Austria: Employee Incentive Schemes In Austrian SME And Start-Ups

Incentivizing employees to increase their performance is a basic management principle. Already decades ago, theory and practice have started to use incentives that align employees' with shareholders' interests to solve the principal-agency conflict described in corporate finance theory. One way to achieve this is to grant employees a participation in the shareholder value. Such schemes are commonly referred to as Employee Stock Ownership Plans (ESOP). ESOP are now as popular as never. There are various ways to implement such programs. The following paragraphs provide a brief overview on corporate, tax and commercial cornerstones of ESOP relating to small and medium enterprises (SME) and start-up companies in Austria in the most common form of an Austrian limited liability company (GmbH).

Why ESOP in SME and start-ups?

ESOP try to align employees' interests with the interests of the shareholders, thus to maximize the shareholder value. Being non-cash remuneration further increases the attractiveness of ESOP for companies. In certain structures, employees even have to purchase their own shares, thereby generating positive cash-flows for the company. These and other factors make ESOP a viable employee incentive scheme especially for early-stage start-up companies or established SME.

Below, we present common mechanics and tax issues of ESOP in Austria, followed by a short analysis of the most typical models: the direct or indirect ownership in real shares and contractual claims in the form of phantom stock.

Common mechanics of ESOP for SME and start-ups

The basic idea for ESOP in start-up companies and SME is that employees receive a participation in the (potential) future success. Employees take part in future value increases of the company by receiving a monetary benefit if the company finally succeeds.

The value of start-up companies or SME is not immediately available as is the case with publicly traded companies. Therefore, only certain models are appropriate for such companies. Stock option or virtual stock option plans generally require a reference share price and are for that reason not suitable. Employees of companies not publicly traded may therefore receive either a real share (directly or indirectly) or a virtual share in the company. To bond the employee to the company, such interests are often subject to future conditions, e.g. the continuous employment or a vesting period during which the interests fully accrue over time.

The realization of such future benefit generally depends on a predetermined trigger event. Since the interests in the company have to be valued, such trigger event is often an exit scenario where a change of control or a comprehensive asset sale of the company occurs at which the value of the entire company becomes available – in the form of the purchase price for the company's business or its shares. The amount of the benefit realized by the employee for such interest is in this case linked to the exit price of the (other) shareholders, resulting in an alignment of interests of the employee with the shareholders.

Companies may grant such interests only to executives or crucial employees. However, the inclusion of certain (but not all) employees into ESOP implies the risk of alleged dis-crimination. Consequently, also other employees could request being accepted to such scheme. Hence, the selection of beneficiaries under the ESOP should be objectively justified and documented thoroughly.

Common tax issues

Any benefit received by the employee upon grant leads to taxable employment income subject to progressive income tax rates (up to 50%1 or 6% tax rate on bonus payments). Such benefit equals the difference between the consideration paid (if any) and the market value of the interest at the time the employee receives beneficial ownership of the interest.

Austrian tax law provides for an exemption for benefits received under an ESOP (ESOP exemption) in case the employee receives shares in the employer or a related group member of the employer (each being a corporation or cooperative). Any taxable benefit from such grant may be exempt from income tax up to EUR 3,000 annually if the ESOP and the employee meet certain requirements.2

Any (additional) benefit received after the grant date or at the trigger event is also taxa-ble and either subject to progressive income tax rates or the preferential investment in-come tax rate of 27.5%3, depending on the underlying interest.

Apart from taxable income of the employee, there are also other tax-related criteria not dealt with in this article, which determine the attractiveness of an ESOP. Further tax is-sues may be whether benefits to the employee are deductible by the employer for income tax purposes and whether the set-up or execution of the ESOP triggers additional taxes.

Real shares in a GmbH

The transfer of real shares in a GmbH requires the form of a notarial deed, transfer restrictions in the articles of association (AoA) must be complied with. Employees can be granted beneficial ownership in new shares (via capital increase) or existing shares (from current shareholders); each option requires the involvement of (usually at least the majority of) shareholders and a notary. The level of complexity at granting existing shares increases with the number of shareholders, in particular if they are expected to decrease their shareholding proportionally. Employees as shareholders are entitled to certain statutory information and control rights. These rights make ESOP in the form of real shares in a GmbH for the majority shareholder(s) by far less practical than, for instance, in a stock corporation with publicly traded shares and more limited minority rights.

