I INTRODUCTION

The term executive typically relates to the members of management boards of stock corporations and the managing directors of limited liability companies (management board members), as well as to (regular) employees with management functions within the meaning of the German Works Constitution Act (executive employees). While the latter group is largely subject to labour law legislation in Germany, management board members are not considered employees, with the consequence that the statutory rules, with some exceptions, do not apply to them.

This lack of regulation allows a discernible degree of flexibility as far as the terms of employment of management board members are concerned, and has led to a certain market standard for executive remuneration. In the context of the worldwide financial crisis of 2008 and its implications in the subsequent years, however, features of executive remuneration, such as an over-proportional variable and share-based compensation, over-generous retirement benefits and severance payments, became the focus of the general public and German legislator's attention. This resulted in the implementation of new corporate governance and regulatory rules that are supposed to ensure that executive remuneration is better aligned to the situation and benefit of the employing company and that apply, in particular, to management board members of stock corporations as well as executives of banks, financial services firms and insurance companies (see Sections VI and VII, for further details).

In Germany, executive remuneration is usually stipulated in an individual service or employment agreement between an executive and the employing company. Certain compensation elements, such as short-term and long-term incentive payments and retirement benefits, are commonly addressed in a side agreement or a general plan applying to a broader group of executives.

Executives are typically not represented by works councils2 or trade unions.

II TAXATION

Under German domestic law, German tax residents (i.e., individuals, including non-German citizens, who have a residence or habitual abode in Germany) are generally taxable on their worldwide income. By contrast, persons who are considered non-residents from a German tax perspective are only taxed on income received from German sources; such German-sourced income generally includes executive remuneration attributable to services performed or used in Germany. In certain situations, for example temporary assignments or deferred compensation that is allocable to services performed both within and outside Germany, Germany's taxation rights may be limited under domestic law or applicable tax treaties.

This section summarises certain German income tax rules that generally apply to German tax-resident executives and non-German tax-resident executives in connection with services performed or used in Germany.

i Qualification of income

The German Income Tax Act (ITA) does not provide for a special tax regime applicable to executive remuneration. The taxation of executive remuneration depends on whether the relevant compensation item qualifies as:

  1. income from dependent personal services (Section 19 of the ITA, employment income);
  2. income from independent personal services (Section 18 of the ITA);
  3. business income (Section 15 of the ITA); or
  4. investment income (Section 20 of the ITA).3

In most cases, executive remuneration qualifies as employment income.4 Exceptions may apply, for example if executives are not entitled to continued pay (in the event of sickness, holiday, etc.), work for various enterprises, are entitled to more or less independently determine their place of work and working hours, or are not subject to instructions. In such cases, an executive's compensation may qualify as income from independent personal services. If executives qualify as co-entrepreneurs in their enterprise, their compensation may qualify as business income (relevant in cases where a German employer qualifies as a partnership from a German tax perspective). Where executive remuneration does not qualify as employment income, the income is subject to tax rules differing from the principles that are described below. In such cases, the income should generally not be subject to wage withholding tax or social security charges, but may be subject to trade tax. Further, the services rendered by executives may be subject to value added tax (VAT).

ii Taxation of employment income

Employment income, including salary, benefits in kind, bonuses, severance payments and deferred compensation, is generally taxed at the ordinary progressive income tax rate with a maximum rate of 45 per cent5 plus 5.5 per cent solidarity surcharge thereon (in total 47.475 per cent) and, if applicable, church tax.6 Executive remuneration paid for several years, for example income received under long-term incentive schemes with a vesting period of more than one year, may benefit from reduced tax rates applicable to extraordinary income.7

Employers are required to withhold applicable income taxes from the cash salary paid to resident and non-resident executives (wage withholding tax) and remit the amounts withheld to the German tax authorities.8 Resident executives are in many cases required to file an annual income tax return. The wage tax withheld is credited as a prepayment against the assessed income tax. By contrast, the tax liability of non-resident executives is generally satisfied with the deduction of the wage withholding tax. Employers are liable towards the German tax authorities for underwithheld wage taxes; this also applies in cases where a third party pays the compensation.

iii Social security charges

In general,9 employment income is subject to social security charges (pension insurance, unemployment insurance, health insurance, long-term care insurance)10 if and to the extent the applicable contribution thresholds are not exceeded.11 The employee's share of the social security charges is withheld by the employer (together with the wage withholding tax). Special rules apply to employees temporarily assigned abroad: Germany has entered into various social security treaties with countries in and outside the European Union; in addition, a number of EC regulations12 must be observed.

iv Capital gains

Capital gains are not subject to wage withholding tax or social security charges and may benefit from special tax rates. For example, capital gains derived from the sale of shares13 and various other financial instruments may qualify as investment income (Section 20 of the ITA). Investment income is generally subject to a flat tax rate of 25 per cent (plus 5.5 per cent solidarity surcharge thereon and, if applicable, church tax). As an exception to this rule, capital gains from the sale of shares are generally taxed in accordance with the partial income system (Section 3 No. 40 of the ITA), under which only 60 per cent of the capital gains are subject to tax at ordinary progressive income tax rates if, at any time during the five years preceding the sale, the executive held a substantial participation of at least 1 per cent in the share capital of the relevant company (Section 17(1) of the ITA). By contrast, employment income does not benefit from the flat tax regime applicable to investment income; it does not qualify for the partial income system. Therefore, it is important to distinguish between the benefits in kind received by an executive that qualify as employment income and capital gains derived subsequently.

