Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

Taxation of Stock Option Plans in Germany

von Peter Scheller

Taxation of Stock Option Plans in Germany

Expatriates especially from the USA and the Anglo-Saxon world who have been sent to Germany by their employers are often beneficiaries of stock option plans. Regularly these employees exercise options while staying in Germany. This raises the question of how benefits will be taxed in the home country and in Germany.

Tax implications are as follows:

Benefits from stock options

Benefits from stock option programs will be taxed in Germany as follows:

The benefit will be calculated as a capital gain:

Fair market value at the day of purchase
minus exercise price
minus expenses in relation to the transaction
Capital gain = benefit from stock options

The benefit will be taxed in the month of purchase. The tax rate will be the progressive standard income tax rate plus solidarity surplus charge. The maximum tax rate is about 47,5%.

If an employee works during the vesting period in Germany and abroad the benefit has to be split. The part of the benefit which relates to times while working in Germany is taxable in Germany. The part which relates to times of working activity abroad might be taxed in the country where the work has been carried out. For the split the actual exercise date is irrelevant. The relevant period (vesting period) starts at the date of granting the options and ends at the earliest possible exercise date.

Example: A US-citizen was sent to Germany by his US-employer. Until 31/12/2013 he lived and worked in New York. From 01/01/2014 on he lives and works in Munich. In January 2013 his employer granted stock options for 10,000 shares. The exercise price is $ 1 per share. Earliest exersise date is 31/12/2014. The vestion period starts in January 2013 and ends in December 2014. The employee exercises his options on 01/04/2015. The market value at this date is $ 11 per share.

The benefit is calculated as follows:

Fair market value (10,000 shares * $ 11)

110,000

Exercise price (10,000 shares * $ 1)

10,000

Expenses

0

Taxable benefit

100,000

Since the employee was working in the vesting period for 12 months in the USA and for 12 months in Germany the benefit has to be split on equal terms. Germany may only tax a benefit of $ 50,000.

This part of the benefit has to be declared in the German income tax return 2015. Benefits have also to be declared on US-income tax returns.

Note:

(1) If the benefit is substantially high there might be a cash problem. The employer must withhold wage income tax on benefits in the month of exercising the options. The benefit does not lead to a cash transfer to the employee. Consequently the wage income tax must be paid out of the normal net wage of the month. This might result in a very low payment to the employee in the respective month. The employee should be prepared. Either he can survive the month without any significant payment from his employer or he can sell shares in order to outbalance the cash deficit.

(2) In theory the employer should only withhold wage tax on the part of the benefit which is taxable in Germany. Experience shows that often payroll departments withhold income wage tax on the total amount. This is due to the fact that especially in relation to the USA a special certificate from German tax authorities is required to avoid withholding tax on the total amount of benefits. This certificate must be in the hand of the employer before exercise date. The employer or the employee can apply for this certificate at the Federal Central Tax Office. In general the employer should apply for it well before exercise date. Experience shows that this is not always the case.

The consequences of a missing certificate are the following. The employer has to withhold income wage tax on the total amount. The employee has to declare the correct benefit in his German income tax return.  The tax authorities will refund the unjustified amount. The problem is that the unjustified amount will be refunded months or years after exercise date and often this strains the cash situation of the employee.

(3) The same negative effect occurs also if other payments which are not taxable in Germany are paid out in Germany. This is the case for extra payments such as bonuses or compensions for unused vacation days. If these payments are granted for times when the employee was not working and living in Germany in general these payments are not taxable in Germany. If above mentioned certificate is not available, the employer has to withhold income wage tax on these payments. Again the employee has to seek for refunding the unjustified tax in his German income tax return.

(4) Experience shows that German tax authorities require extensive proof that certain parts of extra payments or benefits from stock options are not taxable in Germany. They might also require proof that these payments or benefits have been taxed abroad. In general it is much easier to apply for the above mentioned special certificate than to provide evidence that benefits are not taxable in Germany.

