Local tax court of Munich rules on tax consequences of employee stock option plan

The local tax court of Munich recently decided a case where a German stock company granted stock options to its employees (case reference 7 K 1513/07). The options had been issued based on a contingent increase of the statutory capital of the German corporation and had been granted free of charge to the employees, but with a vesting period of two years.

The court held that issuing stock options to employees under a contingent capital increase does not lead to tax deductible personnel expenses at the level of the entity that issued the new shares and granted the options. The court observed that, in the case of such options, it is the shareholders of the corporation who suffer a loss because their shareholdings are diluted, not the company itself so that the company does not actually incur any expenses and cannot be deemed to incur any expenses. Thus, the granting of the stock options should not lead to tax deductible personnel expenses.

The case is pending before the Federal Tax Court (BFH). German companies that have issued or that plan to issue employee stock option plans should carefully monitor the decision of the BFH.

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.