Within the scope of employee equity participation in Germany, it has been controversial whether income from capital commitments is either partly or entirely to be taxed as employment income or a capital gain. In a recent decision, the German Federal Fiscal Court (Bundesfinanzhof, BFH) has now clarified that value derived from profit participation rights (Genussrechte) can be treated as employment income for tax purposes.
The Court determined that an employee should be treated as receiving employment income where, for example, the employee can only exploit the profit participation rights by selling them to the employer and the redemption value of the rights depends on how the employment relationship terminates. In this situation, the value of the profit participation rights is not sufficiently detached from the employment relationship and the profit derived from the retransfer of the rights to the employer should therefore be linked to the employment relationship. It is irrelevant that the profit participation rights are only offered to executive employees of the company.
Following this ruling, where an employer wants to implement employee equity participation in Germany through profit participation rights, it will be necessary to consider carefully whether participating employees will be treated as receiving employment income when they realise the value of the rights, rather than the more advantageous capital gains treatment. It will be important to minimise the connection between the grant of the profit participation rights and the employment relationship. It may be appropriate to seek a binding ruling from the fiscal authorities.
