Restricted Stock Units (RSU) are a way an employer can grant company shares to employees as a form of compensation. This form of compensation became very popular in attracting and retaining talents in the past years.
Restricted Stock Units are issued to employees under certain conditions. In particular under consideration of a vesting schedule – tied to the length of employment or performance goals. The employee will only get the shares once they are vested e.g. after 3 years in the company.
Expatriates especially from the USA or overseas who are sent to Germany by their employers often participate in such Restricted Stock Units schemes. In many cases, the vesting period of the Restricted Stock Units ends in Germany.
While taxation plays a big role for most employees, working and living in different countries during the vesting period can make things complicated in terms of (double) taxation.
The most asked question in my consulting practice: How are Restricted Stock Units (RSU) taxed in Germany?
This question is not only relevant for the employee getting these shares but also for the employer who has to fulfill certain obligations.
Table of Contents
RESTRICTED STOCK UNITS FORM PART OF THE TAXABLE SALARY
Any benefit granted by the employer is considered as salary income in Germany.
The benefit has to be taxed at the time the employee gets the economic interest in the shares. In most cases, this will be the time the Restricted Stock Units vest. The grant date is not decisive for the taxation.
Quick tip:
Although it is quite common that under the RSU scheme employees get the shares at vesting and not at grant date, it is important that the agreements reflect this as well. The German tax authorities check the agreements for the tax evaluation.
To avoid a taxation at grant date without any cash equivalent, the agreements should be checked and kept as supporting documents in the files.
SPLIT OF BENEFIT
The benefit from Restricted Stock Units is to be regarded as remuneration for the entire vesting period.
If an employee works during the vesting period in Germany and abroad, the benefit has to be split.
This is based on most Double Tax Treaties. It is recommendable to check the underlying Double Tax Treaty in each case.
Usually, the Double Tax Treaties assign the taxation right of the salary to the country where the work has been performed:
The part of the benefit that relates to times while working in Germany is taxable in Germany. The part that relates to times of working abroad might be taxable abroad.
In general, the relevant period for the split is the vesting period, i.e. the time between the grant and the vesting.
Quick tip:
Not every country considers a split of the benefit related to the working days so that double taxation might arise. It is not only necessary to check the Double Tax Treaty but to involve a tax specialist in the other country to avoid double taxation.
CALCULATION OF THE TAXABLE BENEFIT
The taxable benefit from Restricted Stock Units is calculated as the difference between the purchase price (paid by the employee, if any) and the fair market value of the shares at the date the shares become fully vested:
Vesting number of shares * fair market value at vesting |
Minus purchase price |
Minus transactional fees |
= Taxable Benefit |
EXAMPLE
John works for a US company who offered him 1,200 RSUs in January 2021. The RSUs are put on a two-year vesting schedule: January 2021 to December 2022. John will receive the shares after two years with the company.
Until December 31, 2021, he lived and worked in New York/USA. From January 1, 2022 he lives and works in Berlin/Germany due to a secondment. End of December 2022 John receives the 1,200 shares since the vesting period ended. The fair market value at vesting is 100 $ per share. There is no purchase price or transactional fees to consider:
Vesting number of shares * fair market value at vesting | 1,200 shares * 100 $ per share=120,000 $ |
Minus purchase price | n/a |
Minus transactional fees | n/a |
= Taxable Benefit from Restricted Stock Units | 120,000 $ |
In the vesting period, John worked 12 months in the USA and 12 months in Germany. Therefore, the benefit needs to be split equally. The taxable benefit in Germany amounts to 60,000 $.
John needs to file two tax returns, in the USA and in Germany.
APPLICABLE TAX RATE
The benefit has to be taxed as regular salary by applying the individual tax rate of the employee.
The tax rates for taxpayers in Germany are progressive. This means that with a higher income, more taxes are paid. In addition, the income scales double for married couples filing jointly.
For a better overview, the following tax brackets apply (for single individuals, fiscal year 2022):
Tax Rate | Income |
0% | 0 Euro to 10,347 Euro |
14% to 24% | 10,348 Euro to 14,926 Euro |
24% to 42% | 14,927 Euro to 58,596 Euro |
42% | 58,597 Euro to 277,825 Euro |
45% | 277,826 Euro or more |
TAX RELIEFS
As of 1 January 2021, employees can get a tax-free amount of EUR 1,440 on the benefit received (§ 3 No 39 German Income Tax Act). Provided all employees who are employed for one year or more are eligible to participate in the plan (increased from EUR 360).
Furthermore, under certain circumstances, the benefit resulting from Restricted Stock Units could be regarded as remuneration for several years of employment. In this case a reduced tax rate applies (so called “1/5 rule”/“Fünftelregelung” § 34 German Income Tax Act).
However, this reduced tax rate only becomes effective if the employee’s salary without the benefit is below the maximum tax rate level of 42% applies. Such level is approx. 58kEUR in case of a single person. If the employee’s income is taxed at this level, the 1/5 rule does not have any effect.
Whether or not the tax reliefs are applicable, is to be checked in each case individually.
ARE RESTRICTED STOCK UNITS TAXED TWICE?
The benefit received is taxed as salary with the individual tax rate of each employee. If the employee continues to hold the shares after vesting and decides to sell them later, a capital gain resulting from the sale is taxed as well.
A capital gain might result if the selling price is higher than the value of the benefit received at vesting.
In case of a direct sale after vesting, a capital gain should not arise assuming that the shares are sold with the fair market value at vesting.
For capital gains there is a flat tax rate of 25% plus 5.5% solidarity surcharge thereof; effective tax rate 26.38% (so called “Abgeltungssteuer”, § 32d German Income Tax Act).
A capital gain taxation in Germany depends from the applicable Double Tax Treaty as well.
GOOD TO KNOW
- On principle, the employer is liable for wage tax for any salary paid or other benefits. Therefore, employees should check their tax position regarding the Restricted Stock Units with their employer. Both parties do have an interest to tax the benefit correctly and to avoid bad consequences.
- Based on my experience, most employees are selling their shares immediately after vesting to cover the income tax and the social security contributions. Otherwise, the employee must advance the amounts.
- Often enough, employer respectively their payroll service provider do not consider a split of the benefit for the taxation in case the employee worked in different countries. Wage tax is withheld on the total amount. This leads to discussions. Therefore, it is recommendable to check the tax position of the Restricted Stock Units before the vesting date ends.
- The part of income which is taxable abroad is usually tax-free in Germany – depending on the Double Tax Treaty. However, this tax-free income will be considered when determining the German individual tax rate. Often enough, this leads to surprising additional tax payments in Germany, especially if the employee moved to Germany during the year. This should be kept in mind.
DO YOU NEED SUPPORT IN ASSESSING THE TAX POSITION?
I am happy to support you in the following areas:
- Review of the Restricted Stock Unit agreement/scheme to assess the tax position.
- Tax advice to design the Restricted Stock Unit agreement/scheme in a tax favorable way.
- Calculation of the taxable benefit under consideration of the working days in different countries.
- Coordination with foreign tax colleagues to avoid double taxation.
- Communication with the payroll service provider to ensure the correct taxation.
- Preparation of the German income tax declaration.
- Support in answering questions by the German tax authorities.
Disclaimer
For a better understanding, this article refrains from using complicated technical terms and is presented in shortened form with regard to the individual preconditions required by law. An individual examination in your case is recommended.
This article does not constitute legal or tax advice but is for general information only. Every personal/company situation is unique, so that your tax situation might be different as described in this article. Therefore, I always recommend professional advice to avoid any tax disadvantages.
Last updated on August 16, 2022