(5) It does not matter whether the employee is resident in Germany or abroad at the time of exercising the options. If shares are exercised while the employee is not tax resident in Germany he has to tax the benefits as non-resident.

Capital gains

Normally employees sell parts of the shares after exersicing the options.The selling of shares in Germany will be taxed in general as capital gains at a flat rate of 25% plus solidarity surplus charge (total tax rate 26.375 %).

Glossary

Income Tax Return Einkommensteuerbescheid
Income Wage Tax Lohnsteuer
Stock Option Aktienoption
Federal Central Tax Office Bundeszentralamt für Steuern
Capital   gains Veräußerungserlöse

Author: Peter Scheller, German Tax Adviser – Master of International Taxation

Bildquelle: www.fotalia.com

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Kommentare

Kommentar von Matt Allie |

Great article!
I'm facing this very situation and my company is asking to withhold German income tax on the full benefit (the ISO options vested while I was in the US under a US contract).
What is my recourse short of myself getting this certificate German tax authorities? Can I point my company to the actual tax law/treaty that clearly specifies only the shares vested while in Germany shall be subject to income tax?

Thank you,
-Matt Allie

Antwort von Peter Scheller

Your employer needs a international tax adviser.

However, you have to declare the benefits in you German income tax returnsince it will have infect on your German tax rate (Progressionsvorbehalt).

Kommentar von Petko Minkov |

Hi Peter,
What do you think of my case. Can I persue my company for overtaxing me?

I've relocated from Bulgaria to Germany and I've received RSU in BG.
The relocation year is over and for the next three years the RSU started to vesting while I am living and working in Germany.
For the last 3 years, I see that all the RSU vests are taxed with 10% Bulgarian taxation(which is 100% Bulgarian taxation) and 52,53%(I don't know what is German taxation percentage) Germany taxation.
Total of 62,53% taxation is applied on these RSU. I've asked my company and they said the above taxation is right.

Best wishes,
Petko Minkov

Antwort von Peter Scheller

I think they do and I think you need professional help.

Kommentar von Alex Halliday |

Is there any tax or reporting requirement in Germany at the option granting stage (US Company to a German employee) or is it only at the point of sale or exercise?

Antwort von Peter Scheller

Only at the point of exercise or sale.

Kommentar von Malte |

Great article! However, there's one aspect I don't see covered: some companies (typically startups) offer an early exercise option, where shares can be purchased prior to vesting (which is technically a lapsing of the repurchase right by the employer). In the US this allows avoiding any income tax in conjunction with an 83(b) election when exercising while there is no spread between the strike price and the fair market value, ensuring capital gains taxation for the entire profit at the time of sale. Is early exercising recognised in Germany, or would an employee who early exercises be subject to tax at vesting time?

Antwort von Peter Scheller

An interesting question. As far as I know there are no statements of the German tax authorities and no rulings of German fiscal courts on this subject.

I think that there is no tax implication if at the date of exercising the options the strick price and the market value is equal. This is at least the case if the employee is able to do with the shares whatever he wants. If there are any legal restrictions (e.g. in regard to selling the shares) a detailed analysis is required.

Kommentar von Viktor |

Super informative article! There is a special case which is not discussed here - I am curious of your opinion. I am a German resident working for an US company and I regularly get Restricted Stock Units (RSUs). I do not pay anything for them, but a portion of these stocks are withheld as tax when I receive them (in the US, not by Finanzamt). They calculate this by 40% for Germany. 3 years later when they are vested I sell them let's say for 10 $ per share. How is my tax German calculated? My Gain seems to be 10$, since I did not pay anything when I received them. However when I got them I paid tax on them through the number of shares withheld (this was the 40%). On my statements I have something called the "adjusted cost base". Is this what I should calculate as "purchase price" instead of 0?

Antwort von Peter Scheller

You need professional advice by a tax adviser.

