The Fiscal Court of Cologne has ruled that, for German tax purposes, Restricted Stock Units (“RSU’s”) should be regarded as compensation which is intended to be an incentive for the future work performance of the employee. This compensation may therefore be subject to tax in Germany even if the employee has ceased to be resident in Germany by the time the award vests.
The case involved a German resident employee who was offered shares within an RSU plan of the parent company of the German employer. Before the award vested, the employee changed jobs to a sister company of the employer based in Poland. The employee relocated to Poland and became tax resident there. By the time the award vested and the shares were issued to him, he was no longer resident in Germany.
The Court confirmed that the granting of RSU’s is to be understood, in a similar way to stock options, as compensation for future work performance and as an incentive for employee loyalty and is therefore oriented towards the future. The intent and purpose of the RSU agreement is to give the employee a special performance incentive for the future in addition to his or her normal remuneration.
The Court therefore decided that, despite the entry of the RSU’s in the employee’s share deposit account at a time when the employee was no longer resident in Germany, the monetary benefit was nevertheless subject to income tax in Germany on a prorated basis, i.e. from the time of granting the RSU’s until relocating outside of Germany.
An appeal to the Federal Fiscal Court has now been filed. We shall therefore have to wait for the outcome of the appeal for a definitive ruling. In the meantime, companies operating RSU plans that include internationally mobile employees who may have been granted rights while they were resident in Germany but who have since moved to another country should take note of the potential German tax charge.