For example, if an executive purchases a small amount of stock from his or her employer at a discount granted by the employer (but otherwise receives beneficial ownership of the fully unencumbered stock at that point), and several years later the stock is sold at a gain, then the executive derives a capital gain from the sale. Note, however, that the benefit resulting from the originally discounted acquisition price qualifies as employment income (and is taxable at the time of the purchase, subject to wage withholding tax, etc.). When later realised as a result of the sale, the difference between the sales price and the fair market value of the stock at the time of its acquisition qualifies as investment income subject to the flat tax regime (assuming that the partial income system does not apply).14

v Time of taxation

Executives are generally required to tax their income on a calendar-year basis. Employment income is usually accounted for on a cash basis (i.e., executives are generally not required to pay income taxes on employment income until they have actually received a benefit in cash or in kind). Consequently, the mere entitlement to receive employment income (even if the respective claim of the executive against the employer is due and payable)15 generally does not result in a taxable event. The cash-based accounting method can be used for tax-planning purposes (e.g., to reduce progressive tax rates, one-time payments can be shifted to calendar years where the expected overall income is comparably low, for example in a retirement scenario).

vi Non-resident executives

Non-resident executives are subject to tax in Germany if their compensation is attributable to services performed or used in Germany.16 Compensation received in the capacity of a general manager or member of the management board of a company managed in Germany is always subject to tax in Germany.17 Generally, the tax liability is satisfied with the deduction of the wage withholding tax.18 Non-resident executives who are tax-resident citizens of another EU Member State or an EEA country may apply for a tax assessment.19 The limited tax liability of non-resident executives results in certain disadvantages compared with the unlimited tax liability of resident executives. Most importantly, non-resident executives are not entitled to the splitting tariff (i.e., the lower tax rates applicable to married couples filing jointly)20 or an allowance for children.21 Non-resident executives who are citizens of another EU Member State or an EEA country, and who have to tax at least 90 per cent of their income in Germany, may consider filing an application for a deemed unlimited tax liability to benefit from the splitting tariff or an allowance for children.22

Capital gains derived by a non-resident executive from the sale of shares in their German-resident employer are only subject to tax in Germany (in accordance with the partial income method) if the executive held (or is deemed to hold) a substantial participation of 1 per cent or more at any time during the five years preceding the sale (see Section II.iv) and is not protected under an applicable tax treaty.23

vii Allocation of income in cross-border situations

Executives who are or become tax-resident in Germany (because their residence or habitual abode is located in Germany) are generally liable for German income tax on their worldwide income.24 Executives who in addition maintain a permanent residence or habitual abode outside Germany (and who may, because of these or other criteria be treated as tax residents under the domestic laws of one or several other countries) may be protected from multiple taxation if a double tax treaty applies. Tax treaties entered into by Germany generally include a tie-breaker provision pursuant to which the tax residency of an individual may, inter alia, be determined by the individual's centre of vital interests.25 Executives should therefore carefully monitor the development of their personal and economic ties with Germany and other countries.

Germany's tax treaties generally include a 183-day clause governing the allocation of taxation rights in respect of employment income. In principle, employment income may only be taxed in an executive's state of residence (to be determined in accordance with the aforementioned tie-breaker provision) unless the employment is exercised in the other contracting state.26 In this case, the employment income is taxable in the other state where the employment is exercised.27 As an exception to this rule, employment income is taxable only in the executive's state of residence if the conditions of the 183-day clause are met.28 The application of the 183-day clause by and large requires that the executive does not stay or work for more than 183 days per year in the other state where the employment is exercised.29 Moreover, the executive remuneration must not be borne by an employer resident (or maintaining a permanent establishment situated) in that other state. It should be noted that Germany has concluded tax treaties that contain certain modifications to the 183-day clause.30 Consequently, executives should check their individual tax situation carefully.

If an employment is exercised both in and outside Germany and the 183-day clause does not apply, the compensation received by the executive must be allocated between the countries concerned. Generally, the compensation should be allocated in accordance with the compensated service in a specific case. In the absence of more appropriate (non-quantitative) criteria, the compensation might have to be prorated on the basis of contractually agreed working days or hours.31 In practice, if an executive works for several group entities located in more than one country, it may be useful to enter into separate (arm's-length) employment agreements to facilitate the allocation of the compensation received (salary splitting).

The apportionment of non-recurrent payments (e.g., bonus payments or deferred compensation under employee incentive schemes) constituting subsequent compensation for earlier work performed both in Germany and abroad may be of particular importance. From a German tax perspective, the attribution of taxation rights depends on whether the compensation qualifies as annex to the work carried out or utilised in Germany. To the extent this allocation is not possible (e.g., for Christmas and holiday bonuses), the compensation must be divided up in relation to the number of days worked in Germany.32

If an executive initially working in Germany subsequently moves to another state and receives deferred compensation while residing in that other state, a double tax situation may occur where the other state claims a taxation right solely based on the time and place of payment of the compensation. In particular, if an executive is not protected from double taxation under a tax treaty, proper tax planning may require that the agreed time and place of payment of deferred compensation is determined in accordance with the local particularities of the jurisdictions concerned.

viii Tax consequences of certain typical equity compensation awards

Stock options and stock appreciation rights

The granting or vesting of non-tradable stock options does not qualify as a taxable event, and therefore does not result in employment income (i.e., no up-front taxation). The same applies to non-tradable, cash-settled stock appreciation rights (SARs), virtual stock options or similar awards under which the employer enters into a contractual promise to pay to the executive the future value of a notional stock option. By contrast, the actual exercise (or other realisation)33 of the stock option or the actual cash payment under SARs qualifies as a taxable event (taxation at maturity). In the case of stock options, the executive must tax (as employment income) the fair market value of the stock received upon exercise minus the option exercise price paid.34 Any subsequent appreciation in the value of the received stock is treated as capital gain (see Section II.iv). In the case of SARs or similar cash-settled awards, the cash payment received by the executive qualifies as taxable employment income. The granting of tradable stock options and SARs should not generally result in up-front taxation (i.e., only the exercise, settlement or sale of such awards should qualify as a taxable event).35

