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Mobility Matters

“Fondsstandortgesetz” – New Tax Opportunities for Employee Incentive Programmes in Germany? May 2022 | By Carmen Egermann and Ingo Todesco with the Global Mobility Services – Reward Services practice at KPMG AG Wirtschaftsprüfungsgesellschaft in Germany

Global Mobility Services (GMS) Publications

Employee incentive programmes bring a variety of benefits: in addition to their salary, employees can participate in the company’s profits, thereby giving them a stake in the company’s success. From the perspective of employers and investors, employee incentive programmes are believed to increase the employees’ commitment and motivation. By establishing a link between employees’ work performance and the company’s value, they may better appreciate how productivity and sales performance may enhance a company’s value.

The selection of a suitable employee incentive programme is a tricky undertaking. There are many elements for a company’s officers to consider: 

  • does this plan correspond with our company culture and business objectives?
  • what are you trying to achieve, what will appropriately motivate to achieve your desired ends?
  • what are our options? 
  • how do we design it? 
  • how do we communicate it?

Incentive compensation plans vary widely and can be highly specific to the employer, but that can have its downside – the legal and tax framework, overall (unfavourable) market conditions, as well as uncertainties from the employees’ perspective, can make implementation more difficult.

In order to create a more favourable environment for employee incentive programmes and foster alternative ways of compensating employees, Germany enacted the Fund Jurisdiction Act (“Fondsstandortgesetz”, hereinafter “the Act”)1 which was passed in June 2021. The Act aims to provide for a more favourable tax treatment for certain employee incentive programmes in Germany. Doing this, in part, means increasing the existing tax allowance from EUR 360 to EUR 1,440, and a new Section 19a EStG of the German Income Tax Act (EStG), which provides for a deferral of taxation, was introduced.

This article will examine new Section 19a EStG, explain the change in the tax allowance, and briefly discuss the impact of both.


Cash payments from virtual incentive plans (e.g., virtual options/phantom stock) and the transfer of shares from equity-based plans (e.g., stock options, RSUs) at no cost or with a discount generally result in income from employment (Section 19 EStG). The taxable benefit arises when the employee acquires economic ownership of the payments or shares.

A detailed review of the taxable event is often required (e.g., in case of restrictions on disposition) considering the individual plan regulations. Furthermore, challenges with regard to the liquidity of the company and employee arise if employees only receive shares with restrictions on disposal. This means shares cannot be sold immediately after transfer and, therefore, no cash is available to cover the corresponding income tax and social tax on the compensation (so-called “dry income”). 

Increase of Tax Allowance to EUR 1,440

The tax allowance, according to Section 3 no. 39 EStG,  is linked to the principle of equal treatment of employees and therefore only applies when the employee incentive programme is offered to all employees who were in an employment relationship with the company for at least one year. A taxable benefit-in-kind that arises because of a free or discounted transfer of shares from equity-based plans should be eligible for the tax allowance. This tax allowance also applies for social security tax purposes. Under the new Act, the tax-free amount of EUR 360 has been increased to EUR 1,440.

Section 19a EStG – Deferral of Taxation for Young SMEs

The new Section 19a EStG offers employees of young, growing companies the opportunity to postpone the actual taxation of a taxable benefit-in-kind derived from the transfer of shares. 

Nevertheless, the requirements to make use of this new statutory provision are very strict and application is therefore very limited. Section 19a EStG is currently only applicable to so-called micro-, small-, and medium-sized enterprises (so-called “young SMEs”)2 that were founded less than 12 years ago. The use of the new regulation is elective and there is no obligation to make use of it.

The benefit would be achieved by postponing the taxable event until the realisation of a “substitute fact.” A substitute fact is an event which is considered relevant for taxation purposes in place of the moment when the employee acquires economic ownership of the shares.

According to the new regulations under German tax law the following events will be considered a substitute fact:

a. Sale of the shares 

b. Termination of the employment relationship 

c. Expiration of twelve years from the transfer of shares.