Kommentar von Peter Scheller |

I got from our co-operation partner Greenback Tax service (https://www.greenbacktaxservices.com/) the following message:

"So RSU's are tricky and even I have a hard time explaining how the taxation works as it is based on so many factors. Below are some articles you can send Peter but let him know that the taxation will depend on a few factors and we would need more information from the client before advising on how the taxes would work. Also while it is common for the US to automatically withhold tax from individuals, I have never heard of the IRS sending any of that withholding back to Germany. The client would need to claim a tax credit or a treaty position in order to get that tax refunded to them which they could then use to pay German tax as required."

Kommentar von Jakob |

Thank you very much for this very helpful article.

Kommentar von Andy |

Very informative article.
How about the taxation of vesop of German company itself? I am a resident of Germany and work for a German company (no US or overseas complications). How and when will my options be taxed (at vesting, at exercising or at selling) and at what tax rate.
Thank you.

Antwort von Peter Scheller

The tax treatment is the same as described in the article only that the full benefit will be taxed when exercised.

Kommentar von Anthony |

Does this mean that if a start-up grants e.g. 10,000 shares to an early senior hire in Germany with a 4 year vesting period and with 1/4 of the shares issued to the employee at the end of each year, that the hire is fully taxable on the estimated value of 2,500 shares at the end of year 1 even if that employee has no immediate way of selling these shares for cash? If so, doesn't this create a serious negative cash flow risk for the employee?

Antwort von Peter Scheller

If the employee becomes owner of the share her has to tax the benefit in the respective month. In this month this can result in a serious cash deficit. You should organize the whole plan differently in order to avoid this problem.

Kommentar von Rohit |

Hello,
Very good article but one thing is not clear. Example- A company issues stock option at a certain fixed price. After one year, some percent of stock vests and the employee can exercise the stock and sell at the market price. But before the employee can actually sell the stocks, he have to use his own money to first buy the stock at the fixed price at which they were issue a year ago.
Will the income considered capital gain or normal taxable salary?

Antwort von Peter Scheller

The difference between market value (on the day of exercise) and exercise price is taxed as a fringe benefit (salary).

If the shares are sold later the difference between selling price and market value (on the day of exercise) will be taxed a income from capital investment.

Kommentar von Rohit |

Thank you for the clarification. I see one issue with the fringe benefit is taxed as salary.
What if till the day one sells the stocks, the market value have gone down such that the fringe benefit is just half of the amount compared to the day of exercise but still above the exercise price?
Example : On the day of exercise @ 100€ and 1000 stock the market value is 150€. So fringe benefit is €50k. But when the stock is sold say, in few months the market price is 120€. Hence the benefit is just €20k but one have already paid tax for twice the benefit.

Antwort von Peter Scheller

Your finge benefit is 50€ which will be taxed as salary.

Later you have a loss of 30 from selling stock. This loss can only be credited against capital gains of the same kind (in this year or in following years).

Kommentar von Peter |

Thank you for the article. I work in Germany and get RSUs in US via ETrade. They withhold tax at 51.53% rate, which is supposed to be the maximum possible tax rate in Germany. On my next salary, my actual income tax rate is applied and the difference is returned to me, so I'm not complaining.

However, I don't understand where this 51.53% comes from. It results in too many shares being sold to cover the tax, which is not ideal. Can you tell how to this rate is calculated?

Antwort von Peter Scheller

No, I cannot explain that. There is not such a tax arte in German income tax law.

Kommentar von Alex |

Excellent article Peter!
So in case Exercise price and Fair market value at the day of purchase remain constant till the options are exercised, the tax would be 0 in Germany? Is my understanding correct?
Thank you!

Antwort von Peter Scheller

The tax on capital gain will be zero. However, there is the taxation of the benefit.

Kommentar von Alex |

So in case Exercise price and Fair market value at the day of purchase remain constant till the options are exercised, the capital gain tax would be 0. How much would be the taxation of the benefit (presuming that the price of the stock would remain constant through the whole process? Due to fact that Fair market value - Exercise price would be 0, the benefit tax would still be 0, right?

Antwort von Peter Scheller

Benefit taxed at you individual tax rate (Market value minus strike price).

Capital gain tax at 26.375% (selling price minus market value at date of exercise).

