The Federal Government plans to make the tax treatment of employee share purchase plans (ESPPs) more attractive as part of the new Future Financing Act (Zukunftsfinanzierungsgesetz). A recent first (ministerial) draft act provides for a number of tax concessions:
ESPPs: tax exemption increased to EUR 5,000
- Employees’ monetary benefits from shares in their employer company awarded free or acquired at a discount are subject to income and wage tax to the extent the tax exemption is exceeded. This tax exemption, which was already raised to EUR 1,440 per calendar year in 2021, is to be increased to EUR 5,000 under the (ministerial) draft act.
- For the exemption to apply, the shares must still generally be offered to all employees and granted in addition to the salary already owed.
- Although this increase would not match similar tax exemptions in other European countries with a pronounced employee ownership culture, it still significantly boosts the attractiveness of share-based compensation plans.
Start-ups: special provision for ESPPs expanded
- A special provision for the taxation of ESPPs in start-ups already stipulates that monetary benefits from the award or discounted acquisition of shares are generally only subject to income and wage tax when the employee leaves the company, sells the shares, or after a period of 12 years has lapsed – provided that the start-up itself meets certain criteria.
- The draft act aims to increase the number of start-ups that can benefit from the special provision by raising the companies’ maximum age from 12 to 20 years. It also doubles the size-dependent thresholds and extends their duration: Under the draft act, the special regime will apply to companies that have (i) less than 500 employees and (ii) annual sales of no more than EUR 100 million or total assets of no more than EUR 86 million, each in the year in which the equity compensation is granted or in one of the six preceding calendar years.
- The maximum deferral of taxation is to be extended from 12 to 20 years. If an employer additionally assumes liability for any wage tax, taxation will even be deferred indefinitely until the shares are sold and thus also beyond the employee’s exit from the company.
- The draft act also provides for the possibility of lump-sum wage taxation of monetary benefits from ESPPs; under this option, a reduced tax rate of 25% applies as opposed to the employee’s personal tax rate of up to 45% (in each case plus solidarity surcharge and church tax, where applicable).
In a next step, the Federal Cabinet will discuss the draft Future Financing Act, before it is submitted to parliamentary procedure; pursuant to the draft act, the Future Financing Act is to enter into force this year.
Equity-based compensation plans are a popular and effective tool for long-term staff retention and incentivising top performers. Gleiss Lutz offers clients comprehensive advice on structuring national and global equity-based compensation plans. In addition to designing and assisting with all relevant legal aspects of the implementation of regular ESPPs, we advise extensively on long-term incentive plans for executives as well as management incentive programmes. We combine specialist expertise in corporate, tax, employment, capital markets, data protection and financial supervisory law, among others, with an integrated full-service approach to deliver tailored and cost-effective solutions to clients.
Feel free to contact us if you have any questions on equity-based employee compensation plans or the impact of the proposed legislative changes on your current ESPP, or if you want to know how to benefit from the improved framework for designing and implementing ESPPs in Germany. Our experts are happy to assist.
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