How is employee participation with profit participation rights taxed?
It only becomes relevant for tax purposes when the profit participation rights are created.
Employee participation only becomes relevant for tax purposes when employees convert their vested options into profit participation rights. At that point, a non-cash benefit arises that is taxed as employment income. The grant, vesting and signing of the allocation agreement do not yet trigger any tax.
When does tax arise?
At the moment the profit participation rights are created. Their value at that point counts as a non-cash benefit and is subject to income tax and social security contributions. Employees decide on the timing themselves. Creating them early usually means a lower taxable value, but tax is paid before any money flows.
Can the tax be deferred?
Yes, if the conditions of Section 19a of the German Income Tax Act (EStG) are met. The company may have at most around 1,000 employees and €100 million in revenue or €86 million in total assets, and must have been founded no more than 20 years ago. Tax then only becomes due when one of these events occurs:
- the profit participation rights are sold or transferred
- 15 years have passed since the transfer
- employment ends, unless the employer assumes liability for the wage tax
In addition, up to €2,000 per year is tax-free under Section 3 No. 39 EStG if the offer is open to all employees who have been with the company for at least one year.
How is later income taxed?
Increases in value after creation and profit distributions are capital income, generally subject to flat-rate withholding tax (Abgeltungsteuer). With a VSOP, on the other hand, the entire payout is taxed as employment income. Unlike many ESOP and VSOP programs, holders of profit participation rights also share in profit distributions, regardless of an exit.
For a side-by-side overview: How do profit participation rights differ from ESOP, VSOP and GmbH shares?
beel does not provide legal or tax advice. This article is for information purposes only. Tax treatment depends on the individual case. Please consult a tax advisor for specific questions.