Empower your team with our ESOP/VSOP services in Germany

The main difference is that under an ESOP (Employee Stock Option Plan), an employee receives the option to acquire real business shares at a certain point in time. In a VSOP (Virtual Stock Option Plan), the employee only receives a contractual right to a payout in the event of certain events (usually the exit). With a VSOP, the employee thus does not receive any actual business shares, but only a contractual payment claim calculated on the basis of virtual (fictitious) business shares.

Yes, if an employee receives (real) business shares, the difference between the price the employee pays for the business shares and the tax value of the business shares is treated as taxable income (with all the consequences such as payroll tax and social security deductions). For this reason, we always recommend a call information. The taxable event here is generally the time at which the option is granted, not the time at which the shares generate income. In Section 19a of the Income Tax Act, the legislator has created the possibility of postponing the taxable period, although certain conditions must be met. It should also be noted that the privileged treatment under Section 19a German Income Tax Act (EStG) does not apply to social security contributions. Virtual shares (also known as phantom shares), on the other hand, only have a tax impact if a liquidity event occurs (i.e. if the employee receives a payout as part of an exit).

Vesting means that an employee must earn his or her right to the shareholding over time. The company wants to create incentives for employees to stay with the company as long as possible. Therefore, an employee must earn the right to receive (virtual) business shares by working for the company for a certain period of time. During the vesting period, the allocated (virtual) shares are transferred to the employee on a monthly staggered basis. Vesting provisions need to be clearly defined contractually under German employment and corporate law in order to be effective. The market standard is four years with a one-year ramp-up period at the beginning of vesting (so-called cliff).

The cliff represents a threshold that the employee must exceed in order to receive any shares at all. A cliff period of one year is customary in the market. This is because in the first year of employment, the contracting parties usually determine whether things will work out with each other. If an employee receives (virtual) business shares and leaves the company before the end of the cliff period (i.e., before the end of the first year), all shares are forfeited. If the employee stays for at least one year, he or she acquires the first part of the shares. The ESOP may require a retransfer clause in order to technically implement vesting and cliff.

The payout is based on what the shareholders receive per real share in the event of the sale of the company or the IPO. The relevant figure is therefore the market value per (virtual) share at the time of payment. The employee thus participates in the increased value of the company on a straight-line basis.

Section 19a EStG was introduced to ease the burden on start-ups with regard to employee participation. The regulation allows deferred taxation of employee share ownership under certain conditions: Instead of having to pay income tax immediately when the shares are transferred, taxation can be deferred to a later date (e.g. when the shares are sold or after 12 years).

The advantages: Employees do not have to bear the tax burden at a time when they have not yet received any liquidity (“dry income”). This makes early genuine participation more attractive.

The restrictions: Section 19a only applies to genuine business shares or stocks, and only if the company meets certain requirements – including being a maximum of 20 years old, employing less than 1000 employees and complying with certain revenue limits. In addition, Section 19a EStG only applies to income tax. Income from a company shareholding is still subject to social security contributions – any social security contributions due are included in the lump-sum pension contribution.

In practice, Section 19a EStG is therefore not applicable to every company or every shareholding plan. A careful examination and, if necessary, consultation with the tax office is recommended.