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In the case of virtual stock option plans (VSOPs), employees are given the same economic status as a real shareholder through a contractual agreement, without actually participating in the company's share capital. As an employer, you save yourself in particular the time-consuming processes under company law that are usually associated with the transfer of shares.
In order to understand the concrete difference between real (ESOP) and virtual (VSOP) employee share ownership, some basic knowledge of shares in corporations is required. According to the GmbHG and the AktG, the GmbH and the AG are legal entities under private law. They require a share capital of 25,000 euros (GmbH) or 50,000 euros (AG). This share capital is divided among the individual shareholders in full euros.
Example: A and B establish a GmbH. Both want to participate with 50 percent and therefore pay in 12,500 euros each. It is agreed in the articles of association that both are authorized to manage the company and each has a 50 percent share in profits, losses and hidden reserves.
The ownership interest thus indicates whether and to what extent the respective shareholder
In addition, each shareholder is liable for the debts of the company up to the amount of his share in the capital stock. In our example, excluding gross negligence and intent, both would be liable for the GmbH's debts up to a maximum of 12,500 euros.
If you now want your employees to participate in the GmbH, a corresponding notarized agreement is required. In doing so, you transfer part of your shares to the employee, who thus also acquires shareholder rights. He or she therefore participates in profit distributions, is liable on a pro rata basis and has the option of selling his or her shares. However, the consequence is also that your participation quota decreases - after all, a maximum of 100 percent of the share capital can be distributed in total.
In this context, ESOP agreements, like VSOP terms and conditions, provide for a cliff and a vesting period. We will deal with these aspects in the following, as there are hardly any differences to the VSOP in this respect.
In practice, ESOP contracts are often structured in such a way that the entitled employee acquires shares in the company or its share capital all at once or spread over a longer period of time.
This is the main difference between the ESOP and the VSOP. Under the VSOP, the employee receives a claim to payment under the law of obligations by virtue of a corresponding agreement, but does not participate in the share capital himself. Complex processes under company law are no longer required and are replaced by a single contract between employer and employee.
To better illustrate, here is an example:
Employer AG and employee AN conclude a VSOP agreement:
After the second year of employment (cliff period), the employee receives a virtual share of two percent in the share capital of the employer's GmbH. If he leaves before this time, he receives no entitlements.
After the third and fourth year, the employee is entitled to a further 1.5 percent of the virtual shares in each case (vesting period). From the fifth year onwards, the length of service no longer plays a role.
In the third year of employment, the employer's GmbH makes a profit of EUR 2,000,000, of which EUR 1,500,000 is distributed to the shareholders. According to the contractual VSOP agreement, AN has a virtual shareholding of 4.5 percent at this point. He therefore receives 4.5 percent of the distribution of 1,500,000 euros, which corresponds to a payment of 67,500 euros.
It is also possible to extend the VSOP agreement to include a participation in the hidden reserves. If, for example, the employer's company is sold, it can be agreed that the employee will participate in the proceeds of the sale (exit profit) in accordance with his shareholding.
A key advantage of VSOP agreements is that they do not require the application of any company law provisions. This is because virtual shares do not exist under company law, but merely establish an entitlement of the employee to a percentage share of the respective tax base (e.g. profit). Therefore, in particular the standards of the KStG are not applicable.
The basis of the VSOP agreement is the relevant regulations of the company. These should contain the following points in particular
VSOP agreements should never be drawn up "on your own", but always with the involvement of an experienced specialist lawyer. This way, you play it safe and avoid legal ambiguities or pitfalls that later lead to - in the worst case - legal disputes with your employees!
Make a consultation appointment now and learn more about the benefits of a VSOP for your company!
"Genuine" shares in corporations are taxed in accordance with the provisions of the Corporation Tax Act (KStG) and, on the employee side, in accordance with Section 20 EStG. If applicable, the facts of Section 17 of the German Income Tax Act (EStG) ("sale of shareholdings") also apply in the event of a sale. All these standards are not applicable to virtual employee shareholdings, as these are not shares in corporations within the meaning of the relevant laws.
A profit distribution that has its basis in the VSOP agreement does not fall under Sec. 8 (3) Sentence 1 KStG. Rather, it is a business expense within the meaning of Section 4 (4) EStG, which reduces profits at the time the entitlement arises. As your employee is not an entrepreneur within the meaning of the German Value Added Tax Act (Umsatzsteuergesetz, UStG), the transfer is not subject to value added tax (§ 1 UStG).
According to a landmark decision by the BFH (Case No. I R 11/15), tax provisions may not be recognized for VSOP liabilities. This is because they are liabilities subject to a condition precedent, the incurrence of which is only certain when they fall due. The formation of provisions is therefore excluded under Section 249 (1) Sentence 1 HGB and Section 6 (1) No. 3a EStG, but is also not required. This is different if the VSOP provides for a buy-out payment or if participation in profit distributions is envisaged.
From the employee's perspective, the distribution is treated as a bonus. It is part of the regular salary within the meaning of Sections 8 (1) and 19 (1) no. 1 EStG, which is subject to regular income tax. The employer is only required to record the additional salary payment in the wage tax certificate or salary statement for the respective month.
Virtual employee shareholdings require a clear and comprehensive agreement to avoid disputes from the outset. This should be individually tailored to the needs and circumstances of the company in question. Various decisions affecting employees and employers must be made when designing the framework conditions of a company's VSOP. The effects of these decisions as well as their alternatives must be known accordingly when a draft is used.
Disclaimer: The contents of the information offered at esop-direkt.de do not constitute legal advice. If you require a legal review of your individual case, please contact our specialized team: beratung@esop-direkt.de
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