For start-ups and scale-ups, attracting and retaining talent is often a crucial factor for success. At the same time, it is important to preserve liquidity, take investors’ interests into account and ensure that employees have a fair share in the company’s value. Employee share schemes can be an effective tool in this regard – provided they are structured in a way that makes sense from a tax and legal perspective.
Profit-sharing rights: involving employees without transferring shares
Profit-sharing rights make it possible to involve employees in the company’s financial success without transferring shares. They do not receive any voting, information or consultation rights, and existing shareholder structures remain unaffected.
At the same time, employees can share in the company’s capital appreciation. Depending on the structure, a share in hidden reserves – and thus in a future exit – is also possible.
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Tax-efficient compared to traditional VSOP models (Virtual Stock Option Plans)
A key advantage of profit-sharing rights lies in their tax treatment. Whilst payments from VSOP programmes are often treated as wages and are therefore subject to taxation of up to 45 per cent (plus solidarity surcharge and, where applicable, corporate income tax), income from profit-sharing rights – in particular capital gains – subject only to 25 per cent capital gains tax (plus solidarity surcharge and, where applicable, state capital gains tax), depending on the structure.
Particularly in the event of a successful exit, this can lead to a significantly higher net benefit for employees.
Profit-sharing rights as an attractive employee share scheme for start-ups and scale-ups (in German only)
Tax benefits arising from the conversion of existing share ownership schemes
The balancing act between cost-cutting and retaining talent (in German only)
Employee share ownership in small and medium-sized enterprises
Section 19a of the German Income Tax Act (EStG): What does the ‘dry income’ risk mean?
A common problem with employee share schemes is that employees have to pay tax even though they have not yet received any cash. This so-called ‘dry income’ risk can significantly reduce the attractiveness of a share scheme.
Section 19a of the German Income Tax Act (EStG) allows for a deferral of taxation under certain conditions. The aim is to ensure that the tax liability arises, as far as possible, only when cash is actually received – for example, as part of an exit.
This allows share schemes to be structured without imposing a tax burden on employees at an early stage.
The Future Financing Act has significantly expanded the scope of application of Section 19a of the Income Tax Act (EStG). Companies may be eligible if, at the time of the shareholding or in any of the six preceding calendar years, they do not exceed the following thresholds:
- fewer than 1,000 employees
- a maximum turnover of 100 million euros
- a maximum balance sheet total of 86 million euros and/or
- established less than 20 years ago
This means that significantly more start-ups and scale-ups will benefit from the tax advantages.
How we support you
Whether it’s the introduction of a new share scheme or the conversion of an existing VSOP into a § Section 19a-f-compliant profit-sharing model – we provide comprehensive support:
