More and more companies are retaining their employees by granting them genuine shares in the company. A particular form of this is known as ‘hurdle shares’. The Bavarian State Tax Office (BayLfSt) has now clarified, in a ruling dated 28 May 2026, how these shareholdings are to be treated for tax purposes.
What are hurdle shares?
Hurdle shares are a form of employee share ownership with what is known as a ‘negative liquidation preference’. This may sound complicated, but at its core it is a simple concept: the employee is only meant to share in the company’s future capital appreciation, but not in its existing enterprise value.
Technically, it works as follows: the current enterprise value is set as the threshold. Up to this threshold, distributions and capital gains accrue exclusively to the other shareholders. Only when the sale of the company or a distribution exceeds this threshold does the employee benefit from their hurdle shares.
A specific example of a calculation
An employee acquires ten shares at 1 euro each, totalling 10 euros. The actual value of one share is 10,000 euros. At the same time, a negative liquidation preference of 9,999 euros per share is agreed. If the company is subsequently sold for 15,000 euros per share, the employee will receive only the amount above the threshold per share, i.e. 5,001 euros. With ten shares, this amounts to 50,010 euros.
No remuneration is payable on the issue of shares
Whether the issue of shares gives rise to a taxable benefit in kind depends on whether the employee acquired the shares at a reduced price. The decisive factor here is the actual value of the shares, taking into account the negative liquidation preference. This significantly reduces the fair market value.
In the example above, after deducting the threshold of 9,999 euros, the fair market value amounts to exactly 1 euro per share. If the employee pays this amount, there is no reduction in price. A benefit in kind – and therefore wages – does not arise at this point.
When are deferred earnings taxed as wages?
A more interesting question is how to treat subsequent gains from dividends or the sale of a business. The BayLfSt makes it clear that the negative liquidation preference alone does not mean that these proceeds are automatically treated as wages. They are, in principle, income from a capital interest.
However, wages may be payable if specific circumstances arise. The agency specifically states:
- The employee is not the beneficial owner of the shares within the meaning of Section 39(2)(1) of the German Fiscal Code.
- The investment was not legally valid or was not actually carried out as agreed.
- The employee receives more than was agreed under company law.
- The sale of the stake is not taking place at market price.
- The participation has no independent economic substance, for example because revenue is only intended to be generated when the work is actually performed.
The latter plays an important role in practice. If the proceeds from the shareholding are payable even when the employee is absent due to illness, this, according to BayLfSt, indicates that the shareholding has an independent economic substance. The mere fact that the shareholding ceases upon termination of the employment relationship does not in itself make the proceeds part of the employee’s wages.
What does this mean for those affected?
Any employee or managing director who is participating in a hurdle-share scheme, or who is planning such a scheme for their company, should have the tax treatment carefully reviewed. The distinction between taxable wage income and tax-favoured capital gains depends heavily on the specific terms of the contract. Individual tax advice is strongly recommended in such cases.
Source: BayLfSt, Decision of 28 May 2026, Ref. 2332.1.1–29/4 St36
Source: Haufe: Tax
This article was created with the help of AI and has been editorially reviewed.
