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Certified Tax Advisor, Manager, National Office Tax & Legal
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Under Section 3 no. 39 of the German Income Tax Act (Einkommensteuergesetz; EStG), the non-cash benefit received by an employee from the free or discounted transfer of certain equity interests is tax-exempt up to EUR 2,000 per calendar year. As regards the eligible group of persons, it has been clarified from the employee’s perspective that all employees in a current employment relationship with the company may benefit from the tax exemption. This may be either a main employment relationship or a secondary employment relationship. From the company’s perspective, however, the question arises as to how the employee equity participation programme must be structured in order for the tax exemption to apply for the beneficiaries; in other words: Which employees must the programme include and which employees may it exclude?
In the case decided by the Fiscal Court Düsseldorf in its decision of July 23, 2026 (case no. 8 K 12/22 H(L)), a stock corporation maintained a group-wide share programme for its employees. Participants were able to invest part of their salary in preference shares and receive a bonus in the form of additional shares, which vested after a three-year lock-up period. However, under the programme terms, employees whose employment relationship was suspended, marginally employed persons, and trainees were excluded from the group of participants. The company treated the resulting non-cash benefits for the programme participants as tax-exempt in accordance with Section 3 no. 39 EStG. Following a payroll tax field audit, however, the tax office denied the tax exemption and issued an additional payment notice because the programme had not been open to all eligible employees. The Fiscal Court agreed with this view.
In support of its adverse decision, the Fiscal Court essentially relies on the relevant wording of the statute and on the legislative history of the provision: The provision requires the participation of “all” employees in a current employment relationship. The original government draft also indicates a broad interpretation, as discrimination against individual groups of employees is intended to be prevented. For reasons of legal certainty, only one objective differentiation criterion was laid down by statute: a minimum period of service with the company of one year. Further differentiations by employee group were deliberately not permitted. Accordingly, only the exclusion of employees whose employment relationship is suspended is harmless in this respect, since, due to the absence of salary payments, they are not in a “current employment relationship” within the meaning of the provision (see also German Federal Ministry of Finance, circular dated June 1, 2024, margin nos. 1, 2). By contrast, the exclusion of marginally employed persons and trainees is harmful.
The relevant definition of employee under Section 1 of the German Wage Tax Implementing Regulation covers all persons who are in an employment relationship and owe their labour to the employer – this also applies to trainees and marginally employed persons. In addition, the wording of Section 3 no. 39 EStG expressly does not distinguish between specific groups. It is therefore irrelevant whether the exclusion of trainees or marginally employed persons was objectively justified or not arbitrary. Unequal treatment that may be permissible under employment law is not sufficient for the tax benefit under Section 3 no. 39 EStG.
The stock corporation was also unsuccessful in the case in dispute with the argument that marginally employed persons and trainees had, in practice, not been able to participate in the programme. On the one hand, the minimum investment required under the plan terms could also have been raised by these employee groups; on the other hand, the programme expressly permitted the allocation of fractional shares. A blanket exclusion on the basis of low income was therefore not mandatory. Nor do the administrative difficulties and practicability considerations put forward justify excluding specific groups if the law expressly requires the inclusion of all employees. Whether such a statutory requirement appears politically or economically reasonable is not a matter of judicial interpretation of the disputed provision, but rather a matter for the legislature.
There is also no breach of the principle of proportionality. The requirements of Section 3 no. 39 EStG are uniform statutory requirements for the employee equity participation programme as such. If the group of beneficiaries is not structured in accordance with the statutory requirements, the tax exemption does not apply to the benefits granted as a whole. In addition, in the case of a beneficial provision such as Section 3 no. 39 EStG, unlike in the case of burdensome provisions, there is no room for a de minimis threshold.
The stock corporation was successful in the present case only on a minor point – and only from a procedural perspective: To the extent that the notice concerned individual wage tax amounts arising from outplacement services provided to individual employees, an employer liability notice should have been issued rather than an additional payment notice.
Procedural notes:
The Fiscal Court Düsseldorf had already reached the same substantive conclusion – apparently concerning the same group – in decisions dated December 14, 2023 (case nos. 8 K 11/22 and 8 K 14/22). However, in the appeals on points of law before the German Federal Fiscal Court (Bundesfinanzhof; BFH) (VI R 5/24 and VI R 4/24), these proceedings were decided not on the merits with regard to the tax exemption, but only from a procedural perspective, namely that the wage tax to be additionally collected may be asserted by the tax office not by way of an employer liability notice, but only by way of an additional payment notice. If the stock corporation lodges the appeal on points of law allowed by the Fiscal Court, the BFH would therefore now have an opportunity to clarify the substantive legal issue.
Practical implications
It remains to be seen whether and, if so, how the BFH will decide. At present, however, this case law must be taken into account when structuring employee equity participation programmes in order not to jeopardise the related tax exemption for the participants. The detailed explanations provided by the Fiscal Court Düsseldorf are helpful in identifying the key arguments and the criteria that must be examined for the purposes of the tax exemption. In this respect, practice can now adjust accordingly.