Being a shareholder does not automatically make the employee participate in any exit profit. In order for the employee to get a share of the pie, it must be ensured that he can sell his share at the same conditions as the other shareholders. For this purpose tag-along rights or put options can either be included in the company's AoA or in a shareholders agreement. The AoA's benefit of enforceability vis-à-vis third parties must be traded off against the disadvantage of publicity (in the companies register).

From an income tax perspective, benefits received by the employee at grant may qualify for the ESOP exemption. Any (remaining) taxable benefit is subject to progressive income tax rates. Subsequent income from holding (dividends) and from transferring the shares at exit (realized gains) results in investment income being generally subject to the preferential 27.5% tax rate.

Indirect (pooled) shareholding through a partnership

A further way to structure an ESOP – and which we see becoming more popular – is to pool employees' interests in a pure holding company (for tax reasons), which in turn owns shares in the GmbH. Thus, the employee holds shares in the operating GmbH only indirectly. For the following reasons, the holding company is typically a limited partnership: limited liability of employees (as limited partners), limited control rights of the employees towards the GmbH (through interposition of the partnership), transparency of the partnership for income tax purposes (treating employees under the ESOP as if they would hold shares in the GmbH directly).

The limited partnership requires at least one general partner, which is responsible for the management of the partnership. In order to facilitate entry and exit of employees to and from the ESOP, a "master limited partner" can pool, distribute to and redeem partnership interests from employees.

As with direct shareholders, being an indirect shareholder does not by itself create a participation in an exit profit. To realize any benefits in this case, the AoA of the GmbH or a shareholders agreement on the level of the GmbH can foresee tag-along rights or put options in favor of the limited partnership. Any profit of the partnership will be allocated to the employees as limited partners.

Income tax consequences for employees as beneficial owners of the participation are comparable to holding direct shares. Any benefit received at grant date is subject to progressive income tax rates. However, it is not entirely clear whether the grant of such participation qualifies for the ESOP exemption, since it may require a direct shareholding in the GmbH or a related group member. Subsequent income from holding (dividends) or transferring the shares (realized gains) results in investment income being generally subject to the preferential 27.5% tax rate.

Phantom stock

In the case of phantom stock (also called virtual shares), the employee does not get corporate ownership rights in the company. Instead, he receives a contractual claim against the company which becomes due upon a trigger event and the amount of which is based on the value of the company.

A phantom stock plan is implemented by an act of the managing directors, backed by a shareholder resolution (especially if the shareholders are obliged to fund the plan). To evidence the contractual right and to symbolically create phantom stock, companies typically issue physical certificates; these are, however, not tradeable securities. The issue of phantom stock requires no upfront payment by the employee.

Commercial terms under phantom stock plan can be detailed almost at will: vesting/cliff periods and good/bad leaver events are simply included in the plan's terms and conditions and determine if, when and to what extent payments will eventually fall due. In order to fund the payments in case of a share sale exit scenario (where not the company, but its shareholders receive the proceeds), the selling shareholders must be obliged to contribute part of their sale proceeds to the company. Payment streams may be short-cut if the purchaser is instructed to pay directly to the company. Such payments result in final shareholder contributions at exit.4

From an income tax perspective, the employee does not receive any benefit at the time of the grant, as she may not dispose of her claims under the phantom stock plan. The employee realizes a benefit only at the time she receives a cash settlement upon the trigger event. Such benefit is not exempt from income tax under the ESOP exemption, since no real shares are transferred. Any benefit is subject to progressive tax rates.

Summary of "Pros" and "Cons"

In case of real shares, the benefits of tax efficiency for the employee must be weighed up against the drawbacks regarding implementation and manageability. To the contrary, phantom stock plans do not provide tax efficiency for the employee, but are easier to implement and to manage. The indirect shareholding takes a middle position between direct ownership in real shares and phantom stock.

Complexity of implementation Manageability Tax efficiency for employee
Real shares - - +
Indirect shareholding through partnership ~ ~ ~
Phantom stock + + -


[1] As of 1 January 2016, the top tax bracket for income tax is temporarily increased from 50% to 55% for income above EUR 1 million until 2020.

[2] Requirements: (1) The employer grants such benefits to all employees or a certain group of employees, (2) in case the shares are securities, they must be deposited with a domestic credit institution or administered by an entity determined by both the employer and the works council and (3) the employee holds such shares for a period of at least five years, if he has not disposed of the shares at or after termination of the employment contract.

[3] As of 1 January 2016, the preferential investment income tax rate increased from 25% to 27.5%.

[4] After 31 December 2015, Austrian capital contribution tax (equalling 1% of the contribution) is not levied any longer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions