MENU
In an increasingly competitive world, companies are looking for innovative ways to attract, retain and motivate talented professionals in the long term. Employee share ownership has proven to be an effective tool for increasing employee performance and loyalty. However, traditional approaches, such as direct participation in the company's equity, often fail due to administrative, legal and tax hurdles. Employee participation via profit participation rights offers a promising alternative. This article provides a comprehensive overview of how profit participation rights can be a flexible and tax-advantageous solution that meets the interests of both the company and its employees.
Today more than ever, companies face the challenge of finding and retaining talented and motivated employees. Especially in innovative and technology-driven industries, the "war for talent" is a decisive success factor. Start-ups and small companies in particular are often unable to keep up with the salaries of large corporations. This makes it all the more important to offer alternative incentives that not only relate to salary, but also offer long-term prospects.
Employee participation programs that allow employees to share in the company's success are one such incentive. They give employees the feeling that they are making a real contribution to the company's success and benefiting from it at the same time. However, traditional forms of participation - such as share options - have various disadvantages, such as so-called "dry income" taxation, which can lead to a considerable tax burden before employees even benefit financially from their participation.
In contrast, virtual participation programs are quick and easy to implement and avoid the problem of "dry income". However, if a payment is made to the employee, the payments are subject to individual income tax.
Profit participation rights offer companies the opportunity to involve their employees in the company's economic success without making them shareholders. Unlike share options (and similar to virtual shares), profit participation rights do not give employees any voting or co-determination rights in the company, but only property rights such as a share in profits or liquidation proceeds.
This form of employee participation is not only flexible, but also attractive from a tax perspective. Profit participation rights are considered an asset participation and are subject to the provisions of Section 19a of the German Income Tax Act (EStG), which means that in many cases wage taxation can be deferred until profits are realized. In addition, the income from profit participation rights is often subject to a more favorable capital gains tax and not the regular wage tax.
Profit participation rights offer a high degree of flexibility and can be tailored to the individual needs of the company and its employees. Companies can structure profit participation rights in such a way that they participate exclusively in the company's profits or liquidation proceeds. However, it is also possible to link the profit participation rights to an increase in the value of the company, which is realized in the event of a sale (exit) or when certain milestones are reached.
Profit participation rights can also be issued in various forms - either as securitized securities or in digital form via tokens. The latter option offers companies the opportunity to implement employee participation even more efficiently and cost-effectively without having to go through complex notarial processes. This can be a decisive advantage, especially for companies that are in a growth phase and regularly hire new employees.
One major advantage of profit participation rights is their tax treatment. As a rule, income tax is only payable when the employee actually generates financial income from their profit participation rights. This eliminates the so-called "dry income" taxation, where employees have to pay tax on unrealized gains.
However, the real advantage is as follows: profit participation rights, which are structured as asset participation, also benefit from more favorable taxation. Income from profit participation rights is generally subject to capital gains tax of 25%, while employment income is generally taxed at a significantly higher rate. This is an additional financial incentive for employees to participate in the company's success via profit participation rights.
For many companies, a key concern when implementing employee participation programs is that employees do not have a say in the company. Profit participation rights offer the decisive advantage that they allow employees to participate economically, but without the obligations and opportunities for influence associated with shareholder rights.
The issue of profit participation rights does not lead to a dilution of the shareholder structure and does not create any additional rights to participate in shareholder meetings. This ensures that the management of the company remains entirely in the hands of the shareholders, while the employees participate in the company's success.
One of the most frequent criticisms of traditional employee share ownership is the high administrative effort involved in issuing and managing company shares. In particular, the notarial formal requirements for the transfer of shares represent a hurdle for many companies. Profit participation rights, on the other hand, can be issued without notarization, which simplifies the process considerably.
Profit participation rights offer companies the opportunity to bind their employees to the company's success in the long term. The prospect of profit sharing or exit proceeds creates incentives that motivate employees in the long term and give them the feeling of being an important part of the company.
Participation via profit participation rights can also take place in stages, e.g. as part of vesting models in which employees only receive the full profit participation rights after a certain period of service. This ensures that employees have a long-term incentive to remain loyal to the company and contribute to the increase in value.
The practical implementation of an employee participation program via profit participation rights requires careful planning and structuring. Companies should pay particular attention to the following points:
The conditions of the profit participation rights should be clearly defined. These include the amount of the participation, the term, the conditions for the payment of income and provisions in the event of a company sale (exit).
Profit participation rights should be structured in such a way that the tax advantages are fully utilized. The provisions of Section 19a of the German Income Tax Act (EStG) should be taken into account in order to defer taxation with income tax and also to take advantage of the more favorable capital gains tax upon exit.
Profit participation rights are a flexible, tax-advantageous and administratively simple option for employee participation. They offer companies the opportunity to motivate their employees in the long term and involve them in the company's success without relinquishing control over the management of the company. For companies that operate in a dynamic market environment and are dependent on qualified specialists, profit participation rights offer an innovative solution for competing for talent and ensuring the company's success at the same time.
The advantages of profit participation rights - from the tax benefits and flexibility in their design to the low administrative costs - make them a genuine alternative to employee participation. Companies that rely on modern participation models can not only increase their attractiveness as an employer, but also promote the loyalty and motivation of their employees in the long term.
Disclaimer: The contents of the information offered at vsop-direkt.de do not constitute legal advice. If you need a legal examination of your individual case, please contact our specialized team: beratung@esop-direkt.de
Thank you for your inquiry, we will get back to you as soon as possible.
Talk to our expert:
Kolja Czudnochowski
Founder & Consultant
For start-ups (with/without investors)
For small businesses & agencies
For medium-sized companies
