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German Tax Authorities Deny Stock Option Plans to be Treated as Personnel Expenses

Germany

In a recent decision, the German Supreme Tax Court judged on the treatment of certain personnel expenses in relation to stock option plans. Such expenses relating to the increase of capital connected to conditional capital increase will be not be tax deductible for the respective stock corporation. Taxand Germany analyses the recent judgement and the impact it may have for businesses in the future.

The German Supreme Tax Court was judged on the following case. A stock listed corporation decided to increase its share capital by issuing new shares. Only certain employees of the stock corporation and of affiliated entities could participate in this increase. The subscription rights were granted to the employees free of charge. After a waiting period, once subscribed, the employees could acquire the shares for 50% of the average stock price.

The stock corporation treated the value of the stock option as personnel expenses and increased the capital surplus in the same amount. The Tax Office, the Lower Tax Court and also the Supreme Tax Court did not follow this approach and treated the issuing of the shares as tax neutral for the respective stock corporation. The rationale for this approach is that the stock corporation did not pay any compensation and did not incur any expenses. So, a contribution into the capital surplus could not be assumed.

For local GAAP as well as for IFRS purposes the above described approach of issuing shares leads to expenses. However, the decision was made clear that for tax purposes the prevailing approach applied for local GAAP and also for IFRS purposes cannot be followed.

Taxand's Take


The deductibility of personnel expenses for tax purposes in case of stock option plans connected to a conditional capital increase does usually not follow the approach for local GAAP or IFRS purposes.

When estimating the costs connected to stock options, taxes resulting from the non-deductibility of certain personnel expenses also need to be taken into account.

Your Taxand contact for further queries is:
Tilo K?nstler
T. +49 6196 5922 4670
E. tilo.kuenstler@luther-lawfirm.com

Taxand's Take Author