Taxation of Stock Option Plans in Germany
von Peter Scheller
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)
Exercise price (10,000 shares * $ 1)
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.
(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.
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 %).
|Income Tax Return||Einkommensteuerbescheid|
|Income Wage Tax||Lohnsteuer|
|Federal Central Tax Office||Bundeszentralamt für Steuern|
Author: Peter Scheller, German Tax Adviser – Master of International Taxation
- exercise date
- exercise price
- income tax
- income tax return
- Income wage tax
- stock options
- vesting period