Employee equity investments are suitable to enable employees to participate in the success of the company. Although they are possible for companies of all sizes and in all sectors, they are an important tool for start-ups in order to retain the skilled workers they need. The legislature has now improved the conditions at least in a few points through its Fund Location Act. The Federal Council approved on May 28th. The transfer of free or discounted shares in the company generally triggers a pecuniary benefit for the employee that is taxable as wages. Previously, wage tax and social security contributions were already due at the time of transfer.
This meant that taxes were due before the employee could sell the stake (so-called “dry income”). So far, a tax allowance of 360 euros could be used. The Fund Location Act is now improving this. The tax exemption will be increased to 1,440 euros, which is still low in an international comparison.
Second important change: If the participation is retained, the direct taxation does not necessarily apply. The employee can choose that the taxation does not apply until after twelve years, unless the employer changes or the shareholding is sold before this period has expired. In this case, the relevant point in time would be decisive. Important: You can only benefit from this if the company does not exceed certain size criteria (around 250 employees, certain turnover limits). The company must also not be older than twelve years. In order to avoid later disputes with the tax office in the event of subsequent taxation, the benefit that is initially not taxed must be confirmed as part of an income tax call information with the tax office after transfer.
It remains important to allocate the sales proceeds achieved to the correct type of income. Wages are taxed at up to 45 percent, depending on other income, while capital income is taxed at a flat rate of 25 percent. What type of income is available depends on the individual structure. A personal investment with a risk of loss and independence from the employment relationship, as confirmed by the Federal Fiscal Court (judgment of December 1, 2020, VIII R 40/18), speak in favor of capital income.