Ask a tax advisor on the topic of Capital assets

Taxation of stock options in non-listed foreign companies

January 13, 2013 | 35,00 EUR | answered by Oliver Burchardt

I work freelance in Germany for a non-listed company in Denmark. In March 2009, I received options to purchase xxx shares of the company at a price of xxx DKK. Later that same year, the company relocated to the USA, with the Danish company becoming a subsidiary of the American company and my options being converted to options on shares of the American parent company, which have the same terms.

The options are non-transferable and are subject to my contractual relationship existing until the option redemption date. The options can be redeemed from April 1, 2013, until March 1, 2019.

Now, I am wondering what the tax consequences would be if I were to redeem the options. As I understand it, the capital gain on the stocks between the option price and market price of the stocks must be taxed as a fringe benefit. But since the company is not listed, I might not be able to easily sell the stocks I could acquire - they would only truly have value for me if the company were to be sold at some point or if the company were to go public. Nevertheless, I would like to redeem the options as soon as possible to prevent them from expiring (either due to the expiration of the deadline in 2019 or the termination of my contractual relationship).

Now I am faced with two problems:

-Since the stocks are not traded, there is no real market price. How should the amount of the taxable capital gain be determined?

-If the taxable capital gain were to be set high, the resulting tax burden could far exceed my assets. However, since the stocks are not traded on the stock exchange and therefore not easily sellable, I might be unable to pay this tax burden and therefore go bankrupt - I might not be able to redeem the options at all. Is that possible?

Oliver Burchardt

Dear inquirer,

Thank you for your inquiry, which I am happy to answer as part of an initial consultation.

Please note that the tax assessment is based on the information provided. Adding, changing, or omitting information can potentially alter the result, possibly significantly.

In a ruling from 2007 (file no. VI R 72/05), the Federal Fiscal Court (BFH) decided that the valuation of shares in non-listed companies must be done according to § 11 (2) BewG.

Therefore, in the event of exercising the options, a company valuation must be carried out either using the earnings value method mentioned in the law or another recognized method (e.g. the Discounted Cash Flow method) by you to determine the value of equity and therefore the value of your shares. This will quickly become a very complex matter, for which you bear the burden of proof.

The amount of tax owed only results from the difference between the market price of the shares and your purchase price multiplied by the tax rate. Even if this leads to economically significant consequences for you, it does not affect the amount of taxes at all. There are certainly ways to reach an agreement with the tax office in cases of existential tax burdens (e.g. through deferrals).

Given the complexity of this topic, I can only advise you to seek detailed tax advice before making a decision on exercising the options. It also depends on the contract structures and how the company valuation, which determines the market price, can be done. Such a forum cannot replace such detailed advice in your case, especially when potentially significant tax debts are involved.

Best regards,

Oliver Burchardt
Tax advisor