Global Share Option Plans

Germany

Securities laws and regulation

Red flags	Response
What are the key securities laws and regulatory obligations or restrictions in relation to granting options, exercising options, selling resulting shares or other relevant events? For example, would a prospectus or any filings be required?	Securities law filings: The grant of options and offer of shares can generally be made to employees in compliance with German securities laws without the need for any adjustments or regulatory filings. Prospectus: The grant of share options may trigger a prospectus requirement under the German prospectus legislation if the options are offered to the public. However, there are exceptions depending on the qualification of an instrument as a ‘security’ or a ‘financial asset’ from the general rule that such public offers in Germany require the publication of a prospectus that has to be approved by the German Federal Financial Supervisory Authority. The EU Prospectus Regulation applies to ‘securities’, however an exemption is usually available. If shares and options constitute ‘financial assets’, they can usually be offered to employees or employees engaged via an employer of record/professional employer organisation (ie leased employees) domiciled in Germany without registration or the requirement to publish a prospectus. Regulatory: Employee share schemes are exempt from most key financial regulations in Germany, however the grant of options to non-employees or EOR/PEO employees is more problematic.

Red flags

Response

What are the key securities laws and regulatory obligations or restrictions in relation to granting options, exercising options, selling resulting shares or other relevant events? For example, would a prospectus or any filings be required?

Securities law filings: The grant of options and offer of shares can generally be made to employees in compliance with German securities laws without the need for any adjustments or regulatory filings.

Prospectus: The grant of share options may trigger a prospectus requirement under the German prospectus legislation if the options are offered to the public. However, there are exceptions depending on the qualification of an instrument as a ‘security’ or a ‘financial asset’ from the general rule that such public offers in Germany require the publication of a prospectus that has to be approved by the German Federal Financial Supervisory Authority.

The EU Prospectus Regulation applies to ‘securities’, however an exemption is usually available.

If shares and options constitute ‘financial assets’, they can usually be offered to employees or employees engaged via an employer of record/professional employer organisation (ie leased employees) domiciled in Germany without registration or the requirement to publish a prospectus.

Regulatory: Employee share schemes are exempt from most key financial regulations in Germany, however the grant of options to non-employees or EOR/PEO employees is more problematic.

Exchange control

Red flags	Response
Are there any exchange control restrictions, notification/filing, or approval requirements related to the exercise of options or sale of shares?	In principle, there is no German exchange control requirement to notify either the Federal Reserve (Deutsche Bundesbank) or Federal Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz). However, there can be reporting requirements, especially where option holders directly hold 10% or more of the shares or voting rights in a foreign company with a balance sheet total exceeding EUR3 million, and for German employees who acquire more than 10% of the voting rights in the company.

Red flags

Response

Are there any exchange control restrictions, notification/filing, or approval requirements related to the exercise of options or sale of shares?

In principle, there is no German exchange control requirement to notify either the Federal Reserve (Deutsche Bundesbank) or Federal Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz).

However, there can be reporting requirements, especially where option holders directly hold 10% or more of the shares or voting rights in a foreign company with a balance sheet total exceeding EUR3 million, and for German employees who acquire more than 10% of the voting rights in the company.

Company law

Red flags	Response
Are there any red flag company law and corporate governance considerations, for example, shareholder approval requirements or financial assistance restrictions?	For private companies, there are no overarching corporate governance requirements specifically applicable to the granting of options. In a German stock company, share option plans are predominantly based on the issue of subscription rights for the exercise of which shares are made available through a conditional capital increase. This requires a resolution by the annual general meeting, which defines the main conditions of the share option programme, in particular, the waiting period for the first exercise of the options and any performance targets. In the case of a German limited company (Gesellschaft mit beschränkter Haftung) however, notarial certification is required before options can be granted by the company.

Red flags

Response

Are there any red flag company law and corporate governance considerations, for example, shareholder approval requirements or financial assistance restrictions?

For private companies, there are no overarching corporate governance requirements specifically applicable to the granting of options.

In a German stock company, share option plans are predominantly based on the issue of subscription rights for the exercise of which shares are made available through a conditional capital increase. This requires a resolution by the annual general meeting, which defines the main conditions of the share option programme, in particular, the waiting period for the first exercise of the options and any performance targets.

