Tax stumbling blocks with Phantom Share Programs

Employee participation programs are an important instrument for attracting and retaining qualified employees and motivating them accordingly, as market salaries in the first phase of start-ups cannot be paid and the key employees thus can participate in the success of the start-up. In this context, start-ups – among others – resort to so-called phantom share programs.


Phantom Share Programs

Under a phantom share program, the beneficiary employee is granted an additional payment claim, which is determined according to certain parameters (e.g. proceeds from the sale of shares by the shareholders). In this case, the employee does not have any legal or contractual shareholder rights. From an income tax perspective, payments in connection with a phantom share program constitute a performance-related remuneration within the scope of the employment relationship, which are taxed with the progressive income tax rate up to 55% (besides that social security contributions and other payroll related cost are due).

A phantom share program is generally set up at the level of the start-up because the beneficiaries work for the company. In many cases, the shareholders agree to bear the costs of the program on a pro rata basis, whereby it is recommended to check the corresponding tax consequences in advance.


Fictitious taxation of profits at shareholder level

If the cost of the phantom share program is borne by the shareholders, the interaction between the proceeds of the sale and the deductibility of the costs of the participation program must be analysed from a tax perspective. Depending on the type of (domestic) shareholder, this may result in negative tax consequences in the form of fictitious profit taxation:

  • Private individuals: Capital gains from the sale of a start-up (GmbH) are generally subject to the special tax rate of 27.5%, whereby directly related expenses are not deductible for tax purposes. Therefore, if private individuals bear the costs of a phantom share program, a disadvantageous fictitious profit taxation occurs.
  • Corporations: Income from the sale of shares in a start-up (GmbH) constitutes taxable income from business activities and is subject to the normal 25% corporate income tax rate. For taxpayers falling under Section 7 Para 3 of the Austrian Corporation Tax Act (eg Austrian GmbH), this prohibition of deduction does not apply, so that there are no disadvantageous tax consequences for corporations if they bear the costs of a phantom share program.
  • Partnerships: In the case of partnerships, the transparency principle applies, thus for the tax assessment of capital gains it is generally necessary to look through to the shareholders behind the partnership.
  • Private foundations: Income from the sale of qualified capital shares (≥ 1%) constitutes taxable income in the case of a private foundation, although it is possible to defer taxation on the basis of an application by acquiring a substitute shareholding (participation level 10%, acquisition within 1 year). In the case of private foundations, the deduction of income-related expenses that are directly economically related to capital income subject to intermediate taxation is excluded. Therefore, if a private foundation bears the costs of a phantom share program, a disadvantageous fictitious profit taxation may occur.


Avoidance of a fictitious taxation of profits?

Against this background, in the course of setting up phantom share programs, it is therefore necessary to examine in detail in advance whether there are any disadvantageous tax consequences associated with the way in which the respective participation program is set up and on the basis of the respective existing shareholder structure.

With regard to a possible avoidance of the above described disadvantageous tax consequences, the following aspects – among others – should therefore be analysed on a case-by-case basis:

  • What is the shareholder structure of the start-up?
  • Has the phantom share program already been set up or is it still in the process of being set up?
  • Is the phantom share program borne by the company or by selected or all shareholders (in the internal relationship)?
  • Are there alternative ways of operating the phantom share program?

Based on this, it can finally be considered whether and how an avoidance of a fictitious profit taxation would be possible under certain circumstances.





Christoph Puchner, Managing Partner and Tax Advisor &
David Gloser, Managing Partner, Tax Advisor and Chartered Accountant from ECOVIS Austria, one of the leading tax consultants in Austria in the startup sector.