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One of the most important and especially in the start-up community preferred possibilities of employee stock programs is the so called “Phantom Stock Programs”. “Phantom” means that the employee’s share is only a “virtual” one - without owning actual shares of a GmbH.
How are these programs taxed on the level of employer and employee?
With a contractual agreement between start-up and employee, the contracting parties agree, that in case of an exit or dividend payment the employee has a claim to a part, e.g. 2%, of the dividend payment or exit purchase price.
When the start-up pays the pro rata exit purchase price or dividend to the employee, a tax issue realizes: The payment has to be taxed with the progressive income tax rate of up to 55%. Besides that, social security contribution constitutes other payroll related cost (see example below). From a tax point of view these payments are treated like bonus-payments. The start-up has to withhold all employer’s taxes and further has to pay all social security contributions and other payroll related cost.
On the one hand the clear advantage of such programs is, that granting such virtual shares does not trigger immediate taxation, the taxation is only triggered with the realization of the payment to the employee. On the other hand the payments have to be taxed with the progressive income tax tarif (up to 55%) and the special capital-gains tax rate of 27.5% is not applicable in this case.
Attention: Even if the Phantom Share agreement is granted between founders and employee, the company is obliged to withhold and pay all payroll related taxes and contributions in case of an exit.
An example may clarify the overall tax burden:
As you can see, the total cost for the employer is about 109% of the gross payment, the employee receives about 48%. As a result the total tax burden is about 61%! This calculation shows, that Austria has an urgent need of lowering the payroll related cost and contributions.
Tax Tip: The employee should file the employee’s tax assessment as soon as possible to reclaim money from the Financial Authority!
Barbara Hölzl, Managing Director and Tax Advisor ECOVIS Austria & David Gloser, Partner, Chartered Accountant and Tax Advisor