In times of strong competition for the best talent, profit participation rights offer a flexible and tax-attractive opportunity for employees to participate in the economic success of a company without granting voting and co-determination rights.
Profit participation rights: instrument under the law of obligations
In contrast to other forms of participation, profit participation rights are not actual shares in the company, but rights under the law of obligations: holders do not receive any shareholder rights such as voting rights or co-determination rights in the management of the company. The corporate governance of the company therefore remains unchanged. Instead, profit participation rights offer economic incentives by granting a share in the company's profits, other key financial figures such as EBIT or EBITDA or, if required in the start-up environment, an increase in the company's value.
In addition, profit participation rights can be structured flexibly and variably: they can be issued and redeemed cost-effectively, quickly and easily, as the transfer does not have to be notarised.
Carmen Egermann
Senior Manager, Tax, Global Mobility Services
KPMG AG Wirtschaftsprüfungsgesellschaft
Tax incentives
The payments from the profit participation right (interest and any capital gains) are generally tax-privileged. The final withholding tax of only 25 per cent plus solidarity surcharge and, if applicable, church tax applies. In comparison, the tax burden for a one-off payment or a classic virtual participation programme is often up to 45 percent plus solidarity surcharge and, if applicable, church tax.
The payout of the profit participation capital upon cancellation of the profit participation rights has no tax consequences if there is only participation in current profits, as it is merely a repayment of capital for tax purposes.
The provision of profit participation rights at a discount or free of charge as part of an employee share ownership programme generally means that the discount is taxable as wages. This results in progressive income tax plus solidarity surcharge, church tax and social security contributions, if applicable.
However, the legislator has created a considerable tax incentive here by increasing the tax-free allowance as part of the Future Financing Act: According to Section 3 No. 39 EStG, the free or discounted transfer of (certain) profit participation rights is tax-free up to a value of EUR 2,000 per year and per employee. The central prerequisite for application is that the participation offer is generally open to all employees who have been in an uninterrupted employment relationship with the company for at least one year (so-called all-employee plans). The amount of the employer's contribution can vary depending on the group of employees - provided certain conditions are met. The benefits in detail:
- For employees: considerable savings on income tax and social security contributions
- For employers: cost savings for the employer's social security contributions, provided the employees have not yet exceeded the contribution assessment limits with their other remuneration components
- Special case for deferred compensation: Utilisation of the tax-free allowance is also possible, but the exemption from social security contributions does not apply
Employees of start-ups and scale-ups benefit from deferred taxation when profit participation rights are granted: if an actual equity participation is granted, this is a non-cash benefit that is subject to income tax at the time of transfer. § Section 19a of the German Income Tax Act (EStG), on the other hand, contains regulations according to which, under certain conditions, non-cash benefits, even from larger equity investments, are not initially taxed. Taxation only takes place at a later date. The aim is to delay taxation until the sale of the investment and the inflow of any exit profit. The correct contractual structure is important here.
The following conditions apply for the application of Section 19a EStG at the time of the transfer or in one of the six preceding calendar years:
- Less than 1,000 employees
- Maximum turnover of 100 million euros
- Maximum annual balance sheet total of 86 million euros
How we support you
- Analysis of your company-specific challenges and objectives.
- Simulation calculation to clarify the tax effects of the participation programme.
- Tax advice on the optimum structure and support in obtaining a possible wage tax ruling.
- Drafting of the contractual documents (KPMG Law).
- Valuation of the selected participation instrument as well as business and accounting treatment.
- Communication of your programme to employees.
- Ongoing administration of your participation programme.
