Germany: Possible Tax Arrangements In The Taxation Of "Stock Options"

Taxation of Employee Stock Options

Today, stock options are part of the "standard repertoire" in the compensation practice of large companies, particularly in the employment contracts of managing directors, board members, and other top executives. They give the employee the right to purchase a certain number of the company's shares at a previously set price (the purchase price) after the expiration of a retention period.

As a rule, stock options granted on the basis of respective agreements are considered income on which the employee must pay taxes. In this respect, the income "flows in" not when the stock option is granted, but only when the option is exercised and the stocks are booked on the employee's securities deposit (the "inflow" time). The amount of the taxable income is determined on the basis of the difference between market value at the time of inflow and the purchase price agreed upon in the option agreement.

Depending on the development of the stock price, there might be a significant increase in value up until the time of exercise, resulting in a corresponding tax burden. The question for the employee is whether the tax burden can be minimized by means of an appropriate arrangement, such as bringing forward the inflow relevant in terms of taxes to a point in time when the value of the stock option is low and the actual increase in value of the stocks prior to the time of exercise is no longer covered by the employee's income tax and/or wage tax.

Advanced Inflow Time

The German Federal Finance Court (Bundesfinanzhof ; BFH) decided in its judgment dated September 18, 2012 (VI R 90/10) that the noncash benefit of a stock option flows to the employee also in the case of a transfer to a corporation belonging to him or her, even if no adequate consideration has been agreed upon (an amount known as the "concealed equity contribution"). Decisive to the time of inflow is the employee's "utilization" of the benefit allocated by the employer, i.e., its economic incorporation into the employee's property.

If, as is usually the case, the employee exercises the option him- or herself, the noncash benefit flows in at the time the stocks are booked on the securities deposit. This does not apply, however, if the employee has previously disposed of the option.

In the opinion of the BFH, this is the case if the employee transfers the options by means of a concealed equity contribution to his or her limited-liability company (GmbH ). Thus, the inflow of the noncash benefit in this case is advanced to the time of transfer of the options. The employee therefore receives only the value of the option and/or the stock at this point in time. If, after this concealed equity contribution, there is another increase in the value of the stock and the corporation exercises the option at the time of exercise, then the further increase in value remains untaxed for the time being. The hidden reserves are subject to taxation only if the stocks are sold by the corporation. Such capital gains (and dividends) are, as a matter of principle, 95 percent exempted from the corporation tax and the trade tax. When the tax exemption is taken into account, taxes accrue in the amount of approximately 1.6 percent of the capital gain. If the corporation distributes the capital gain to the shareholder/employee, for private assets a flat-rate tax amounting to 25 percent plus the solidarity surcharge and, if applicable, church tax accrue. Even in the case of a full distribution, the total tax burden thus amounts to less than 30 percent on the gains from the stock option; if the employee had exercised the option directly, income tax (or, if applicable, "wealth tax" (Reichensteuer )) of up to 45 percent plus the solidarity surcharge and church tax would have accrued.

According to the BFH, such tax arrangements generally do not constitute an abuse of the law, even if the arrangements lead to lower tax burdens.

Tax Planning in Connection With Employee Stock Options

The BFH's judgment leaves room for individual tax planning in connection with employee stock options, particularly in the case of managing directors, board members, and other top executives with relatively high income and a high percentage in variable remuneration in the form of stock options.

Imagine the following scenario:

Managing Director X establishes a limited-liability company (GmbH) for his private asset management. X is the beneficiary of a stock-option plan provided by his employer, and in May 2013 he receives the (transferable) option to purchase 1,000 shares from the U.S. parent company at an exercise price of €10 per share. At the time the option is granted, the price is €18 per share. The earliest date for exercising the option is May 31, 2015.

On August 15, 2013, X transfers the options to his limited liability company by means of a concealed equity contribution. On this day, the stock of the parent company is listed at €16 per share. On May 31, 2015, the quotation of the shares has risen to €32 per share. The limited-liability company purchases 1,000 shares at the exercise price of €10 per share.

What is the solution?

At the time of transfer of the stock option, X was supposed to receive a noncash benefit in the amount of €6,000 (€16,000 [the quotation of the shares] minus €10,000 [the exercise price]), which is taxable.

At the time of exercise of the option by the limited-liability company, X does not receive any (further) noncash benefit. For the limited-liability company, the acquisition is a transaction that does not affect the net income. Subsequent gains from dividends or capital gains of up to 95 percent should be tax-free.

In such an arrangement, it is necessary to consider not just the circumstances of the individual case, but also the fact that capital gains and dividends would not be exempt from taxes at a rate of 95 percent for the limited-liability company if the stocks were purchased by the corporation with the object of reselling the same on short notice. According to the German Tax Act 2013, this arrangement should be restricted to credit institutions and financial-services institutions, but due to the current political landscape, the German parliament has not yet adopted the act, despite the fact that this particular amendment was not viewed as controversial by any of the political parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.