The Case at a Glance
An expat who moved from Germany to the USA and worked there for a subsidiary received stock options. Upon his return to Germany, he exercised a portion of these options, raising questions about the tax treatment of these incomes. The German tax office taxed the incomes not taxed in the USA in Germany, while the Finance Court (FG) had a different opinion. The BFH faced the challenging task of deciding on the correct taxation, considering the Double Taxation Agreement (DTA) between Germany and the USA.
Key Points of the BFH Decision
In cases involving cross-border elements, the BFH’s decision indicates that the potential tax exemption of incomes arising from the exercise of stock options is determined by the professional activity during the period the options were earned. According to Article 15 Paragraph 1 Sentence 1 of the DTA between Germany and the USA from 1989/2008, which refers to a person resident in one of the contracting states, only the residency according to Article 4 of the DTA-USA from 1989/2008 at the time of income receipt is decisive.
Time-Related Benefits and Earning Period
The BFH emphasizes that stock options are generally granted as an incentive for future performance, and therefore, the monetary benefits from exercising the options are proportionally assigned to the earning period. This earning period is defined between the granting of the stock options and their first opportunity to be exercised.
Taxation Rights According to DTA
Regarding the DTA between Germany and the USA, the taxation rights for incomes from exercising stock options are limited if the activity leading to the stock options was performed in the other contracting state. This means that incomes attributable to activity in the USA can be exempted under certain conditions in Germany, considering the progression reservation.
Practical Implications for Expatriates
Expats who receive stock options during their international career must be aware of the tax consequences of a residency change. The BFH’s decision highlights the importance of the residency principle and the principle of income receipt in taxing such incomes. It is crucial to carefully review tax obligations in both countries and make appropriate plans.
Conclusion
The taxation of stock options upon a change of residency involves complex tax law questions, influenced by international agreements and national legislations. The BFH’s recent decision provides important guidelines for practice and underscores the need for careful tax planning for internationally active employees. Expats should, therefore, closely coordinate with tax advisors specializing in international tax law to assess their individual situation, minimize tax risks, and capitalize on optimization opportunities.
