Update: Germany | Wage-tax deferral for German start-ups in an international setting
Published on 10th May 2023
Draft law appears to allow a wage-tax deferral on internationally structured employee share schemes
Germany's Ministry of Finance issued a legislative draft on 12 April 2023, which, among others, implies that German employees with equity awards in foreign entities are allowed to benefit from German wage-tax deferral regime.
Besides several significant improvements in the scope of the deferral regime and the deferral period, the draft law also appears to allow a wage-tax deferral on internationally structured employee share schemes. This would prevent any taxation on "dry income”: not only taxation on dry income from the grant of shares in a German employer, but also in an employer’s affiliated foreign entity.
Extension of applicability
International start-ups entering the German market with a German employing entity will usually grant shares in a foreign group entity. As the employee share scheme in these instances does not typically provide for a direct participation in the German employing entity itself, the current law denies a wage-tax deferral.
The draft law extends the current scope of the deferral regime to cases in which the shares are not granted in the employer itself, but in an affiliated company in the meaning of German corporate law. As a non-resident company can also qualify as an affiliated company under German corporate law, the wage tax deferral regime should be applicable to these cases as well.
Other improvements
Besides the extension of the scope, the following improvements have been proposed.
Lowering of the 'threshold' for eligible employer
| Old law | Draft law | |
| Foundation of business | Max 12. years | Max 20. years |
| Staff headcount up to | 250 persons | 500 persons |
| Annual turnover up to | EUR 50M | EUR 100M |
| Annual balance sheet total up to | EUR 43M | EUR 86M |
Additional taxable events reducing taxation risk of 'dry income'
| Old law | Draft law | |
| After elapse of wage tax deferral period during employment relationship | 12 years | 20 years |
| Transfer of equity awards during employment relationship | Yes | Yes |
| Termination of employment relationship | Yes | Yes |
| Transfer of equity awards regardless of wage tax deferral period and existing employment relationship | No | Yes, if employer bears liability for wage tax |
Possibility of a tax rate of 25%
| Old law | Draft law | |
| Personal income wage tax tariff | Yes | Yes |
| Option for lump-sum wage taxation | No | yes -> 25% |
Osborne Clarke comment
Although the draft law implies that the grant of shares in a foreign affiliated entity falls within the scope of the German wage-tax deferral regime, an explicit wording would be important to grant legal certainty from the start.
As the legislative procedure is still at an initial stage and critics are suggesting additional improvements to the draft law, the possibility of further significant changes cannot be excluded.
The possible developments remain exciting, however. We will keep you informed of the draft law's progress.
