If a company is sold that has agreed a virtual participation with its employees via phantom shares, then this represents compensation. Therefore, such a bonus is subject to both wage tax and social security duties. Thus, the taxation of phantom shares takes place when investing for income tax. Unlike the shareholder, the profit distribution received does not constitute a dividend, but is part of the income from non-self-employment. Therefore, the taxation of phantom shares, instead of via the capital gains tax, is carried out quite regularly with the personal tax rate. However, since the payment of such a premium often accounts for a large share of the annual income, the tax rate for taxation of phantom shares and other income is usually higher than for taxation as a dividend. In addition, the sale of a company under these conditions also excludes the possibility of applying the more favourable part income procedure when taxing phantom shares.

Through phantom shares, shareholders can share their employees in the sales proceeds of their company without actually obtaining the status of shareholder. In this way, the actual shareholders retain all voting rights and thus full control over the company.

Since the virtual participation of employees of a company via phantom shares does not justify a position as a shareholder or co-entrepreneur, one has to take a differentiated look at the tax context when taxing phantom shares. In fact, phantom shares are an indirect, purely virtual stake in the company, but it leads to real income when a sale of the company takes place. In addition, agreements for granting phantom shares are often part of the employment contract. Therefore, the shareholdings paid out as a bonus in the company’s sales proceeds constitute tax income from non-self-employment (§ 19 (1) no. 1 EStG). Thus, the taxation of phantom shares takes place under the income tax.

Taxation of Phantom Shares: Payroll Tax and Social Taxes

Because the premium payment due to a virtual participation counts as remuneration under employment law, it is also relevant when withholding wage tax. Of course, this also leads to a deduction of the solidarity surcharge and, possibly, the church tax. The tax class of the employee is decisive for the amount of the taxes.

In addition to the taxation of phantom shares under the wage tax, such a premium also requires social security. However, because such a bonus can often make up a larger amount, attention must be paid to the different contribution limits.

However, the company also incurs expenses related to the payment of bonuses based on phantom shares. Because the employer’s share of social insurance is also relevant here and must therefore be observed.

As a final point, we want to consider the differences between the taxation of phantom shares of an employee and that of the profit of a GmbH shareholder when selling a GmbH. In doing so, we address both options available to a GmbH shareholder in the taxation, the capital gains tax and the partial income procedure.

3.1. Application of capital gains tax

If a GmbH shareholder sells his GmbH shares, then he can tax the profit made by capital gains tax. Although in principle the savings lump sum must be included, but in the case of a tax of considerable scope, as one can expect from a GmbH sale, this allowance is negligible. It is therefore possible to simplify this by assuming a 25 % capital gains tax. In addition, there is the solidarity surcharge of 5.5%. If church tax also applies, then the percentage is subject to the regulations of the individual federal states. So at most one has to assume a tax of just under 29% when applying the capital gains tax.

Depending on the amount of income of the employee subject to taxation under the assessment, the taxation of his phantom shares may be cheaper or higher than the capital gains tax. This is because the personal tax rate of the taxpayer is decisive. If his income is so low that his personal tax rate is lower than that applicable to capital gains tax, then taxing his phantom shares is more beneficial. However, because a sale of the GmbH very likely leads to a larger bonus, the personal tax rate of the employee is probably usually higher than the combined tax rate, which acts in the capital gains tax.

3.2. Taxation in the partial income procedure

As a rule, the Parts Income Procedure applies to the taxation of the profit from the sale of GmbH shares. This is because a minimum participation of 1% in the GmbH is a condition. Since we assume that the GmbH shareholder is in most cases more than 1% in his GmbH, the part income procedure is the main focus of our comparison series.

In the partial income procedure, 40% of the profit is tax-free. So the other 60% is taxed at the personal tax rate. Since this is usually a high amount, we assume the top tax rate of 42%. It follows that the tax is also in the order of 25 %. Here, too, taxes are added to the solidarity surcharge and, if necessary, to the church tax. However, we deliberately ignore the possibility of applying advertising costs. Finally, the employee would not incur any costs in connection with his phantom shares, which could be considered as advertising costs.

Thus, in this case too, we come to the conclusion that the taxation of phantom shares usually takes place at a higher percentage than in the case of the taxation of a GmbH shareholder.

4. taxation of phantom shares and GmbH shares

Of course, a comparison in the taxation of the profit from the sale of a GmbH to the shareholder and an employee who is entitled to phantom shares can only work to a limited extent. However, the comparison shows how different the taxation of a basically identical tax item can be if the framework conditions differ from one another. The question remains, therefore, whether an approximation of taxation by the legislature makes sense here.

Such a change of law could also convince in other respects. Thus, by means of a tax relief of both the shareholder and the employees, it could act as an indirect support for the creation of companies. Admittedly, these are of course purely hypothetical final ideas, but the favoured taxation of phantom shares would certainly be a conducive incentive, which would be particularly welcomed by young entrepreneurs and their dedicated employees.