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

„Wenn es knifflig wird.“

Taxation of Stock Option Plans in Germany

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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.

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