Restricted stock and restricted stock units

The award of restricted stock granted unconditionally and merely subject to a contractual restraint on disposal until the expiry of a predetermined minimum holding period is generally taxed up front. This means that the fair market value of the stock at the time of delivery (not taking into account the restraint on disposal) minus the purchase price paid for the stock qualifies as taxable employment income.36 If, however, the restraint on disposal is structured such that a disposal is not only forbidden by agreement but legally unfeasible (e.g., because the executive requires a resolution of the employer to effect a transfer of title), the taxable realisation event is postponed as long as the restraint on disposal exists.37 The exact criteria for the distinction between contractual and absolute restraints on disposal are still subject to discussion.38

By the same token, the granting of restricted stock that is subject to a forfeiture condition (such as continued employment or financial performance), pursuant to which the stock has to be returned in the event that such conditions apply, should also result in a taxable event upfront if there is no absolute restraint on disposal (i.e., a condition subsequent should not prevent up-front taxation).39 However, the return of the stock in the event the forfeiture condition applies and the stock is returned should result in negative employment income.

Restricted stock units (or phantom stocks), under which an employer promises to deliver stock or cash equal to the value of a specified number of shares, are subject to different tax rules. Similar to stock options and SARs, executives must recognise employment income only at the point in time when the shares are actually delivered or the cash is actually paid. The tax basis is the value of the shares at the time of delivery or the amount of cash received.

ix Tax deductibility for employers

Executive remuneration generally qualifies as a tax-deductible business expense and therefore reduces the corporate income and trade tax base of a German employer.40 If the executive remuneration is not paid by the employer but by an affiliated entity (e.g., a foreign parent company), cost transfer agreements are frequently required to achieve a reduction of the German employer's tax base. Such scenarios also generally trigger the requirement to withhold and remit wage withholding tax by the German employer, although it may not be involved in the payment process.41 Careful structuring is required in such tripartite situations. Awards of stock options that merely dilute shareholders' equity do not result in a tax-deductible expense.42

x Tax planning and other considerations

Typical considerations in connection with payments of executive remuneration include the following:

  1. making use of the cash-based accounting method by determining a favourable time for non-recurrent payments or bundling several tranches of payments, for example, to benefit from special tax rates for extraordinary income, reduce tax progression or avoid double taxation with respect to remuneration previously earned in another jurisdiction;
  2. using salary splits to facilitate the allocation of executive compensation between various jurisdictions;
  3. organising the executive's individual tax situation, for example, by avoiding an undesirable unlimited tax liability in Germany, by applying for an intended deemed unlimited tax liability or by making use of the 183-day clause; and
  4. making use of personal holding companies to shelter capital gains income in exceptional situations, although recent legislative efforts may make such structures less efficient (portfolio exemptions).

III EMPLOYMENT LAW

i Severance payments

Executives do not generally have a statutory severance claim upon termination of their service or employment relationships; any entitlements in this respect need to be stipulated in their individual service or employment agreements.

Executive employees

Agreements with employees with management functions (executive employees) will only occasionally include severance clauses, because this group of executives is subject to statutory protection against wrongful dismissal under German labour law. Accordingly, a termination by an employer requires a justified reason, such as behavioural reasons (e.g., severe misconduct), personal reasons (e.g., continuing incapacity) or operational reasons (e.g., redundancy, in particular in connection with the shutdown of a department or site). Absent such justified reason, an employer will have to reach a settlement with an employee in the course of legal proceedings that employees in Germany typically initiate after receiving notice of termination from their employers, or enter into a termination agreement with an employee (which requires the employee's consent). The severance amount to be paid to make the employee accept his or her dismissal is subject to negotiation, and usually depends on how the parties evaluate their chance of succeeding in the pending legal proceedings. Generally, severance payments by employers in Germany range between half and one full month's salary (including pro rata variable payments) for each completed year of employment, but may actually be significantly higher if an employer has a weak case.

For executive employees, protection against dismissal is limited to a certain extent: in cases where an employee qualifies as an executive employee within the meaning of the German Dismissal Protection Act, the employer may request that the labour court dissolves the employment relationship with the employee against appropriate severance payment without providing any justification.43 An employee is only considered as an executive employee if he or she is authorised to hire or dismiss employees independently.

To increase the attractiveness of the German market for financial institutions considering relocating in the wake of Brexit, the German legislator enacted Section 25(5a) of the German Banking Act. Pursuant to this new provision, the above-described arrangements applicable to executive employees apply mutatis mutandis to risk-takers in the financial sector provided they are employed at a significant institution (e.g., financial institutions with total assets on average of at least €15 billion in the past three financial years).44 As a result, an employer may request the German labour court to dissolve the employment relationship with a risk-taker against severance payment without providing any justification. In this context, employees are considered risk-takers if their professional activities have a material impact on their institution's risk profile and their annual fixed remuneration amounts to at least three times the social security contribution ceiling (i.e., currently an aggregate amount of €234,000).

Management board members of non-listed companies

While not unheard of, it is also not very common that service agreements with management board members of non-listed companies provide for severance payments or change in control provisions. Although management board members do not benefit from statutory protection against wrongful dismissal, their service agreements frequently run for a fixed term during which they can only be terminated for good cause, which is a rather strict test under German law.45 A company intending to terminate the service relationship with a management board member prematurely without good cause will have to negotiate a termination agreement with the management board member, including offering him or her a severance package. The outcome of the negotiations will largely depend on the remaining term of the service relationship.

Management board members of listed companies

Notwithstanding the fact that service agreements with management board members of listed companies are typically entered into for a fixed term of up to five years, these types of executives are more commonly entitled to severance payments under their service agreements upon a termination without good cause. Pursuant to Section 4.2.3 of the German Corporate Governance Code (GCGC),46 any severance payments, including fringe benefits, should be capped at the lower amount of two times the management board member's last annual remuneration (severance pay cap) or the remuneration that the management board member would have earned during the remaining term of the service agreement. This requirement is expected to remain unchanged in the revised GCGC (GCGC-new),47 which is expected to come into force in late 2019 or early 2020.48

ii Change in control provisions

Under German law, there is no statutory termination right on the part of a company or an executive if the ownership structure of the company significantly changes. Both parties continue to be bound by the terms and conditions of the existing service or employment agreement, including any fixed term agreed therein.

