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Obstacles to Employee Equity Participation Remain
Expansion of employee equity participation has been an issue in German politics for many years.
And now the federal government is suggesting tax privileges for employee equity participation be changed
after the 2009 reform flopped.
T
he high increase in company profits and
income from capital in the period from
2003 to 2007 (37.6%) compared with
the moderate rise of salaries (4.3%)
prompted the parties forming the previous government, CDU/CSU and SPD, to reform tax regulations on employee equity participation.
Until that point, employee equity participation had been promoted with a tax advantage of
up to 1135 a year if employees received stock
(not necessarily in the employer’s company) for a
price below the market price. At this time, however, just 3,750 companies offered employee
equity participation, with only about 2 million
employees participating throughout Germany.
Spring tax reform
In April 2009, the German Act for Fiscal Promotion of Employee Equity Participation came
into force. The former government’s intention
with the act was to increase employee equity
participation from 2 million to up to 3 million.
Under this new law, the reduction in the
purchase price for shares is not taxed up to
1360 a year so long as the shares are granted
gratuitously on top of regular remuneration with
no chance of the shares being used to set off
future claims. In addition, the employee must
acquire direct participation in the employer’s
company.
Manfred Hack, Partner, K&L Gates LLP, www.klgates.com
Goal missed
Today we know that the current law missed
its goal. In the past nine months, no special
employee fund has been established, and
employee equity participation has remained at
substantially the same level as before. One possible reason for this is that companies are too
strained to grant to employees an additional
1360 a year on top of their salaries.
A new approach
The new government of CDU/CSU and FDP
reacted by laying down in their coalition agreement that they would implement a tax advantage for “invested pay“: Employees should
receive a tax advantage if their claim for remuneration is converted into shares. In December
2009, the government introduced a new act to
parliament that deals with employee equity
participation. But the main feature of the current
tax regulation that creates an obstacle to
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8 commerce germany March 2010
Today we know that the
current law missed its goal:
No special employee fund has
been established, and employee
equity participation has
remained at similar levels
Indirect participation is no longer
tax privileged, unless the employee
receives shares in a special employee
fund that spreads its investment such
that 60% of the capital flows to companies with employee equity-participation plans in place.
effective promotion of employee equity participation remains unchanged: A tax advantage is
realized only if employees receive shares at a
reduced price. As a result, the employer has to
grant (a part of) the shares on top of regular
remuneration.
In considering the official reasoning of the
government, it is unclear whether implementing
the targets of the coalition agreement was not
intended or simply failed to happen. It is more
than doubtful that the new act will help expand
employee equity participation.
왏
In December
2009, the German
government introduced a new act to
parliament that deals
with employee equity
participation