Germany: Proposed change to taxation of employee share ownership effective 2024

Draft legislation would change the taxation of employee share ownership in order to facilitate such ownership

Proposed change to taxation of employee share ownership effective 2024

The Federal Ministry of Finance (BMF) published draft legislation that would change the taxation of employee share ownership in order to facilitate such ownership—effective from 2024.

The draft law on the future of financing includes proposed measures related to financial market law, company law, and tax law intended to strengthen the performance of the German capital market and increase the attractiveness of Germany as a financial location for both national and international companies and investors. 

Tax exemption for the transfer of employee share ownership at a discount

The tax-free maximum amount would be increased to €5,000 (from €1,440), but would be linked to a requirement of additionality ("in addition to the salary owed anyway") which would exclude deferred compensation.

In addition, an "indirect holding period" of three years would be introduced for employee share ownerships in order to avoid undesirable windfall effects through immediate sale after transfer of the share by the employee without loss of tax exemption. If the shareholding is sold or transferred free of charge within three years, the initially tax-exempt portion of the salary is to be taxed at the final withholding tax rate of 25%.

Deferral model for employee share ownerships provided at a discount

The scope of application of the preferential treatment would be extended to companies with fewer than 500 employees (from the current 250 employees) and annual turnover of no more than €100 million (from current €50 million) or an annual balance sheet total of no more than €86 million (from current €43 million).

The period in which exceeding the threshold is harmless would also be extended. The preferential treatment could be claimed if the threshold was not exceeded at the time of the transfer of the share or in one of the six preceding calendar years (i.e., a seven-year period, rather than the current two-year period). In addition, currently "young" companies whose date of foundation is no more than 12 years ago are eligible, but the date of foundation would be adjusted to 20 years before the date of the transfer of the share.

The tax exemption also would be extended to cases where the company shares are not granted by the employer itself, but by the (founding) partners or other group companies. In addition, the final taxation of the non-cash benefit would occur after 20 years (from current 12 years), if the employee has not sold the shareholding or terminated his employment relationship beforehand. A possibility for lump-sum wage taxation by the employer with a tax rate of 25% would also be created for all taxable events (transfer of the share ownership, expiry of (in future) 20 years, termination of the employment relationship). Finally, it would be possible to further postpone taxation for the facts "expiry of 20 years" and "termination of employment relationship " (dry income) if the employer irrevocably declares that he assumes liability for the wage tax (optional liability regulation). In these cases, only the later fact of the actual "transfer or sale" would trigger taxation.

Read an April 2023 report [PDF 367 KB] prepared by the KPMG member firm in Germany



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