Listed companies often grant their management board members the right to terminate a service relationship prematurely within a certain time frame following a change in control event, and to collect a predefined severance. Pursuant to Section 4.2.3 of the GCGC, any severance payment should be capped at three times the management board members' last annual remuneration, which corresponds to 150 per cent of the severance pay cap. However, according to the GCGC-new, benefit commitments made in connection with the early termination of a management board member contract by the management board member due to a change of control should not be agreed upon (any longer).49

In addition, the terms of share-based compensation and retirement benefit plans may provide for a vesting or acceleration of rights if the service relationship with a management board member is terminated as a result of a change in control.

iii Confidentiality

Executives in Germany are by virtue of German law required to treat as confidential all trade and business secrets that they become aware of during the term of their service or employment relationship. This duty of confidentiality generally does not cease to exist when the service or employment agreement ends, but its scope is disputed.

Thus, the particulars of a confidentiality obligation are typically stipulated in greater detail in an executive's service or employment agreement. It is customary in Germany that employers impose continued confidentiality obligations on their executives that shall also survive the termination of the service or employment relationship. While this practice is generally acknowledged, the relevant confidentiality clauses will only be enforceable if their scope is very precise and if they do not impede an executive's professional advancement in an unreasonable manner. As a consequence, employers intending to protect their customer or personnel base or market share from poaching attempts of a former executive will usually have to make the executive accept a post-termination non-compete undertaking (or, at least, a post-termination non-solicitation undertaking) (see Section III.v).

Remedies for breach of the confidentially obligation concerning trade secrets during and after the employment or service relationship include civil claims for injunction, removal and damages. In implementation of the EU Directive (EU) 2016/943 on protecting trade secrets, the German Trade Secrets Act entered into force in April 2019, providing for a detailed regime on protecting trade secrets against unlawful obtainment, use and disclosure. Depending on the circumstances of the individual case, the intentional disclosure of business secrets also qualifies as a criminal offence punishable with up to two or three years of imprisonment (or even up to five years for severe breaches).50

iv Non-compete obligations during the term of service or employment

During the term of their service or employment relationships, executives are generally not permitted to engage in competition with their employer.51 From a general point of view, the existence (or even the initiation) of a competitive situation between an employee and an employer may result in a conflict of interest on the part of the executive.52

Accordingly, executives must not do business, carry out transactions or support any activities in the employer's line of business on their own behalf or on behalf of third parties without the prior consent of the employer. Executives violating this obligation may face disciplinary actions (up to and including dismissal) and become liable for damages.

In addition to the statutory rules, it is customary to further specify the statutory obligations in an executive's service or employment agreement by means of explicit non-compete and non-solicitation clauses. Further, service or employment agreements may contain provisions on contractual penalties in the case of breaches of statutory or contractually obligations contained in such clauses.

v Post-termination non-compete clauses

Apart from generally applicable unfair competition rules, executives in Germany are, as a matter of law, not bound by competition restrictions after termination of their service or employment relationships. Any such restrictions therefore need to be put on a contractual basis by entering into a post-termination non-compete or non-solicitation (or both) arrangement with the executive.

German courts take the view that post-termination non-compete clauses are only enforceable if and to the extent there is a legitimate interest on the part of the employer, and the further professional career of the executive is not unreasonably restricted by the territorial and temporal scope of such non-compete obligation.53 While the German Commercial Code sets a specific legal framework for post-termination non-compete arrangements with regular employees (including employees with management functions),54 the relevant rules do not apply to management board members. As a practical matter, however, any post-termination non-compete clauses in service agreements of management board members are typically drafted along the lines of the statutory provisions in the Commercial Code.

Post-termination non-compete arrangements usually run for a period of between one and two years following the termination date of an executive's service or employment agreement (two years being the maximum post-termination non-compete period permitted under German employment law). In certain cases, an extended garden leave period (in particular, such leave of an extraordinary long duration) that immediately precedes the termination date may actually require a shorter non-compete period or may even render a post-termination non-compete undertaking entirely unenforceable if the aggregate period of time during which an executive was kept out of business would practically put an end to his or her professional career in the relevant industry. However, there are no strict guidelines as to when a garden leave that is forced on an executive would affect the scope and substance of a subsequent post-termination non-compete undertaking. Rather, any potential risks in this respect will have to be assessed based on the facts and circumstances of each individual case, and in particular the situation in the market or business area concerned as well as the activities and functions of the respective executive.

To be valid and enforceable, a post-termination non-compete arrangement must provide for an adequate financial compensation to be paid to an executive during the non-compete period. German mandatory law55 requires a minimum non-compete compensation for regular employees that is equal to 50 per cent of their last total remuneration under the employment agreement (including all monetary and non-monetary benefits).56 As stated above, this legal requirement is not relevant for post-termination non-compete arrangements with management board members; however, there is a common understanding among legal practitioners that non-compete compensation must be offered to these persons as well. The non-compete compensation provided in post-termination non-compete arrangements with management board members typically varies between 50 per cent of their last fixed salary (excluding other benefits) and as high as the full amount of their last total remuneration (including all monetary and non-monetary benefits). It is also not uncommon to link the non-compete compensation to the reason for termination and grant a higher amount if the termination of the service relationship had not been caused by behaviour of the management board member to the detriment of the company (also referred to as a good-leaver situation).

