Taxation of Benefits in Kind

Generally the provision of shares by the employer to an employee for free or a lower price than the market price leads to a benefit in kind that is taxable at the date the employee receives the shares in his bank account. Thus, wage tax and social security contributions are due in the respective month.

From 1 July 2021 on a new regulation regarding the date of taxation is applicable for transactions taking place after 30 June 2021. This regulation is only applicable for privileged companies.

Privileged companies in this regard are those that were founded a maximum of twelve years ago and that qualify as small or medium-sized enterprises (according to the EU Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises) at the time of the transfer or in the preceding calendar year. For this purpose, the following thresholds may not be exceeded:

Small or medium-sized enterprise: less than 250 employees, annual sales not exceeding 50 million EUR or annual balance sheet total not exceeding 43 million EUR,
Small enterprise: less than 50 employees, annual sales and annual balance sheet total not exceeding 10 million EUR,
Microenterprise: less than 10 employees, annual sales and annual balance sheet total not exceeding 2 million EUR.

If the employer fulfills the requirements above it is now possible not to tax the benefit in kind at the date the employee receives shares but at a later date (see below). This means that at the transaction date no wage tax is due and thus a temporary tax exemption occurs. Please be aware that the non-taxation through payroll is only possible with the consent of the employee who can therefore choose between an immediate or later taxation of the benefit in kind. Please be informed that a retrospective application of the non-taxation within the annual income tax return of the employee is excluded thus it is only possible to apply for it within the payroll.

If the employee decides to apply for the regulation and the later taxation then the benefit in kind for the shares shall only be subject to taxation and wage tax is due if:

The shares are transferred by the employee in whole or partly (for payment or free of charge) to a third party or in the case of a contribution to business assets,
Twelve years have elapsed since the transfer of the shareholding, or
The employment relationship with the previous employer is terminated. If the employer bears the wage tax in this case, this amount will not be part of the taxable wages.

After the transfer of shares to the employee, the employer can ask the responsible tax office of the company for a confirmation of the amount of the benefit not taxed by the employer. The tax office is obliged to provide a confirmation. This shall avoid discussions with the tax office in later years regarding the amount of the taxable benefit in kind at the date of transferring the shares.

In the case that the benefit in kind (FMV minus payment of the employee) at the later date of taxation will be lower than the benefit in kind that was not taxed at the date the employee receives the shares, then only the lower amount will be taxable. This does not apply, however, if the impairment is not caused by business operations or if it is based on a measure under company law, in particular a distribution or return of capital contributions.

Please note, that this regulation has only effect for the taxation. Contributions to the social security are still due (if the income ceilings are not already exceeded) in the month the employee receives the shares in his bank account.

Christian Gorges
christian.goerges@bdo.de