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Substance participation rights: a possible instrument for employee stock programs

Employee stock programs are a huge topic, especially in the start-up scene. This often raises the question of how the participation should be granted. Usually the founders have the choice between „real“ shares or „virtual shares (e.g. phantom shares etc.).

A hybrid form could be the granting of a so-called substance participation right: the employee concludes a profit participation right agreement with the start-up company.

This agreement regulates the amount of the percentage participation in the start-up (as a genuine substance participation). The issuance of a substance participation right takes place via a capital contribution, similar to a capital increase at a GmbH.

The big difference to real shares is that the beneficial owners of the participation rights do not have the right to vote in the general meeting. The participation in the goodwill and in the hidden reserves is, however, identical with the participation of a real shareholder.

There are also no tax differences to a real GmbH participation: dividend payments are finally taxed at 27.5 %; any exit profits (e.g. caused by the sale of the  participation right) are subject to the 27.5 % special tax rate at the level of the holder of the profit participation right.

However, if the profit participation rights are transferred to the employee at a reduced price, tax issues also arise with regard to taxation of benefits in kind.


Substance participation rights can be an alternative to other possibilities for employee stock programs in start-ups: without voting rights for the holders of profit participation rights, same taxation as for GmbH shares.


Barbara Hölzl, Managing Director and Tax Advisor ECOVIS AustriaDavid Gloser, Partner, Chartered Accountant and Tax Advisor