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From when are employee participations attributed to the employee from a tax perspective?
4/17/25, 6:30 AM
The tax authorities' current statement provides welcome clarity for practical purposes: Despite common clauses such as reverse vesting or restrictions on disposal, the transfer of economic ownership can occur as early as the grant date. This is provided that the right to receive dividends is granted from the outset—an important aspect for tax relief under Section 67a of the Income Tax Act.
From when are employee participations attributed to the employee from a tax perspective?
A key question in the tax assessment of "genuine" employee participation programs is the point in time at which the transfer of economic ownership occurs. The Federal Ministry of Finance has fortunately provided practical clarity in a recent response to an inquiry.
Real participation programs
In so-called “real” participation programs, employees are granted real shares in the start-up (e.g. GmbH shares, profit participation rights, FlexCo shares, company value shares).
In addition to legal aspects (e.g., voting rights, participation), from an economic perspective, the impact of a participation program on the beneficiaries and the company, or ultimately the shareholders, is crucial. From the beneficiary's perspective, the focus is on the tax consequences of granting the participation program and at the time of returns. From the company's or shareholders' perspective, however, it is important whether the expenses associated with the participation program are tax-deductible and how the participation program impacts the shareholders economically.
If employee participation is granted free of charge or at a discount, there are ways to avoid a monetary benefit subject to the progressive income tax rate (= market value of the granted shares derived from a timely valuation [e.g., financing round, secondary] less any purchase price). This can be achieved, for example, by granting shares using a negative liquidation preference.
Contractual design of participation programs
Employee participation plans are subject to certain contractual agreements to ensure that the incentive system is effective and targeted. The following is an overview of commonly encountered contractual provisions:
Nominal | The employee only pays the (calculated) nominal amount, which is proportional to the total capital. |
Reverse vesting and Cliff period | Employee participation is generally subject to a reverse vesting period of four years (48 months), which generally begins upon the grant date. Additionally, a short cliff period is agreed upon (usually one year). In contrast to traditional vesting, in which an employee acquires the participation gradually over time, with reverse vesting, the employee receives the entire shares immediately, but must return them – at most partially – in good and bad leaver cases. Finally, the extent to which any distributions (which are rather rare in startups) are due during the vesting period is also regulated. |
Tag-Along/Drag-Along | These are co-sale rights and obligations in the participation agreement. |
Restriction on disposal | Employees may not sell the shares without the consent of the company (or its shareholders). |
Contractual design of participation programs
The Austrian tax authorities recently also issued a statement on the timing of the transfer of beneficial ownership in connection with employee participation programs. In this context, it is encouraging that the tax authorities – in agreement with German Federal Fiscal Court case law and literature – have essentially confirmed that, despite the provisions typically agreed upon for employee participation programs (reverse vesting, cliff period, leaver clauses, restrictions on disposal), the transfer of beneficial ownership should already occur on the grant date when an employee participation program is granted.
Only with regard to the agreement on the right to receive dividends, in the opinion of the tax authorities, care must be taken to ensure that in the case of a reverse vesting agreement and a desired immediate transfer of economic ownership (which is particularly important when applying a negative liquidation preference to avoid a taxable monetary advantage), the right to receive dividends is fully granted from the outset (partly without economic effects, e.g. due to the lack of profit distribution potential in the case of start-ups in the initial phase).
The time of the transfer of economic ownership is also important for the new startup employee participation scheme according to Section 67a of the Income Tax Act (EStG), since the preferential taxation is tied, among other things, to a holding period of three years from the first transfer of a startup employee participation scheme.
Conclusion:
The typical clauses in employee participation programs (e.g., reverse vesting, leaver clauses, restrictions on disposal) do not preclude the immediate transfer of beneficial ownership of the employee participation. Based on the recent Federal Ministry of Finance guidance, special attention should also be paid to the right to receive dividends during the vesting period. From a practical perspective, it is encouraging that the framework for the transfer of beneficial ownership is now more clearly defined. Nevertheless, it is always advisable to conduct a comprehensive assessment of each individual case.
This article was written by David Gloser (Partner, Tax Advisor and Auditor) and Christoph Puchner (Partner and Tax Advisor) of ECOVIS Austria. ECOVIS Austria is one of Austria's leading tax consulting firms in the startup sector. www.ecovis.at
