are valued according to the recognized methods in the following order (Fig. 1.3 of the Circular of the Federal Ministry of Finance dated June 1, 2024, docket no. IV C 5 - S 2347/24/10001 :001):

• Derivation of fair value from sales between third parties less than one year ago
• Valuation taking into account earnings prospects
• Valuation based on expert opinions, e.g. in accordance with IDW S1 (provided by German CPA) or valuation methods customary in the industry
• Valuation according to the simplified capitalized earnings method (§ 11 (2) Sentence 4 BewG in conjunction with §§ 199 et seq. BewG)

Tax Deferral (§ 19a EStG) for young companies

Startups & Co. can give employees a stake in the company against a Tax Deferral

If the employee agrees, the employer can transfer an equity stake to the employee without immediate tax liability. In this way, the employee participates in the success of Startups & Co. and can contribute to the company's success with the motivation of an entrepreneur.

Example of tax deferral under § 19a EStG

In 2024, a start-up company founded in 2020 will voluntarily give each of its employees 10.000 Euros worth of shares.

Employees are in agreement with the tax deferral.

In 2028, the shares will be worth 50.000 Euros. When the founders leave the company, all shares are sold to an investor. The company now agrees to the sale, which is then executed by the employees.

Solution

Employees received a 10.000 Euros non-cash benefit from the free transfer of shares in 2024.

The employer does not have to withhold wage tax on the tax base of 8.000 Euros until the exit/sale in 2028. This is the 10.000 Euro payment in kind minus the 2.000 Euro tax-free allowance (§ 3 no. 39 EStG).

Wage tax is calculated using the progressive tax rate (only until 12/31/2024: fifth rule).

The step-up in value of 40.000 Euros from 2024 to 2028 is also subject to taxation under § 20 EStG (income from capital gains) and § 17 EStG (sale of shares in corporations).

What happens when an employee leaves the company?

Normally, the tax deferral ends (standard case). However, the employer can make a binding commitment to the tax department on behalf of the employee to withhold and pay wage tax for the departing employee at the time of the sale. The employer is then liable to the tax authorities.

Formal requirements regarding company size and age

To be eligible for the tax deferral, the company must be young (established within the last 20 years) and meet the EU SME guidelines (Official Journal L 124 of May 20, 2003, pg. 36), i.e. in particular it must be a small or medium-sized company. This includes companies that have

• fewer than 1.000 employees;
• an annual turnover of less than 100 million Euros;
• less than 86 million Euros in total assets.

The size criteria must have been met either in the year of the transfer of share ownership to employees or in one of the preceding six years.

No social security deferral

Employee shareholdings subject to tax deferral are not exempt from social security contributions (§ 1 (1) sentence 1 no. 1 of the Social Security Remuneration Ordinance, SvEV). Any non-taxed compensation must therefore be included in the calculation of the pension allowance.

According to fig. 39 of the aforementioned Circular, social security contributions are no longer due in the event of a later exit/sale. The taxable benefit is therefore not to be included in the calculation of the pension allowance.

Custom tax advisory

Contact us to get accurate guidance in your specific case to benefit from equity plans knowing the tax and social implications and costs to your company and employees. In cross-border cases, there are specific aspects that need to be considered and discussed.