10 December 2020
Taxation of employee shares to be changed - what does this mean exactly?
The draft of the so-called Fund Location Act provides for a new regulation in the Income Tax Act which expressly states that no monetary advantage is accrued at the date of share transfer (deferred taxation) (Section 19a EStG-E):
Special rule for income from employment in the case of participation in capital
(1) If an employee is transferred by his employer, free of charge or at a reduced price, in addition to the remuneration already owed, a share of assets within the meaning of Section 2 Para. 1 No. 1 (a), (b) and (f) to (l) and Para. 2 to 5 of the Fifth Capital Accumulation Act in the employer's enterprise, the advantage shall not be subject to taxation under Section 19 or to wage tax deduction in the calendar year of the transfer under the conditions set out in paragraphs 2 and 3. When determining the advantage, the tax-free amount pursuant to Section 3 No. 39 is to be deducted if the relevant conditions are met. Section 39b Para. 2 sentence 5 number 3 shall apply. The acquisition costs are to be assessed at the fair market value of the asset participation.
2. The temporary non-taxation referred to in paragraph 1 may be applied in the payroll tax deduction procedure only with the consent of the employee. The temporary non-taxation may not be made up for in the course of the assessment for income tax.
3. Paragraph 1 shall apply only if, at the time of the transfer of the shareholding, the employer's undertaking does not exceed the thresholds laid down in Article 2 Para. 1 of the Annex to Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36), as amended, or did not exceed those thresholds in the previous calendar year and was not set up more than ten years previously.
(4) Wages not taxed in accordance with subsection 1 shall be subject to taxation in accordance with Section 19 and to the deduction of income tax as other income if
“(27) Section 19a is applicable for the first time to assets transferred after 30 June 2021. ”
The mechanics of the new regulation can be summarized as follows: If the employee receives objectively valuable shares free of charge, which are not sold until later, then the pecuniary advantage is taxed as salary only at the time of sale and thus "retroactively".
It is exciting as far as the increase in value is concerned, which was achieved after the acquisition by the employee and which will then be realized in the event of sale. Here, a distinction must be made between the original value (wages, see above) and the hidden reserves formed thereafter.
Employee A is to receive shares in the S GmbH where he is employed free of charge at the end of 2021. The shares (1.5%) then have a value of 100,000 Euros. Later, in 2023, all shares in S GmbH will be sold. A's shares will have a purchase price of 300,000 Euros.
A would like to realize the further 200,000 Euros later in a tax-efficient manner and is considering whether he should not transfer the shares to a private holding company at the beginning, because this would then be able to realize capital gains almost tax-free later (participation exemption).
No dry income, paragraph 1, first sentence
Tax allowance, paragraph 1, sentence 2
According to sentence 2, the tax-free amount pursuant to Section 3 No. 39 EStG must be deducted once when determining the advantage within the meaning of sentence 1 if the corresponding conditions (cf. Section 3 No. 39 sentence 2 EStG) are met. Under the new regulation, the tax-free amount is 720 Euros.
Obligation to pay social security contributions, paragraph 1, sentence 3
Acquisition costs, paragraph 1, sentence 4
Employee consent requirement, paragraph 2
According to paragraph 2, the employee's consent is required (sentence 1) and will not be taxed (dry income) in the course of the income tax assessment (sentence 2).
Eligible SMEs, paragraph 3
Deferred taxation as wages, paragraph 4, sentence 1
The draft law aims to solve the problem of so-called dry income - but does not intend to waive any taxation of it. According to the draft bill, the following cases will trigger downstream taxation:
Fifth rule, paragraph 4, sentence 2
According to this, the tariff reduction pursuant to Section 34 Para. 1EStG applies if at least three years have passed since the transfer of the asset share. The tariff reduction is already applicable in the wage tax deduction procedure.
The practical effect of this facilitation is likely to be comparatively small, especially in the case of assets with significant value.
Downside protection, paragraph 4, sentence 3
If the value of the capital participation (including additional acquisition costs) is lower later when taxed than at the beginning of the transfer, only the later (lower) value will be used as the basis for taxation.
Acquisition costs of the asset, paragraph 4, sentence 4
The "tax value" of the assets (e.g. shares in GmbH) also constitutes the acquisition costs for income tax purposes. This is necessary in order to avoid double recognition of subsequent increases in value.
Impairment losses are not recognized (i.e. for taxation as wages and correspondingly for acquisition costs) if the impairment is not caused by operational reasons or if the impairment is based on a measure under company law, in particular a distribution or return of investment.
Recording in the payroll account, paragraph 5
The provisionally untaxed fair market value of the participation and other information must be recorded by the employer in the payroll account. The employee will be informed accordingly about the pay slip. In this way he can understand the tax treatment himself.
Date of application, Section 52 Para. 27 EStG-E
The new regulation is to apply from 1 July 2021, the date of transfer of the shares being decisive. Whether this refers to civil law effectiveness or the transfer of economic ownership is not specified. It would seem appropriate to refer to the transfer of economic ownership.
The subsequent taxable events referred to in paragraph 4 may not be appropriate in all cases.
Effects on design practice?