Convertible bonds are a special form of investment and also an option to involve employees in the employer’s company. Their tax treatment is quite complex, which is simply due to the “multi-stage” design of convertible bonds. In addition, the underlying law has fundamentally changed with the introduction of the withholding tax in 2008.
Principle 1: What is a convertible bond?
The term “convertible bond” is initially composed of two components, “bond” and “conversion”. Both are to be assessed separately, since the respective investor or investor first issues a bond. This can be converted later, usually at a certain time, into shares in the respective company. Only with the second step do convertible bonds differ from regular bonds.
1.1. Part one: The bond (bond)
In the case of a bond, a private or institutional investor lends the issuer of the bond a certain amount for a certain period of time. For this purpose, he receives interest, which either become due on an ongoing basis, at certain intervals or only at the end of the agreed term. In principle, the bond is thus a long-term loan, which the investor grants the respective company against payment of interest.
Bonds can have considerable maturities, for example those of 30 years. In these cases, it is customary to pay out the interest due once a year or every two years. If this were not so, the compound interest effect would create an ever higher payment burden for the creditor. Because the outstanding right to interest payment is in principle another loan that the investor grants the company.
Claims arising from bonds, i.e. interest, are other capital claims within the meaning of § 20 (1) number 7 EStG. The reason for this is that an investor receives consideration in the form of interest payments for the temporary provision of capital. If the bond is sold, § 20 (2) sentence 1 number 7 EStG applies. Here, too, there is income from capital assets.
Part Two: The Conversion Option
Only part two makes convertible bonds what they are – a bond that the investor can later convert into shares (shares or other investments) in the issuing company. In principle, various conditions apply, which can differ significantly from convertible bond to convertible bond:
This article does not replace tax or legal advice in an individual case. Facts, current law, jurisdiction, documentation and implementation remain decisive.