In the case of a German limited company (Gesellschaft mit beschränkter Haftung) however, notarial certification is required before options can be granted by the company.

Employment law

Red flags	Response
Are there any material employment law issues to be aware of, for example the requirement to consult employees?	The regulations on share options in employment contracts, share option plans, and option contracts represent general terms and conditions and are subject to content control. The transparency requirement mandates that the rules regarding the conditions under which, and the extent to which, an entitlement to the option should exist must be formulated clearly and understandably. The control of general terms and conditions is relatively strict under German law. The general principle of equal treatment (Gleichbehandlungsgrundsatz) must always be observed when granting share options. This principle may give rise to an entitlement to the granting of share options. If the company has a works council, further rules must be complied with. Whether and to what extent the works council has a right of co-determination in the case of share options is controversial. However, a right of co-determination is predominantly assumed.

Red flags

Response

Are there any material employment law issues to be aware of, for example the requirement to consult employees?

The regulations on share options in employment contracts, share option plans, and option contracts represent general terms and conditions and are subject to content control.

The transparency requirement mandates that the rules regarding the conditions under which, and the extent to which, an entitlement to the option should exist must be formulated clearly and understandably. The control of general terms and conditions is relatively strict under German law.

The general principle of equal treatment (Gleichbehandlungsgrundsatz) must always be observed when granting share options. This principle may give rise to an entitlement to the granting of share options.

If the company has a works council, further rules must be complied with. Whether and to what extent the works council has a right of co-determination in the case of share options is controversial. However, a right of co-determination is predominantly assumed.

Plan communications

Red flags	Response
Are there any requirements for the communications, for example, a translation into any language(s), and if so, which?	The German language is not a mandatory requirement for the share option documentation. The grant of share options can also be negotiated in English if the employees have sufficient knowledge of the English language.

Data protection

Red flags	Response
What are the key data protection requirements, if any?	There are no German-specific requirements for the granting of share options with regard to data protection law. However, the general requirements regarding data processing should be considered. The requirements of the GDPR (DSGVO) must be fulfilled in cases where personal employee data is to be made available to persons or bodies that are not party to the employment relationship (for example, if the parent company offers the share option).

Red flags

Response

What are the key data protection requirements, if any?

There are no German-specific requirements for the granting of share options with regard to data protection law. However, the general requirements regarding data processing should be considered.

The requirements of the GDPR (DSGVO) must be fulfilled in cases where personal employee data is to be made available to persons or bodies that are not party to the employment relationship (for example, if the parent company offers the share option).

Governing law

Red flags	Response
Will governing law and jurisdiction clauses be effective?	In principle, jurisdiction agreements and clauses on applicable law are possible. However, the prerequisite is that a foreign parent company is a party in the applicable document. When applying foreign law, the mandatory provisions of German employee law must be complied with. According to recent jurisdiction, these regulations also include the control of general terms and conditions.

Tax treatment

Red flags	Response
What is the tax and social security treatment (including other employee and employer levies)? Are there any red flag issues, for example tax on grant, filings or notifications?	Tax on grant: The grant of non-listed options to German tax resident employees generally does not give rise to any German tax liabilities. Tax on exercise: The exercise of options by German employees will generally give rise to certain wage tax compliance obligations by the employer as well as a personal income tax liability of the beneficiaries, normally calculated by reference to the difference between the fair market value of the shares on the date of exercise and any strike price paid to acquire the shares. Deferred taxation: If the option is not exercised in connection with an exit event, the transfer of shares to the beneficiary will typically give rise to dry income taxation issues given the option holder will be liable to pay any taxes and charges in cash out of their own funds upon exercise of the option. Since 2023, subject to certain prerequisites, option holders of certain small enterprises may benefit from a deferred taxation scheme, ie the payment of the relevant income taxes may be postponed to a future event (see the below list). The deferred taxation will become payable at the earliest of: disposal of the option shares 15 years from the date of exercise of the option termination of the option holder's employment, unless in the case of point two above and the employer having granted the options unconditionally assumes a secondary liability for the outstanding wage tax.

