• In principle, at the time of exercise, the spread will likely be taxed as regular income and be subject to income tax, social security contributions and other surcharges. It will be up to you to make the necessary withholdings.

• At the time of sale, the gains will be subject to capital gains tax at a rate of 25% (if the grantee holds less than 1% of the capital), plus church taxes, depending on the grantee’s situation. No social security charges will apply here.

A simple way to reduce taxation for the grantee would be to allow the grantee to “early exercise” the stock options (i.e. exercising stock options that have not vested yet). This way, the amount subject to income tax (highly taxed) is smaller. On the other hand, early exercise is riskier for the grantees (because the company business prospects are less clear in earlier stages) and early exercises are not always easy to manage from the company’s perspective in case someone leaves the company before the end of the vesting period.  

NSO

You can definitely grant non-qualified stock options (NSO) to local residents in Germany!

• There are certain tax advantages (Taxation deferral and Exemption of €1,440 on the spread) subject to certain conditions.
  ‍
• The company will be responsible for reporting and withholding taxes and social security contributions at the time of exercise of the stock options.
  ‍
• The grantee will be responsible for reporting any capital gain made when selling the shares.

NSO

You can definitely grant non-qualified stock options (NSO) to local residents working as EoR employees in Germany.

• There are certain tax advantages in Germany, but none of them is applicable in situations where the stock options are granted to EoR employees.
  

• The EoR, as local employer, will be responsible for reporting and withholding taxes and social security contributions at the time of exercise of the stock options.
  ‍
• The grantee will be responsible for reporting any capital gain made when selling the shares.
  

Some EoRs refuse to make the withholdings if you haven’t informed them that you have granted equity awards to the employees, make sure you inform the EoR when you grant the stock options!

NSO

Yes, you can definitely grant non-qualified stock options (NSO) to local residents working as contractors in Germany.

• There are certain tax advantages in Germany, but none of them is applicable in situations where the stock options are granted to contractors.
  

• The grantee will be responsible for reporting the gain made at the time of exercise of the stock options, and any capital gain made when selling the shares.