Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAGermanyapply to the West German federal states and the thresholds for the EastGerman federal states are considerably lower.4.2 Employer tax and social security contributions4.2.1 Corporation tax deduction: A German company cannot generallyclaim a corporation tax deduction for the cost of providing shares, but if itbuys shares in its foreign parent or its own shares and delivers thoseshares to its employees for less than the purchase price through anemployee share plan, it should be able to claim a tax deduction. 12 Thecorporation tax deduction would be for the difference between the pricethat the employer paid for the shares and any amount paid by theemployees. If the German employing company makes a payment to aparent company or to an employee benefit trust, that payment shouldalso be tax deductible.A German employing company can generally claim a tax deduction forany ancillary costs and expenses of establishing an employee shareplan.4.2.2 Social security contributions: Social security contributions are duewhere the employee is subject to wage tax. 134.3 Tax withholdingThe employer must withhold wage tax and social security contributions (andchurch-tax, if any) if the employer provides the shares directly or if the sharesare provided by another person (for example, the parent company or a trust)1213There is discussion whether the difference between the price paid by the employer and the price paidby the employees qualifies as tax deductible expense because according to section 8b of theCorporate Income Tax Act losses generated through a sale of shares in a corporation are not taxdeductible. Accordingly, it is disputed whether losses stemming from a sale of shares at a reducedprice to a company's employees qualify as losses generated through a sale of shares for tax purposesor a tax deductible personnel expense. There are no court decisions or guidelines from the Germantax administration in this respect.The rates in 2010 are: 19.9% for retirement benefit insurance, 2.8% (from 1 January 2011, 3%) forunemployment insurance, 1.95% (additional charge of 0.25% for childless employees born after 1January 1940 and older than 23) for nursing insurance and 14.9% for statutory health insurance whichare, in principle, borne 50/50 by the employer and the employee.However, for any income in excess of specific salary thresholds, no social security contributions haveto be paid. The applicable salary thresholds are in 2010: €66,000 for retirement benefits insurance,€66,000 for unemployment insurance, €45,000 for statutory health insurance and €45,000 for nursinginsurance. These thresholds only apply to the West German federal states and the thresholds for theEast German federal states are considerably lower.UK/1729295/03 81 September 2010
Employee Share Plans in Europe and the USAGermanyunder an agreement with the employer. In the latter case, a withholdingobligation of the employer arises if the employer is aware or should be aware ofthe provision or grant of shares or is involved in any activities in relation to theplan, which is assumed to be the case where a group company makes theawards.5. Taxation of share options5.1 Employee tax and social security contributions5.1.1 Grant: There is no tax charge on the grant of a share option providedthat the share option is non-transferable. 145.1.2 Exercise: Wage tax and solidarity surcharge (and church-tax if any)arise on the exercise of a non-transferable share option on thedifference between the market value of the shares at the date of transfer(the date on which the shares are booked out from the account of thetransferor) and the option exercise price and the price (if any) paid forthe option. 15 For the 2010 tax year wage tax ranges from 0% to 45%.The solidarity surcharge amounts to 5.5% of the income tax liability.5.1.3 Tax exemption: A tax exemption for share-based payments has beenavailable since 1 April 2009.The gain on the exercise of a share option is tax exempt to the extent itdoes not exceed €360 per year. In order for the new exemption toapply, two requirements must be met: (1) participation in the plan mustbe an additional benefit for the employee (i.e. the benefit may not bededucted or credited against the employee's agreed wage) and (2) theemployer (i.e. the German subsidiary) must offer participation in the planto all employees.Companies may amend their existing plans in order to benefit from thenew exemption for future option grants. In addition, in principle, the tax1415If the option is transferable, the employee may be deemed to have received a taxable benefit. TheFederal Fiscal Court decided that the grant of a transferable stock option should only be taxable onexercise unless such options have been acquired on the market from third parties. Due to thatdecision there is some uncertainty as to how the tax authorities will treat transferable options. In one ofthe Federal States the tax authorities have announced that all options should be treated as giving riseto income the time of exercise.Pursuant to the tax authorities no tax charge will arise when a transferable option is exercised orbecomes unconditionally exercisable, if it has been subject to wage tax at the date of grant. Pleasesee footnote 14 above with regard to the view of the Federal Fiscal Court.UK/1729295/03 82 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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