Red flags

Response

What is the tax and social security treatment (including other employee and employer levies)? Are there any red flag issues, for example tax on grant, filings or notifications?

Tax on grant: The grant of non-listed options to German tax resident employees generally does not give rise to any German tax liabilities.

Tax on exercise: The exercise of options by German employees will generally give rise to certain wage tax compliance obligations by the employer as well as a personal income tax liability of the beneficiaries, normally calculated by reference to the difference between the fair market value of the shares on the date of exercise and any strike price paid to acquire the shares.

Deferred taxation: If the option is not exercised in connection with an exit event, the transfer of shares to the beneficiary will typically give rise to dry income taxation issues given the option holder will be liable to pay any taxes and charges in cash out of their own funds upon exercise of the option.

Since 2023, subject to certain prerequisites, option holders of certain small enterprises may benefit from a deferred taxation scheme, ie the payment of the relevant income taxes may be postponed to a future event (see the below list).

The deferred taxation will become payable at the earliest of:

disposal of the option shares
15 years from the date of exercise of the option
termination of the option holder's employment, unless in the case of point two above and the employer having granted the options unconditionally assumes a secondary liability for the outstanding wage tax.

Non-employee options

Red flags	Response
Are there any issues with granting options to non-group employees, eg advisers/consultants or PEO employees?	Granting options to non-employees, such as advisers and consultants, is generally possible and should be reviewed on a case-by-case basis, particularly in relation to VAT. However, caution is advised, as a broad offer of options to non-employees may trigger a prospectus requirement. Under German law, the granting of share options to employees of an employer of record (EOR) or professional employment organisation (PEO) is problematic, and more specific advice should be obtained. The approval of the EOR/PEO is required before share options are granted. Granting options to such employees only works in practice: with the consent of the EOR/PEO in accordance with specific share option grant documentation that sets out the EOR/PEO arrangements.

Red flags

Response

Are there any issues with granting options to non-group employees, eg advisers/consultants or PEO employees?

Granting options to non-employees, such as advisers and consultants, is generally possible and should be reviewed on a case-by-case basis, particularly in relation to VAT. However, caution is advised, as a broad offer of options to non-employees may trigger a prospectus requirement.

Under German law, the granting of share options to employees of an employer of record (EOR) or professional employment organisation (PEO) is problematic, and more specific advice should be obtained. The approval of the EOR/PEO is required before share options are granted.

Granting options to such employees only works in practice:

with the consent of the EOR/PEO
in accordance with specific share option grant documentation that sets out the EOR/PEO arrangements.

Other

Red flags	Response
Are there any other red flags, for example, is a sub-plan required?	No other red flags.

Securities laws and regulation

Red flags

What are the key securities laws and regulatory obligations or restrictions in relation to granting options, exercising options, selling resulting shares or other relevant events? For example, would a prospectus or any filings be required?

Response

Securities law filings: The grant of options and offer of shares can generally be made to employees in compliance with German securities laws without the need for any adjustments or regulatory filings.

Prospectus: The grant of share options may trigger a prospectus requirement under the German prospectus legislation if the options are offered to the public. However, there are exceptions depending on the qualification of an instrument as a ‘security’ or a ‘financial asset’ from the general rule that such public offers in Germany require the publication of a prospectus that has to be approved by the German Federal Financial Supervisory Authority.

The EU Prospectus Regulation applies to ‘securities’, however an exemption is usually available.

If shares and options constitute ‘financial assets’, they can usually be offered to employees or employees engaged via an employer of record/professional employer organisation (ie leased employees) domiciled in Germany without registration or the requirement to publish a prospectus.

Regulatory: Employee share schemes are exempt from most key financial regulations in Germany, however the grant of options to non-employees or EOR/PEO employees is more problematic.

Exchange control

Red flags

Are there any exchange control restrictions, notification/filing, or approval requirements related to the exercise of options or sale of shares?

Response

In principle, there is no German exchange control requirement to notify either the Federal Reserve (Deutsche Bundesbank) or Federal Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz).

However, there can be reporting requirements, especially where option holders directly hold 10% or more of the shares or voting rights in a foreign company with a balance sheet total exceeding EUR3 million, and for German employees who acquire more than 10% of the voting rights in the company.