Other work-related income that an executive earns during the non-compete period may, to a certain extent, be deducted from the non-compete compensation, and the executive must regularly inform his or her previous employer about such earnings.57 According to the GCGC-new, severance payments made to management board members due to premature termination of their activity shall be taken into account in the calculation of the non-compete compensation.58

IV SECURITIES LAW

i Prospectus requirements in connection with offering securities to employees

Many typical executive compensation arrangements are considered to involve the offer of securities. The prospectus requirements in connection with securities offerings, including offerings to employees, are governed by the European Prospectus Regulation.59 The European Prospectus Regulation has applied in full since 21 July 2019, including certain provisions providing for exemptions for employee offerings. It repeals the European Prospectus Directive,60 as amended by Directive 2010/73/EC, and replaces large parts of the German Securities Prospectus Act.

The European Prospectus Regulation requires that an offer to the public of listed or non-listed securities may only be made in an EEA jurisdiction, including Germany, after publication of a prospectus approved by the relevant national competent authority (in Germany, the German Federal Financial Supervisory Authority (BaFin)), or by an authority of another EEA country after having notified the relevant national competent authority of the approval.61

There are a number of exemptions from the requirement to publish a prospectus when offering securities in Germany.62

First, a specific employee offering exemption is available under the European Prospectus Regulation for securities63 that are offered or allotted to existing or former directors (including management board members) or employees by their employer or by an affiliated undertaking, provided that an information document is made available containing information on the number and nature of the securities and the reasons for and details of the offer.64

Unlike previously under the Securities Prospectus Act, the employee offering exemption is available irrespective of whether a company has its registered office in the EEA or whether the company is listed on an EU-regulated market or a third-country market regarded as equivalent to an EU-regulated market. As a result, third-country issuers also benefit from the employee offering exemption even if they are neither listed on an EU-regulated market nor on a third-country market regarded as equivalent.65

Second, there are private placement exemptions, including, in particular, a prospectus exemption if securities are offered to fewer than 150 persons per EEA country.66

The European Prospectus Regulation also provides for a prospectus exemption with respect to the admission to trading on a regulated market of securities offered in employee offerings, provided, inter alia, that the securities are of the same class as the securities already admitted to trading on the same regulated market and that an information document is made available.67

ii Managers' transactions

According to Section 19 of the Market Abuse Regulation (MAR),68 persons discharging managerial responsibilities (including management board members, employees with regular access to inside information and the power to make certain managerial decisions) as well as persons closely associated with them must notify the company and the BaFin of certain types of transactions promptly and no later than within three working days.69 These transactions include not only those concerning shares of the company or related financial instruments (in particular, derivatives), but also those relating to debt instruments and emission allowances.70

Companies are obligated to immediately publish a notification,71 including the executive's name, the price and volume as well as the date and place of the transaction, and to notify the BaFin of the publication and submit the information to the Company Register. Additionally, companies must draw up a list of persons discharging managerial responsibilities and persons closely associated with them, and notify the persons discharging managerial responsibilities of their obligations in writing. Persons discharging managerial responsibilities must notify the persons closely associated with them.

The MAR provides for a statutory closed period of 30 days before the announcement of an interim financial report or a year-end report, during which no transactions may be conducted at all, subject to hardship exemptions.72 Pursuant to European Securities and Markets Authority (ESMA) guidance, the relevant announcement for purposes of the closed period is the public statement whereby the issuer announces, in advance of the publication of the final year-end report (or the final interim report, as the case may be), the preliminary financial results agreed by the management body of the issuer.73

There are no statutory requirements under German law that executives must hold stock of their employer.

iii Insider trading and market manipulation

The MAR also governs insider trading and market manipulation. Pursuant to Article 7 MAR, inside information is, inter alia, non-public information of a precise nature relating to companies or financial instruments that, if made public, would likely have a significant effect on the prices of those financial instruments or related derivatives. Pursuant to Article 7(3) MAR, and following a decision by the European Court of Justice,74 where inside information concerns a process that occurs in stages, each (intermediate) stage of the process can already constitute inside information.

It is considered unlawful insider dealing for a person to use inside information to acquire or dispose of, for the person's own account as well as for a third party, directly or indirectly, financial instruments to which that information relates. Cancelling or amending an order that has been placed before acquiring the inside information is also considered insider dealing. Moreover, the use of recommendations or inducements can amount to insider dealing in cases where a person knows or should have known that it is based on inside information. However, certain legitimate behaviours may serve as a justification for actions that would otherwise be deemed insider dealing.75

The MAR's market abuse rules set forth an enumeration of definitions, examples and indicators to determine whether a person has manipulated the market using false or misleading information (Article 12 et seq. MAR). A failed attempt already qualifies as market manipulation. Certain accepted market practices promulgated by national regulators, and accepted by ESMA pursuant to certain procedures, may provide exemptions.

Breach of insider trading or market manipulation rules may qualify as a criminal or administrative offence. The German legislator implemented the sanctions regime of the Directive on Criminal Sanctions for Market Abuse (CSMAD)76 in the German Securities Trading Act. The sanctions have become much more severe in connection with MAR and CSMAD. They include very substantial amounts for fines and public naming and shaming of violations and violators.

There are no specific German rules with respect to short swing trading of executives.

iv Anti-hedging rules

Under German law, there is no general prohibition for executives to hedge themselves against risks to variable elements of their compensation. However, German law provides anti-hedging rules, for example, with respect to executive remuneration by financial institutions77 and insurance companies,78 and EU law provides anti-hedging rules, for example, with respect to executive remuneration by alternative investment fund managers (AIFMs)79 and undertakings for the collective investment of transferable securities (UCITS).80 According to these rules, financial institutions, insurance companies, AIFMs and UCITS must take appropriate measures to ensure that executives do not limit or cancel out the risk in connection with their risk-oriented compensation elements through hedging.

V DISCLOSURE

German generally accepted accounting principles,81 Section 4.2 of the GCGC82 and, as the case may be, the International Financial Reporting Standards, require extensive annual public disclosure concerning the remuneration of a company's management board members. The disclosure forms part of the notes to the annual financial statements and must also be reflected in a remuneration report, which forms part of the management report and provides detailed information on the principles and the amount of the remuneration of the management board members. Disclosure comprises the total annual remuneration with a breakdown for each management board member, divided into fixed and variable compensation components.83

Privately held companies are generally subject to the same disclosure obligations (except those under the GCGC); however, the remuneration of each individual management board member need not be disclosed. Certain further disclosure exemptions may apply for small companies.84

Moreover, the general shareholders' meeting of a stock corporation may resolve, with a three-quarters majority of the votes cast, that certain remuneration-related information (in particular, a breakdown of the remuneration of each individual management board member) need not be disclosed for a period of up to five years.85 If enacted as proposed, this option will be removed by ARUG II (see SectionVI).

There is no requirement to make the full text of the service agreements between a company and its management board members publicly available.

VI CORPORATE GOVERNANCE

As a reaction to the worldwide financial crisis, the German parliament adopted legislation in 2009 changing certain rules on the remuneration of management board members of stock corporations in Germany.86 These changes are supposed to set incentives in favour of the sustainable development of enterprises, to prevent excessively high levels of remuneration and to strengthen the transparency of management board remuneration.

Some more recent initiatives are also, in part, aimed at the regulation of executive remuneration and include the recent revision of the GCGC (to result in the GCGC-new) and the proposed law transposing the amended Shareholder Rights Directive of 17 May 201787 into German law (referred to as ARUG II), both expected to come into effect in late 2019 or early 2020.

i Appropriateness of remuneration and shareholder rights

The supervisory board of a stock corporation determines the remuneration of the management board members.88 It must ensure that the remuneration is appropriate in relation to the management board members' duties and responsibilities, their performance and the situation of the company, and that it does not exceed the customary remuneration that is granted in comparable companies without good reasons for such excess.89

The Stock Corporation Act90 provides that the general shareholders' meeting of a listed company may adopt a non-binding resolution on the remuneration system for the management board members. Plans to implement a mandatory and binding shareholder vote on the remuneration system (say-on-pay) based on the recommendation of the supervisory board have been considered, but never implemented. The amended Shareholder Rights Directive stipulates that companies have to establish a remuneration system concerning their directors and that shareholders have the right to vote on the remuneration system at the general meeting. In line therewith, the proposed ARUG II provides that companies must submit their remuneration system to the shareholders' vote at the general meeting at least every four years and that the general meeting may adopt a non-binding resolution on the remuneration system.91 A rejecting shareholder vote will trigger an obligation to present a revised remuneration system (at the latest) at the next ordinary general meeting for another shareholder vote.92 In addition, the companies have to draw up a clear and understandable remuneration report on which the annual shareholders' meeting has the right to hold an advisory vote.93 The remuneration system as well as the remuneration report has to be published on the website of the company.94

According to the GCGC, German stock corporations should generally set forth a maximum amount for each part of the management remuneration (e.g., for bonus payments and stock options).95

ii Variable compensation, stock options and directors' and officers' liability insurance

In the case of a listed company, any variable compensation granted to the management board members must be determined on the basis of a multiple-year assessment that requires essentially forward-looking characteristics. Short-term bonus payments that only consider the performance within a single fiscal year continue to be permissible, as long as they are combined with a long-term bonus element and the overall metrics of the variable compensation offer an adequate incentive for the management board members to pursue the sustainable development of the company with a longer perspective.96 According to the GCGC-new, the performance criteria of the variable remuneration components should be based not only on operational targets but in particular on strategic objectives, whereby the supervisory board shall determine the extent to which the individual targets of each board member or targets for the entire management board as a whole are decisive.97

There is a mandatory waiting period of at least four years before stock options granted to a management board member may be exercised and shares acquired thereby may be sold.98

Directors' and officers' insurance that a stock corporation takes out on behalf of its management board members to cover risks arising from the performance of their duties and responsibilities must provide for a deductible to be borne by the management board member of at least 10 per cent of the amount of the damages (capped at one-and-a-half times the management board member's fixed annual salary).99

iii Reduction of remuneration

Pursuant to the Stock Corporation Act,100 the supervisory board should reduce management board members' remuneration if a company's situation deteriorates in a manner such that it would be unreasonable to continue compensating the management board members at the agreed level. A reduction may be justified by adverse economic developments because of which the company is significantly losing money, has to make general pay cuts or must carry out collective dismissals.

The management board members concerned may challenge such reduction by filing an action for specific performance. Additionally, they may terminate their service agreements with the company as of the end of the next calendar quarter by giving at least six weeks' notice.101

VII SPECIALISED REGULATORY REGIMES

Reforming the principles of executive remuneration in financial institutions and insurance companies has been a key topic on the agenda of the German legislator and the BaFin.

i Capital Requirements Directive IV

In the context of banks and credit institutions, Germany has implemented the requirements set forth by the Capital Requirements Directive IV (CRD IV, including the widely discussed bonus caps) and as specified by the European Banking Authority (EBA) by amending the Banking Act as well as the Ordinance regarding Remuneration in Financial Institutions (GORFI).102 In response to the issuance by the EBA of its guidelines on sound remuneration policies in 2015, the BaFin amended the GORFI, effective as of 4 August 2017, and further amendments to the Banking Act and the GORFI were made in 2019. In addition, a directive amending CRD IV (including the remuneration-related provisions contained therein), also referred to as CRD V, entered into force on 27 June 2019 as part of the 'banking package'. Germany and other EU Member States have to implement those amendments into their respective national laws by the end of 2020.

Remuneration principles

German remuneration principles are substantially in line with the requirements as currently set forth by the European Union. The ratio between fixed and variable compensation for employees of financial institutions is thus capped at 100 per cent of the fixed remuneration, subject to an increase to 200 per cent if explicitly approved by a financial institution's shareholders. The scope of application for bonus caps is broader than required by the EU directives (gold-plating) given that all employees (and not just risk-takers) are subject to the cap in Germany.103

However, with a view to the principle of proportionality set forth by CRD IV,104 certain provisions of the Banking Act and the GORFI apply only to certain categories of institutions, namely significant institutions, not significant institutions and not significant institutions with a balance sheet total less than €3 billion. As a result, the numerous smaller German banks are exempted from various obligations, for example, regarding the identification of internal risk-takers or the deferral of at least 40 per cent (60 per cent in case of a member of the management board or the next lower management level) of variable remuneration components over a period of at least three years (six years in the case of a member of the management board or the next lower management level). These exemptions and their conformity with CRD IV have been debated at EU level. Meanwhile, amendments to CRD IV relating to, inter alia, the variable elements of remuneration have been introduced by CRD V, allowing EU Member States to exempt smaller banks from certain obligations contained in CRD IV (including in relation to the variable remuneration components), subject to certain requirements.105

Pursuant to the Banking Act, only significant institutions are obliged to identify risk-takers.106 In addition, the obligation only exists if a measure regarding the respective risk-taker is planned. The GORFI also provides for a mandatory clawback of variable remuneration already paid out if a risk-taker proved to have a negative impact on the overall success of a company.107 These clawback elements may add up to the full amount of the bonus if the risk-taker is personally responsible for significant losses for the company or regulatory sanctions against it, or in the case of a serious breach of external or internal rules relating to personal conduct. Members of the management board or the next lower management level are particularly affected because their variable remuneration is safe only after seven years.

Several institutions across the European Union have changed their remuneration policies and introduced role-based allowances, which institutions tend to consider as fixed remuneration, arguing that such allowances are linked to the position rather than to performance. Role-based allowances are payments made in addition to the fixed remuneration (base salary) and the performance-based variable remuneration (bonus). However, the EBA has taken the view that these allowances should be classified as variable remuneration in cases where they are not predetermined, not transparent, not permanent or revocable, or in cases where they provide incentives to take risks.108 With these allowances being considered variable remuneration, the respective remuneration policies would in some cases not comply with the limit on the variable remuneration to 100 per cent of the fixed remuneration (200 per cent with shareholders' approval).

In Germany, since 2017, the GORFI provides for the abolition of all types of remuneration other than fixed and variable remuneration elements. If in doubt, an element will be deemed variable remuneration. The GORFI defines in detail under which conditions remuneration is considered to be fixed. The remainder is considered to be variable remuneration.

Disclosure requirements

All relevant institutions must disclose their remuneration principles on an annual basis, including on their websites.109 The published information must comprise the aggregate amount of remuneration paid out by an institution, broken down into fixed and variable components, and the number of recipients of variable remuneration. Significant institutions are subject to increased disclosure obligations and must, for example, also disclose the composition, tasks and organisation of their remuneration committee, the aggregate amount of deferred variable compensation and the aggregate amount of severance payments made.

ii AIFMD and UCITS Directive

The German Capital Investment Act (GCIA) implements the AIFMD (and the UCITS Directive) into German law. As a result, the following applies to both AIF and UCITS management companies.

Remuneration principles

The GCIA110 provides for regulations regarding the remuneration of an investment fund manager's senior management and employees who either exercise control functions, whose professional activities have a material impact on the fund's risk profile (risk-takers) or who receive a total remuneration that takes them into the same remuneration bracket as senior management and risk-takers. In particular, the remuneration system of investment fund managers must promote sound and effective risk management; it must be in line with the business strategy, objectives, values and interests of the fund; any variable remuneration must be assessed over multiple years appropriate to the life cycle of the funds managed by the relevant company; and there must be an appropriate balance between fixed and variable components.

Corporate governance

In the case of significant investment funds (i.e., in general, funds managing assets of at least €1.25 billion in the aggregate and employing at least 50 employees), a remuneration committee has to be established, which advises and controls the company in respect of its remuneration system.111

VIII DEVELOPMENTS AND CONCLUSIONS

According to the public view in Germany, the worldwide financial crisis of 2008 and its influence on the current banking and sovereign debt turmoil was, to a large extent, attributable to an executive remuneration system that incentivised short-term risk-taking over long-term sustainability. Although more than 10 years have already passed by, the terms and conditions of executive remuneration, in particular at financial institutions, continue to be in the focus of public attention. The GORFI, as amended, with its new definition of fixed and variable remuneration, could be a good start for achieving legal clarity.112

Several financial institutions in Germany have comprehensively amended their remuneration systems in past years. For instance, they have introduced clawback elements for bonus and other variable payments to their executives and employees in accordance with new mandatory laws.113 Most financial institutions in Germany have increased the fixed portion of the remuneration, started to pay special allowances to bypass the bonus caps114 and introduced creative remuneration structures (e.g., debt-based remuneration instruments that convert into equity). Many of them have, meanwhile, obtained shareholders' approval for bonuses that amount to twice annual fixed pay.

Significant legislative measures at both national and EU level have taken place. Key issues were the scope of CRD IV for smaller financial institutions (now addressed in CRD V), the abolition of role-based allowances and mandatory clawback elements for bonus payments. In particular, the amended Shareholder Rights Directive, and by extension the proposed ARUG II, contain provisions resulting in potentially important amendments to the current rules on the remuneration of management board members and supervisory board members. One of the main features of the amended Shareholder Rights Directive and the proposed ARUG II is the obligation to establish a remuneration policy with a detailed minimum content that has to be submitted to the vote of the general shareholders' meeting at least every four years. The German legislator has proposed that the vote be only advisory, but it is expected that, de facto, the vote has binding character. While the deadline for the amended Shareholder Rights Directive to be implemented into German law (10 June 2019) has already passed, the entry into force of ARUG II is expected in late 2019 or early 2020. In any event, the regulation of executive remuneration will continue to be a hot topic in Germany.