Everything else you may find in the article or you may ask a German tax adviser for help.

Kommentar von Peter |

Found the answer to my query above:
Max tax rate = 45% + 5.5% soli + 9% church tax = 51.525%

The US entity uses this rate since they don't have any way of knowing the actual applicable rate for a particular individual in germany. This is then corrected on my next german paycheck.

Antwort von Peter Scheller

The church tax is only correct if you are meber of a German section of the church.

Other than that you should consult a expirienced adviser to reclaim the tax paid in excess of you regular tax rate for that year.

Kommentar von Rohit |

The stock option were granted by the employer not at any favorable price or discount price but average market price but with a vesting timeline.
So how is there any fringe benefit when the employee have to pay the average market price?
I think fringe benefit comes into play only when the stocks options were granted at a much lower market price or at fixed discount price.

Antwort von Peter Scheller

If there is no benefit the pruchase of shares is a "normal" capital investment. You may tax the capital gains if you sell the shares later.

Kommentar von Emily |

I have a different question. Say, if I work in US and got the options, and after the company got IPO, and I got all of my option vested (but not exercised). then I moved to Germany and started work for another company in Germany . then I exercise those options in Germany. Is it correct that since all those income are obtained in US, So I only need to pay the US tax ( federal and state) for those? And also, will it affect my tax rate in Germany ? Thanks

Antwort von Peter Scheller

A professional answer on your questions require more information and professional advice.

Kommentar von Ali |

Great Article Peter! I have a different question. I worked as a freelancer/contractor for a german company. They alloted me some VSOPs to retain me on long term basis. I am not based out of EU and worked for this company remotely during my time there. Now the company is exiting and i will be able to exercise my vested shares. My question is, will they deduct taxes on these vested shares or should i take care of my own taxes in my home country which is based outside of EU? Thanks

Antwort von Peter Scheller

That requires professionel advise.

Kommentar von Jamie |

Awesome article, Peter! Question from me: how taxation applies for cashless exercise-and-same-day-sale? Is the whole income (price - exercise-price) taxable as income or part as income and part as capital gain?

For example, let's say a US company finds investors that make a tender offer and allow employees to sell their stock options through cashless exercise and same-day sale. Let's say that Joe lives in Germany and has 1000 stock options (vested in Germany) with $10 exercise price and fair-market value of the company is $50 (according to US 409A). The investor offers to buy the stock for $100. Is the income tax applicable to 1000x($100 - $10) or is it 1000x($50-$10) and then additional capital gain tax on top of it for 1000x($100-$50)?

Antwort von Peter Scheller

How can an investor offer 100$ if the market value is 50$?

However,

(1) the taxation of the fringe benefit depends on working period during the vesting period. If the employee was performing his work during the vesting period entirely in Germany then he has to tax 50$ minus 10$. This will be taxed at the individual tax rate of the employee.

(2) the capital gain will be taxed with 100$ minus 50$ at a flat rate of 26.375%

 

Kommentar von Marc |

Thanks for your article Peter! There is a fundamental principle I don't fully understand though:

If I have to pay taxes for exercising my stock options (ISO) in Germany (cause there is a diff between stock prices at both times), and then after that when I sell my real shares I still have to pay taxes again from the benefit, wouldn't that mean that I am paying two times taxes from the same benefit?

Antwort von Administrator

No,

Fringe benefit: Market value minis strike price (but think about vesting period)

capital gain: Selling price minus market price (above)

 

Kommentar von Andrea |

Great article! Question: I work in Germany and I've exercised the vested bunch of VSOs after I left the company. At exercise time the company also requested me to pay taxes on the difference between fair market price and exercise price, which I believe would have been withhold from my salary if I was still employed there. Now, in the process of filling my tax declaration, I should provide proof of the above mentioned transaction, in order not to pay the same taxes twice, right?

Antwort von Administrator

Why, the fringe benefit should be on your tax certificate (Lohnsteuerbescheinigung)?