Company law

Red flags

Are there any red flag company law and corporate governance considerations, for example, shareholder approval requirements or financial assistance restrictions?

Response

For private companies, there are no overarching corporate governance requirements specifically applicable to the granting of options.

In a German stock company, share option plans are predominantly based on the issue of subscription rights for the exercise of which shares are made available through a conditional capital increase. This requires a resolution by the annual general meeting, which defines the main conditions of the share option programme, in particular, the waiting period for the first exercise of the options and any performance targets.

In the case of a German limited company (Gesellschaft mit beschränkter Haftung) however, notarial certification is required before options can be granted by the company.

Employment law

Red flags

Are there any material employment law issues to be aware of, for example the requirement to consult employees?

Response

The regulations on share options in employment contracts, share option plans, and option contracts represent general terms and conditions and are subject to content control.

The transparency requirement mandates that the rules regarding the conditions under which, and the extent to which, an entitlement to the option should exist must be formulated clearly and understandably. The control of general terms and conditions is relatively strict under German law.

The general principle of equal treatment (Gleichbehandlungsgrundsatz) must always be observed when granting share options. This principle may give rise to an entitlement to the granting of share options.

If the company has a works council, further rules must be complied with. Whether and to what extent the works council has a right of co-determination in the case of share options is controversial. However, a right of co-determination is predominantly assumed.

Plan communications

Red flags

Are there any requirements for the communications, for example, a translation into any language(s), and if so, which?

Response

The German language is not a mandatory requirement for the share option documentation. The grant of share options can also be negotiated in English if the employees have sufficient knowledge of the English language.

Data protection

Red flags

What are the key data protection requirements, if any?

Response

There are no German-specific requirements for the granting of share options with regard to data protection law. However, the general requirements regarding data processing should be considered.

The requirements of the GDPR (DSGVO) must be fulfilled in cases where personal employee data is to be made available to persons or bodies that are not party to the employment relationship (for example, if the parent company offers the share option).

Governing law

Red flags

Will governing law and jurisdiction clauses be effective?

Response

In principle, jurisdiction agreements and clauses on applicable law are possible. However, the prerequisite is that a foreign parent company is a party in the applicable document. When applying foreign law, the mandatory provisions of German employee law must be complied with. According to recent jurisdiction, these regulations also include the control of general terms and conditions.

Tax treatment

Red flags

What is the tax and social security treatment (including other employee and employer levies)? Are there any red flag issues, for example tax on grant, filings or notifications?

Response

Tax on grant: The grant of non-listed options to German tax resident employees generally does not give rise to any German tax liabilities.

Tax on exercise: The exercise of options by German employees will generally give rise to certain wage tax compliance obligations by the employer as well as a personal income tax liability of the beneficiaries, normally calculated by reference to the difference between the fair market value of the shares on the date of exercise and any strike price paid to acquire the shares.

Deferred taxation: If the option is not exercised in connection with an exit event, the transfer of shares to the beneficiary will typically give rise to dry income taxation issues given the option holder will be liable to pay any taxes and charges in cash out of their own funds upon exercise of the option.

Since 2023, subject to certain prerequisites, option holders of certain small enterprises may benefit from a deferred taxation scheme, ie the payment of the relevant income taxes may be postponed to a future event (see the below list).

The deferred taxation will become payable at the earliest of:

disposal of the option shares
15 years from the date of exercise of the option
termination of the option holder's employment, unless in the case of point two above and the employer having granted the options unconditionally assumes a secondary liability for the outstanding wage tax.

Non-employee options

Red flags

Are there any issues with granting options to non-group employees, eg advisers/consultants or PEO employees?

Response

Granting options to non-employees, such as advisers and consultants, is generally possible and should be reviewed on a case-by-case basis, particularly in relation to VAT. However, caution is advised, as a broad offer of options to non-employees may trigger a prospectus requirement.

Under German law, the granting of share options to employees of an employer of record (EOR) or professional employment organisation (PEO) is problematic, and more specific advice should be obtained. The approval of the EOR/PEO is required before share options are granted.

Granting options to such employees only works in practice: