Employee stock ownership

A new law on employee stock ownership makes purchasing employee shares more attractive. It also enhances Germany’s competitiveness within the EU and presents new opportunities for recruiting employees, particularly for startups.

Employee stock ownership encourages employees to share in their company’s economic success, as it motivates them to work with passion and strengthens their emotional connection to their employer. Already widespread in other countries, employee stock ownership plans in Germany are currently found primarily in large corporations. However, to make employee stock ownership plans (ESOPs) more attractive, the tax-free maximum amount for equity participation was raised from 360 to 1,440 EUR per year on July 1, 2021. Your tax advisor in Düsseldorf explains who this legislative change is intended for and how startups in particular can benefit from it.

Background: What is Employee Stock Ownership?

The goal of EPP is to bind a company’s employees more closely to the company, its productivity, and its progress. As part of an ESOP program, employees often have the opportunity to acquire a stake in “their” company at a discount or for free. This can take the form of an equity stake (employee stock, GmbH stake) or a debt stake. With an equity stake, the employee has the greatest rights to information and participation; with a debt stake, these rights are significantly more limited. The hybrid form is most common in small and medium-sized enterprises due to its flexibility. This includes profit-sharing rights and silent partnerships.

The Advantages of Employee Stock Ownership

The benefits of an employee equity participation scheme are varied and far-reaching. Among other things, they allow employees to expand their investment portfolio and thus make an effective contribution to wealth accumulation—despite the current low interest rates. Furthermore, employee equity plans strengthen corporate democracy, provided they are accompanied by voting rights for participating employees (e.g., through employee stock options). In general, they increase employee engagement and motivation, which is also reflected in company performance. They foster employees’ identification with the company and represent an advantage in attracting qualified employees. Furthermore, the widespread adoption of employee stock ownership plans can facilitate corporate investments, as granting equity participation does not involve a cash outflow but is often even accompanied by a personal contribution from the employee.

Legislative Update

To make Germany a more attractive business location and ensure international competitiveness, the framework conditions for employee stock ownership were amended in the summer of 2021. Since the transfer of company shares to employees generally results in a tax liability, the law includes a tax exemption. The tax-exempt amount was raised to an annual amount of EUR 1,440 effective July 1, 2021. The tax exemption results in a corresponding exemption from social security contributions. The new regulation applies on the condition that the participation is open to all employees who, at the time the offer is announced, have been in an uninterrupted employment relationship with the company for one year or longer. The exemption is to be deducted once if these conditions are met.

The Special New Regulation for Start-up Companies

An income tax threshold has been introduced for employees of start-ups. From now on, income from the transfer of equity interests in the employer’s company is initially not subject to taxation. The rule regarding the non-withholding of payroll tax on the transfer of equity interests applies without any amount limits. Taxation will occur at a later date, which can be deferred for up to 12 years. Other definitive triggers for taxation include the sale of shares or a change of employer.

This new regulation is particularly lucrative for startups that cannot yet pay top salaries but still want to remain competitive with established industries and large corporations. Now, these young companies can offer attractive incentives to foster strong employee loyalty and thus attract talented and sought-after employees.

Tax Consulting in Düsseldorf and Oberhausen

Your tax advisor will be happy to assist you in implementing and structuring an employee stock ownership plan for your company. With our offices in Düsseldorf and Oberhausen, we offer you a diverse team and specialists in your field. Contact us to schedule an initial consultation.