In its ruling dated May 28, 2026 (S 2332.1.1-29/4 St36), the Bavarian State Tax Office issued a statement regarding the tax treatment and taxation of so-called “hurdle shares” in management stock ownership plans.
Manager and employee stock ownership plans can be structured in a wide variety of ways. Essentially, these can be divided into genuine equity interests—such as granted shares, stock options, and limited liability company (GmbH) shares (ESOP for short)—or into synthetic equivalents via virtual or contractual equity interests (VSOP for short). So-called hurdle shares fall into the category of genuine company interests, in which managers or employees become full-fledged shareholders or partners under the law. Their name derives from their inherent “hurdle” or value threshold. This is because holders of hurdle shares typically join the company without making a significant capital contribution but only participate in future increases in the company’s value starting from the date of their entry.
From a technical standpoint, hurdle shares are implemented in (notarized) shareholder agreements separate from the original articles of incorporation and, under corporate law, are structured as a negative liquidation preference. Accordingly, in the event of liquidation or a sale of the company, the value of the company generated prior to the entry of eligible managers is to be allocated in full to the existing shareholders and, in many cases, to the founders or investors. Original company value generated after managers join the company also benefits any hurdle share shareholders. The proper and accurate valuation of the company’s value at the relevant point in time plays a crucial role here.
In the absence of explicit tax law provisions applicable to this area, the tax treatment of hurdle shares in advisory practice has thus far been based on individual income tax rulings and binding rulings grounded in prior Federal Fiscal Court (BFH) case law (see BFH, Dec. 14, 2023 – VI R 1/21, BStBl. II 2024, 387; BFH, Dec. 14, 2023 – VI R 2/21, BFH/NV 2024, 386; BFH, Oct. 21, 2025 – VIII R 13/23, BStBl. II 2026, 215; BFH, Nov. 25, 2025 – VIII R 11-12/23, BFH/NV 2026, 252; BFH, Oct. 21, 2025 – VIII R 14/23, BStBl. II 2026, 353), which gave rise to discussions regarding taxation at the time of issuance as well as at exit. This is because, in the case of income subject to payroll tax resulting from the receipt of hurdle shares, there would, in case of doubt, be so-called “dry income” for payroll tax purposes, which would be subject to payroll tax or income tax of up to 45% plus the solidarity surcharge without any cash inflow to the holder. Even at the time of exit, the classification as salary income or capital income would have a significant effect on the applicable tax rate (withholding tax or the partial income procedure).
Therefore, the recent and first-of-its-kind ruling by the State Tax Office dated May 28, 2026 (Ref. No. S 2332.1.1-29/4 St36) is very welcome in light of the need for a legally sound structure for hurdle shares. The Bavarian tax experts at the tax administration clarify in this ruling that, on the one hand, the issuance of hurdle shares and, on the other hand, their economic return upon exit or liquidation must be treated separately for both legal and tax purposes. Furthermore, the issuance of hurdle shares, provided they are valued appropriately and accurately, is not to be considered a non-cash benefit subject to income tax. In addition, exit proceeds from hurdle shares are generally to be classified as income from capital assets, provided that the contractual provisions do not contain predominantly value-determining links to the employment relationship. As long as the managers are the beneficial owners of their hurdle shares, can exercise the usual corporate rights, do not receive non-market-based value-added benefits, and the economic substance of the hurdle shares does not correspond to that of an employment contract (e.g., no compensation in the event of illness), the exit proceeds from hurdle shares constitute capital income subject to the flat-rate withholding tax or the partial income procedure.
An accurate and appropriate valuation of the hurdle—or the underlying company valuation—and its documentation play a central role in the issuance and exit processes. Individual financing rounds or share sales, as well as valuation reports prepared by certified public accountants (in accordance with IDW S 1), regularly provide a reliable basis or approximation.
The ruling reaffirms the approach taken in existing practice and enhances legal certainty for companies and beneficiaries of management participation programs.