Kommentar von Andrea |

My former company has sent me the Lohnsteuerbescheinigung for the VSO exercise as "class 6" income and I understood from my financial consultant that I should include it in my tax declaration. However, I'm not fully convinced and I think I should at least document that I've already paid the taxes for that. Hence my initial question.

Antwort von Peter Scheller

That requires an analysis what really happened and cannot be done on this blog.

Kommentar von Nahiyan |

I have got received a grant of options to purchase my employer's stock
My employer is not yet gone Public yet(no IPO yet). Some stocks are already vested. I have not yet exercised
Do I have to mention this anywhere in my Steuererklarung? (while not yet exercised)
If company does not go Public do I need to notify to tax authorities if I exercise?

Antwort von Administrator

In general not but ask you tax adviser.

Kommentar von MQ |

Thanks for the article.
Regarding a VSOP exit of a GmbH. When it is paid out upon an exit (private company) it is commonly paid as income / bonus in Germany and taxed as income as I am aware. With that in mind what if the employee is no longer a German tax resident at the time of exit payout? ie at the time of Grant the employee was an employee of the German GmbH and a German resident but some years later at the time of the exit the employee is no longer a tax resident of Germany. Where is the income tax payable in Germany or in the third country?
Thanks

Antwort von Administrator

To answer you querstion nore information is required. I think you need a tax consultant.

Kommentar von Frank |

Hi,
I have a problem that you partially discussed but not quite.

I am a German citizen, working in Germany. The foreign mother company is running an LTIP (LongTermIncentiveProgram), offering Stock Options to selected managers in Germany and abroad.

If decided to participate, those options have to be purchased by investing own savings - so they aren’t really part of any salary in my mind. I have to transfer the money and sign a contract with a foreign bank as well as the mother company.
The strike price is way over the current market value and vesting period is roughly 3.5 years.
I should say our German finance department doesn’t know anything about that.

Along with the LTIP information they delivered a document explaining the tax implications for various countries. This document has been provided by a well known consulting firm.
Even though we have to buy those options and are at full risk of losing our investment, they state that exercise would be subject to German income tax (up to 47%) + social insurance (if applicable).

I am wondering whether they can be right here?
What would I have to deliver as proof to German tax authorities in case they see this as part of my salary?
As long as the option price and strike price are calculated at fair market value, I see this as private investment. Am I wrong here?

Thanks for any hint you can give here. I am not sure if my average Joe tax consultant would be much of a help.

Antwort von Peter Scheller

Interesting case. This seems like a mixture between a incentive plan combined with a capital investment. To give a proper advice one has to analyze he contracts in detail.

Kommentar von Yev |

Thanks for the most helpful article on this topic! I'm struggling to understand the correct sections in tax declaration where to enter the value of stocks that have been granted. Could you please give some tips on what are the correct sections? Thanks!

Antwort von Administrator

Of which country's tax declaration to talk about?

Kommentar von Alexander Wangerowski |

Dear Yev, the fringe benefit has to be decalred on ANLAGE N with your salary and the capital gain on ANLAGE KAP. Best regards
Alex

Kommentar von Tim Hauser |

Hi Peter,

Thanks for this informative article.

What advice would you give a Startup founder seeking to grant German employees (employed via GmbH subsidiary of a US C-corp) stock options of the US holding company?

As I understand the tax is triggered at the timepoint of executing the options (fringe benefit) and at the time of selling shares (capital gains). What is the best solution to avoid fringe benefit tax? Is it to move the exercising date far into the future?

TH

Antwort von Administrator

You need professional advice by a German tax adviser.

Kommentar von Enrico R |

Great article, thanks Peter!

Two questions:

1) if the vested stocks are managed by a non German broker, capital gain taxes may not be withheld at source and need to be paid separately. Can Capital Gain taxes be paid in the regular tax filing for the year when the stocks got sold? Or should any advance payment be made?

2) Do stocks accrued via stock option plan in a non German broker need to be sold in first-in-first-out?

Thanks,
Enrico

Antwort von Peter Scheller

If the plan is an incentive your employer has to withhold income tax on wages.

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