The dry income problem
When an employee exercises real stock options and receives GmbH shares, German tax law treats the difference between market value and strike price as taxable wages at that moment, even though the shares themselves cannot easily be sold. This creates dry income, a tax bill without matching cash, which historically discouraged employees from exercising options in private companies.
The Fondsstandortgesetz introduced Section 19a EStG to address this, and later the Zukunftsfinanzierungsgesetz expanded and adjusted its scope and limits. The rule allows the taxable moment to be deferred to a later point, most commonly a sale of the shares, meaning tax is only due once the employee actually has cash from a transaction, unlike a VSOP, which is taxed on payout regardless of deferral rules.
How Section 19a EStG deferral works
- Applies to qualifying real equity granted by small and medium sized companies meeting age and size conditions
- Defers the taxable moment from exercise to a later trigger, such as sale of the shares or a maximum holding period
- The employer can also take on liability for the resulting wage tax under certain conditions, easing the employee's burden
- Conditions and time limits have changed through successive legislation, so current details should be confirmed before relying on it
Section 19a EStG is specifically aimed at real shares and real options resulting in real shares. It does not apply to VSOP payouts, which are pure cash compensation, a distinction that also shows up when comparing equity tax regimes across other European countries.
Section 3 No. 39 EStG allowance
Section 3 No. 39 EStG provides a limited annual tax-free allowance for the value of certain employee share benefits granted as part of an employer's participation programme, on top of the deferral available under Section 19a EStG. This allowance reduces the taxable amount at the point of grant or transfer up to the statutory limit, with any excess taxed normally.
The exact allowance amount has been increased by recent legislation and may change again. Always confirm the current figure with a German tax or payroll adviser rather than relying on a fixed number.
Deferral and allowance side by side
| Instrument | Tax type | Deferral available | Allowance available |
|---|---|---|---|
| Real shares or options | Wage tax and social security | Yes, Section 19a EStG | Yes, Section 3 No. 39 EStG |
| VSOP virtual options | Wage tax and social security | No | No |
Section 19a and wage tax questions
- Does Section 19a EStG apply to VSOP plans?
- No. It applies to real shares and options over real shares. VSOP payouts are cash compensation taxed as ordinary wages with no deferral option.
- Is social security due on equity income as well as tax?
- Yes, both VSOP payouts and the taxable benefit from real option exercise are generally subject to social security contributions in addition to wage tax, up to the relevant contribution ceilings.
- Who qualifies for the Section 19a EStG deferral?
- It is aimed at small and medium sized companies below certain age and size thresholds. These thresholds have been adjusted by legislation, so eligibility should be checked for the current rules.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.