The tax-free allowance for employee equity: who gets it, for what, and how the share is valued

A software company in Leipzig wants to give each of its forty employees a small share in the company at year end, valued by an expert at 2,600 €. The managing director expects a tax-free gesture. The payroll clerk does the sums differently: 2,000 € stay exempt, 600 € are wages, and whether the circular also reached the field staff decides the allowance for all forty.

A benefit arising from employment

Anyone given a share, a GmbH stake or a profit-participation right by their employer for nothing or below value gets something with a money value. Income tax law treats such goods as receipts when they arrive within one of the categories of income. Here the category is obvious: the share comes because the person works in the business.

So the benefit is, to begin with, wages like any other benefit in kind. It is subject to wage tax withholding in the month in which the share passes. That no euro appears on the salary account changes nothing; it only makes things more awkward, because the tax has to be paid out of the rest of the salary.

The legislator still wants to encourage employee ownership and has built two tools for it. The first is an annual allowance that exempts part of the benefit outright. The second is a deferral of taxation for young and smaller companies. This module deals with the allowance, the second module with the deferral.

Both tools start from the same point: the benefit, meaning the gap between the value of the participation and what the employee pays for it. A transfer at full value produces no benefit and so needs no exemption. Only the discount or the gift creates taxable wages.

This topic must be kept strictly apart from capital-formation payments. There the business pays money into a savings contract and support comes through a bonus; the course on capital-formation payments explains it. Here the subject is the participation itself, which the business hands over directly.

The allowance in § 3 no. 39

Under § 3 no. 39 of the Income Tax Act, in the version read on 23 September 2026, the benefit is tax-free to the extent that it does not exceed 2,000 € in total in the calendar year. This is an allowance and not an exemption threshold: whoever goes above it pays tax only on the part beyond the limit.

The amount applies per employee and per calendar year. It is therefore not used up over the whole period of employment but becomes available again every year. A plan that hands out a share each year can use the allowance in full year after year.

The words in total carry a practical meaning. If someone receives two participations in the same year, say shares in March and a profit-participation right in November, both benefits are added together. The allowance is granted once, not per award.

The exemption requires a current employment relationship. Someone who has already left and still receives shares afterwards under an old promise falls outside the wording. Conversely, any ongoing employment will do, whatever its scope, part-time work included.

Because the benefit is tax-free, it does not appear as a taxable item in wage tax withholding. The employer still has to record it: § 41 of the Income Tax Act requires the tax-free payments to be entered in the payroll account as well. An audit can thus trace who received which share and when.

From the business's point of view the exemption is a matter of design. If the benefit lies just above the allowance, a small payment by the employee can remove the taxable remainder. Whether that is worth doing depends on how high the wage tax on the remainder would be and how much administration it causes.

Open to everyone with one year of service

The exemption has a condition that concerns the plan as a whole rather than the individual recipient. The participation must be open at least to all employees who, at the time the offer is announced, have worked in the company without interruption for one year or longer.

This is a floor. The business may draw the circle wider and include newcomers too. It may not draw it narrower: an offer only to managers or only to one department does not meet the condition, even if some of the recipients have been there for a long time.

The reference date is the announcement of the offer, not the later transfer. Someone who has been in the business for eleven months on the day of the circular does not belong to the mandatory group. Including them anyway does no harm; leaving them out keeps the exemption intact for the others.

Being open does not mean that everyone has to accept. It is enough that every eligible person had the opportunity. Anyone who declines does not block the exemption for the others. That makes it all the more important to address the offer demonstrably to everyone, for instance through a dated circular.

The word uninterrupted deserves a second look. A colleague who was rehired after a dismissal counts her service only from the new contract. How longer dormant periods within a running contract are to be treated is not said in the statute; in case of doubt, a binding wage tax ruling from the tax office of the establishment helps.

The tax office checks the condition at the employer, not at the individual employee. If it fails, the exemption falls away for the whole plan and the benefit becomes fully taxable wages for everyone. For payroll this is a liability risk that clean documentation avoids easily.

Which participations count, and which do not

The allowance does not refer to a list of its own but to the Fifth Capital Formation Act. Covered are the forms in § 2(1) no. 1 under letters a, b and f to l, plus subsections 2 to 5. The details of these investment forms are dealt with in the course on capital-formation payments.

