Is this equity compensation fair for the CTO


b) Society


The agreement of an ESOP is intended to give the employee an advantage. If the virtual share in the company already has a certain value at the time of subscription and is also marketable, the employee must tax this value as wages. The wage tax has to be paid by the company, which puts a strain on liquidity. That can quickly run into the hundreds of thousands. It is therefore important to ensure that the tax-triggering moments are taken into account and that immediate taxation is avoided.


The right of those entitled to an ESOP is directed against the company, hereinafter referred to as GmbH. The GmbH must show this obligation in its annual financial statements. The initial formation, as well as the later additions or reductions in the provision, must also be posted to income with tax effect. If the start-up is already in the profit phase, the additions can become tax-effective, i.e. the taxable income will be lower. However, within the scope of Section 248 (2) of the German Commercial Code (HGB), there is also the option of not posting the additions at the expense of the commercial and tax results, but rather posting the expenses as production costs of an intangible asset (IP = intellectual property) and then posting this value from the use of the IP then written off for tax purposes. With this option, German commercial law approaches international standards. According to IFRS, the capitalization of research and development services on IP's is mandatory. If a self-created intangible asset is capitalized due to the option in § 248 HGB, the development costs must also be included, while research costs must always be treated as expenses.

Insofar as the activity of the ESOP authorized person is directly directed towards the development of a product (“hardware”), there is no right to choose. Then his salary and thus the addition to “his” pro rata provision must be capitalized.

If the GmbH does not have the funds to fulfill the ESOP itself and it receives the funds from the shareholders (from their taxed income), for example in the context of the sale of shares, the funds injected are either loans and thus liabilities or deposits, according to the determination of the payer. therefore to book equity. If the money comes from non-shareholders, e.g. with committed related companies or pure capital providers, you will have to check whether loans have been granted (tax-neutral) or whether a donation has not been made. Gift tax could then apply. If customers, including related companies, co-finance the ESOP out of their own sales interests, the funds injected could, however, also be allocated to the exchange of services and thus become relevant for both sales tax and income tax purposes.



c) Employees in Germany


In the case of pure stock options, the tax authorities and jurisprudence have so far assumed that taxation only takes place at the time the options are exercised at the then valid value. It is therefore largely assumed that stock options are taxable as income from employment and not, for example, the increase in value after the commitment is taxed as the sale of shares - which would often be cheaper. Consequently, final taxation, i.e. taxation when the options are actually exercised, is practiced.

In the opinion of the BFH, however, there may already be an inflow when the options are granted, provided that the option right itself is marketable, i.e. the employees can also sell the rights. This is because an inflow takes place within the framework of the surplus income of the EStG through the acquisition of economic power of disposal. Income is deemed to have accrued at the point in time at which the recipient has or can dispose of it economically. Sufficient for the inflow of the monetary benefit from real or fake “stock options” is the availability of the possibility of sale.

The increase in value will no longer be taxed as labor income from the point in time of the tax inflow, at the latest from the exercise of the option right, but in the case of sale as part of the capital income.

The increase in value will no longer be taxed as labor income from the point in time of the tax inflow, at the latest from the exercise of the option right, but in the case of sale as part of the capital income. This was most recently confirmed by the BFH in its judgment of October 4, 2016 - IX R43 / 15, published on January 25, 2017



d) Employees with international commitment


ESOP are often offered to employees who contribute to success through a stay abroad, e.g. by posting to a foreign affiliated company. If the activity associated with the ESOP is physically carried out in other countries, it must be checked according to the criteria of the respective double taxation agreement which country has the right to tax which part of the amount. According to most agreements, Germany must then exempt the part taxed abroad.

The BMF letter of November 12, 2014 on the taxation of wages according to the double taxation agreement represents the perspective of the German tax authorities, which is not without reservation the correct one and is also not coordinated internationally with the contracting countries.

The domestic exemption is granted to persons who are unrestrictedly liable for tax in Germany at the time of exercise (usually at the time of exit) only if they can prove taxation abroad or can prove that they have disclosed the income to the responsible tax authorities, but they can see it Eye has waived taxation. This results from Section 52d (9) EStG. Beneficiaries who are not (no longer) living in Germany at the time of exercise are not subject to unlimited tax liability, but only to a limited extent. You can be taxed with the proceeds from the ESOP in accordance with Section 49 (1) No. 4 EStG in Germany (if necessary pro rata, see above) if and to the extent that the proceeds are attributable to physical work.