Ideally, taxation would only take place when the employee realises a profit via liquidation of the shareholding. (This would constitute substitute fact a. above.) In this case, an employee could be provided with shares from equity-based plans without having to cover wage tax that might otherwise be due upon transfer of the shares to the employee. However, in case of termination of the employment relationship or the expiration of 12 years (substitute facts b. and c.), any tax would become due although the shares have not been disposed of. In this case, the problem of “dry income” would only be postponed, rather than eliminated. This may be seen as problematic by companies and employees because there may still be situations where the employee will have to fund a tax payment for income that has not yet been realised (so-called “dry income”).

Social Security

The deferral of taxation does not apply for social security purposes, because the new regulation is not considered to be applicable under the German Social Security Compensation Directive (Sozialversicherungsentgeltverordnung). This means that the deferred taxable benefit-in-kind should be considered to be subject to social security contributions with no deferral; i.e., social security contributions will be due upon receipt of the incentive income. In return, no social security contributions should arise on the taxable benefit-in-kind in the year that the substitute event takes place. The different treatment for social security purposes should only have impact if the ceilings for social security purposes are not already exceeded with other employment income.

Non-Taxed Benefits-in-Kind

Section 19a EStG also includes the requirement that non-taxed benefits-in-kind must be confirmed with the tax authorities by means of a free-of-charge binding ruling for wage tax purposes initiated by the employer. Differences between tax office and companies or employees, such as the valuation of benefits-in-kind, should be clarified in a timely manner and not only when a substitute fact occurs.

Potential Impacts of Section 19a EStG

The deferral of taxation under 19a EStG is not achieved by means of an interest-free tax deferral; rather, it is assumed that the monetary benefit only arises at the time of a substitute event. Consequently, the taxpayer’s circumstances at the time of the substitute event are relevant. For employees with lower taxable income in the year of deferral and higher income in the year of the substitute event (e.g., sale of shares) the applicable tax rate could be significantly increased. This means, assuming that salaries increase over the years, the application of Section 19a EStG could even be negative in terms of the overall tax burden due to the progression of German income tax.

The overall picture and situation of the employee should be considered when making use of this new regulation. Therefore, the new statutory provision stipulates that this ruling concerning the wage tax withholding procedure is only applicable with the consent of the employee.


Employee incentive programmes are already an important component of providing long-term incentives to employees and fostering company loyalty and retention. From practical experience it can be seen that most prominent companies listed in the German share indices DAX and MDAX already use such programmes to incentivise their employees, and the number of mid-sized and smaller German companies implementing employee incentive programmes is increasing. The new Act provides further tax incentives by increasing the tax allowance from EUR 360 to EUR 1,440, and introducing a new provision permitting deferral of the taxable event for employees of young SMEs.

Although the provisions of Section 19a EStG are generally beneficial, they will require close coordination between employers, taxpayers, and the tax authorities in terms of practical application. 

In December 2021, a three-party coalition government was forged in Germany, headed by the new chancellor Olaf Scholz, a center-left Social Democrat (SPD). There are still high expectations for the new government concerning further momentum in the legislative arena that would lead to increasing the attractiveness of employee incentive programmes in Germany.


1  See “Act to promote Germany as a Fund Jurisdiction and the implementation of the Directive (EU) 2019/1160 amending Directives 2009/65/EG and 2011/61/EU with regard to cross-border distribution of collective investment undertakings (Fund Jurisdiction Act – FoStoG)” dated June 3, 2021, Federal Law Gazette part I 2021, p. 1498/See Gesetz zur Stärkung des Fondsstandorts Deutschland und zur Umsetzung der Richtlinie (EU) 2019/1160 zur Änderung der Richtlinien 2009/65/EG und 2011/61/EU im Hinblick auf den grenzüberschreitenden Vertrieb von Organismen für gemeinsame Anlagen (Fondsstandortgesetz - FoStoG) in the Bundesgesetzblatt (Teil I2021 Nr. 30 vom 10.06.2021) by clicking here.

2 “SMEs” according to EU-Commission Recommendations: < 250 employees and either < EUR 50 million in annual turnover or < EUR 43 in annual balance sheet total.

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