For practical purposes an overview of the covered letters is enough. What they have in common is that they give a stake in the employer's business or create a secured claim against it:

• a) shares issued by the employer or listed shares
• b) convertible bonds and profit-sharing bonds
• f) profit-participation certificates issued as securities
• g) member balances in a cooperative
• h) stakes in the GmbH that is itself the employer
• i) silent partnerships in the employer's business
• k) loan claims against the employer secured by a bank or an insurer
• l) profit-participation rights in the employer's business without a certificate

What is missing stands out. Letter c, meaning units in investment funds, is excluded. An employer who gives fund units to its staff therefore cannot rely on § 3 no. 39. The allowance supports a stake in one's own business, not investing in general.

The participation must be in the employer's business. A group company within the meaning of § 18 of the Stock Corporation Act also counts as such, meaning a company combined with others under unified management. Shares in the group parent given to employees of a subsidiary are therefore covered.

Some letters impose extra requirements that the Capital Formation Act regulates itself. Profit-participation rights, for instance, may not promise repayment at nominal value, and in a silent partnership the employee must not become a co-entrepreneur. Anyone setting up a plan checks these features against the statute, not against a summary.

Subsection 2 of the Capital Formation Act, to which the provision also refers, treats securities of a controlling company like the employer's own. Shares, convertible or profit-sharing bonds and profit-participation certificates of the parent company thus count as if the employer had issued them itself.

Fair market value: stock price, comparable sale or earnings value

For ordinary benefits in kind, § 8(2) of the Income Tax Act prescribes the usual final price at the place of supply, reduced by usual discounts. For capital participations, § 3 no. 39 sets its own rule: the fair market value is used. That is a term of the Valuation Act, which therefore dictates the next steps.

Under § 9 of the Valuation Act, the fair market value is the price a sale would fetch in normal business dealings, given the nature of the asset. Unusual or personal circumstances are disregarded. These expressly include restrictions on disposal that arise from the person of the holder.

That has an uncomfortable consequence. A lock-up that binds only the employee may be disregarded as a personal restriction on disposal and then does not reduce the fair market value. Anyone who wants to push down the value of a locked share with a flat discount should clear it with the tax office first.

For listed shares valuation is simple. § 11(1) of the Valuation Act takes the lowest price quoted on the valuation date on the regulated market. If there is no quotation on that day, the last price within the 30 days before applies. The same holds for the open market.

A GmbH stake or a share in an unlisted company is harder. Here § 11(2) first derives the value from sales between unrelated parties that took place less than one year ago. In practice a funding round with an outside investor is the most important such sale.

Without such a comparable sale, the value is determined by reference to earnings prospects or with another recognised method that is also customary outside tax law. The method to use is the one a buyer would base the price on. The net asset value, meaning assets less debts, sets the floor.

The benefit is then the fair market value found in this way, less whatever the employee pays. With a gift it equals the fair market value. With a discounted purchase it is the difference. Only then is the allowance applied to that difference.

Above the allowance: wage tax on wages without cash

Whatever exceeds the allowance is taxable wages at the time of transfer. The employer must withhold wage tax on it although it pays out no matching amount of money. The benefit arrives once and belongs in the wage tax withholding for the month in which the share passes.

If the salary is not enough to cover the tax, § 38(4) of the Income Tax Act sets the order. First the employee must put the shortfall at the employer's disposal, or the employer holds back other pay. If neither works, the employer notifies the tax office of the establishment, which then claims the tax from the employee.

A common question is whether the monthly exemption threshold of 50 € for benefits in kind applies on top. By its wording it covers benefits in kind valued at the usual final price under § 8(2) sentence 1. For participations, however, § 3 no. 39 prescribes the fair market value.

Anyone who wants to combine both exemptions is therefore relying on an interpretation rather than on the statute. It is safer to plan the 2,000 € allowance as the only exemption for the participation and to keep the small threshold free for other benefits in kind such as vouchers.

§ 3 no. 39 says nothing about social security; it follows its own rules, which this course does not cover. Anyone planning a scheme has the contribution consequences checked separately before presenting employees with a calculation that only looks at tax.

If the share is sold later, a new story begins. Depending on the size of the holding, the gain belongs to business income under § 17 or to capital income under § 20 of the Income Tax Act; the course on capital income explains the taxation. The second module shows why the acquisition value matters there.