VSOPs are virtual stock option plans. In this way, the employer gives the employee a share in the company's success without real company shares (such as shares in a limited liability company or shares) changing hands. Instead, the VSOP is based on a purely contractual agreement, as is the case with a sales contract, for example.
The VSOP differs fundamentally from the ESOP (Employee Stock Option Plan) in that no real shares in the company are transferred to the employee. Instead, the employer places the employee in the same position under asset law as if he or she were a shareholder, without actually giving him or her this position. This is because, in principle, only those who hold shares in the capital stock or share capital can be shareholders. This is not the case with the VSOP.
There are also some differences in terms of taxation . Income from an ESOP is always income from capital assets, but income based on a VSOP is part of wages and salaries. In addition, when a virtual shareholding is transferred - unlike in the case of an ESOP - no non-cash benefit is taxable because the employee does not receive one. Employers and employees therefore avoid the so-called "dry income" problem.
In the case of employers, profit distributions to genuine shareholders must be made from the annual profit (Sec. 8 KStG). However, payouts on the basis of a VSOP are simply operating expenses, i.e. they reduce the profit. Since an outflow of assets always takes place only when the annual profit is determined, employee shareholdings are generally ideal - and better suited than, for example, a high salary - for ensuring liquidity.
VSOPs are generally enormously flexible. Therefore, we cannot cover all possible circumstances in the following examples and limit ourselves to frequent or common agreements!
VSOP agreements ("conditions") usually provide that the relevant group of beneficiaries participates in profit distributions. In simplified terms, this means that if, for example, 100,000 euros are distributed, the one percent shareholder receives 1,000 euros. The same applies to the "virtual shareholder", who is also entitled to 1,000 euros.
The difference, however, is that the virtual distribution is not made from the annual profit (net income for the year as defined by the KStG). Instead, the employer recognizes it as a regular expense (= operating expense, Sec.4 (4) EStG). On the company side, the payment of the VSOP distribution is therefore no different from other expense items, such as the purchase of a new desk.
In the case of employees, profit-sharing payments based on a VSOP do not form part of income from capital assets, as this can only be the case if the employee is also a shareholder. Instead, the payment is comparable to a "bonus" such as a Christmas bonus and is part of wages and salaries. This also means that the separate tax rate for investment income (25 percent) does not apply.
The employer includes the VSOP payment in the salary and records it in the payroll at the time of transfer. It is taxable for the employee as soon as it accrues (Section 11 (1) EStG). The employer withholds the wage tax directly.
Start-ups are often founded with the purpose of a later, profitable sale. It is therefore appropriate to give employees who have contributed to the growth of the company a share in the proceeds of the sale (exit proceeds). The so-called "exit" is therefore explicitly regulated in most VSOP contracts.
Usually, when the company is sold, the employee receives the share of the proceeds from the sale corresponding to his quota. Generally, the latter is determined in accordance with Section 16 EStG:
Selling price/takeover price by buyer less selling costs (notary, etc.) less investors' liquidation preferences, if any, less value of operating assets (assets on the balance sheet) = Profit
The employee then receives, for example, one percent of the disposal proceeds determined in this way. This payment is to be recognized as a cost of disposal if it is made directly. If the transferee of the company undertakes to pay the pro rata exit proceeds, this is an outstanding receivable which increases the operating assets on the assets side of the balance sheet and thus reduces the gain on disposal.
Note: Exit payments based on a VSOP therefore always reduce the sales profit in one of the two ways!
In the case of the employee, there are no differences to the current profit participation. The exit proceeds are subject to wage tax as wages. There is no income from capital assets pursuant to Section 20 EStG or from trade or business pursuant to Section 17 EStG, as there is no original participation in the share capital.
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