Footnotes

1 Michael Brems is counsel and Jens Hafemann is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP.

2 Executive employees may establish a representative body of their own called a speakers committee. To a broad extent, the functions and responsibilities of such committee are comparable to those of a works council (which is only in charge for regular employees without any management functions). In particular, the speakers committee must be informed and consulted prior to the contemplated termination of the employment agreement of an executive. In the case of a breach of such obligation, the termination of the employment relationship is invalid (see Section 31 of the German Act on the Speakers Committee, Section 105 of the Works Constitution Act).

3 Non-arm's-length compensation payments received by executives that hold shares in their employer (that is treated as a corporation for German tax purposes) may also qualify as constructive dividend distributions (i.e., investment income within the meaning of Section 20 of the ITA). If executive remuneration is paid in connection with a sale of a business (e.g., under an earn-out arrangement), the compensation may not qualify as employment income but as a retroactive purchase price increase for shares the executive held in the employer. See also BFH BStBl II 11, 948. In addition, special rules may apply to executive remuneration paid as carried interest to managers of a private equity fund (see Section 18(1) No. 4 of the ITA).

4 The qualification for German tax purposes does not necessarily follow German labour law principles. For example, board members of the management board generally qualify as employees for tax purposes but not for labour law purposes. By contrast, supervisory board members from a tax perspective generally derive income from independent services. Note that the distinction between the management board members and the supervisory board members originates from the typical German two-tier corporate governance model for stock corporations (only a German societas europaea can have a one-tier corporate governance system). A German GmbH that is not subject to mandatory co-determination rules generally is not required to establish a supervisory board. The two-tier corporate governance system underlying the distinction between income from independent services and employment income may create specific questions in cross-border scenarios.

5 The highest tax bracket of 45 per cent applies to taxable income in excess of €265,327 (2019) for single individuals (or twice that amount for married couples filing jointly). The second-highest tax bracket of 42 per cent applies to taxable income in excess of €55,961 (2019) for single individuals (or twice that amount for married couples filing jointly).

6 The church tax varies between states, and generally ranges between 8 and 9 per cent of the income tax.

7 Section 34(2) No. 4 of the ITA.

8 Employers are generally liable for wage withholding taxes and social security charges underwithheld (Section 42d of the ITA, Section 28e SGB IV). In addition, under-withholding may result in criminal charges. If in doubt, an employer may decide to file an application for a wage withholding tax ruling (Section 42e of the ITA). If an executive's monthly cash wage is lower than the wage withholding tax to be withheld (e.g., if an executive is receiving substantial benefits in kind under a share compensation plan), the executive needs to provide the employer with the cash required to remit the wage withholding tax to the tax authorities. If the executive fails to do so, the employer is required to inform the tax authorities (Section 38(4) of the ITA). The employer may also be required to withhold wage taxes if the executive remuneration is paid by third parties (e.g., a foreign affiliate of the German employer) (see Section 38(1)3 of the ITA). For example, this needs to be observed if a foreign parent company grants stock options or other incentives to the employees of a German company. In the context of an M&A transaction, the payment of exit bonuses made by the seller to key employees of the German target company may require wage withholding at the level of the target company.

9 Exceptions apply, for example, to management board members of stock corporations, who are generally exempt from statutory social security charges (assuming that they take out private health insurance).

10 As of 2019, the social security charges amount to 18.6 per cent (pension insurance), 2.5 per cent (unemployment insurance), 3.05 per cent (long-term care insurance; 3.3 per cent for childless persons) and approximately 14.6 per cent (health insurance). The health insurance rate varies from insurance to insurance. Approximately half of the total social security charges must be borne by the employer.

11 As of 2019, the contribution thresholds generally amount to €80,400 (€73,800 for East Germany) for pension and unemployment insurance, and €54,450 for long-term care and health insurance.

12 In particular, Regulation (EC) No. 883/2004, Regulation (EC) No. 987/2009 and Regulation (EC) No. 465/2012 are relevant.

13 Different rules apply to the sale of partnership interests.

14 It should be noted that a decision of the German Federal Tax Court (BFH) (BFH, VIII R 20/11) focuses on the existence of good and bad-leaver provisions in the terms of a compensation instrument. Good and bad-leaver provisions distinguish certain events (such as ordinary old-age retirement as a good event and termination for cause as a bad event) and provide that the return that an executive will generate from the instrument will be higher in the case of good-leaver and lower in the case of bad-leaver events. Although the decision only dealt with a specific question relating to a participation right, it is unclear whether the tax authorities may interpret it to establish a broader principle to the end that the existence of good and bad-leaver provisions in compensation instruments generally indicate that the return qualifies as income from employment (and not as capital gain or investment income). The underlying argument would be that the distinction between good and bad-leaver events evidences a connection of the income received with the employment relationship. As a practical consequence, in cases where it is contemplated to provide for good or bad-leaver provisions in the terms of compensation instruments, this decision should be carefully analysed, and it may be advisable to obtain an advance wage withholding tax ruling.

15 By contrast, the grant of a claim against a third party (e.g., insurance) may result in a benefit in kind that is taxable up front (BFH BStBl. II 07, 579).

16 Section 49(1) No. 4 of the ITA. Services of non-resident executives who work outside Germany may be used in Germany if a German employer is furnished with the results of the non-resident's work. For example, the Federal Fiscal Court decided that market analyses prepared by an employee outside Germany but used by the employer's German management may result in a German tax liability for the employee residing abroad (BFH BStBl. II 87, 379). Under German domestic law, the compensation paid to non-resident management board members and authorised signatories of companies having their place of management in Germany also qualifies as German-source income. However, Germany's taxation right may be excluded under an applicable tax treaty (see Section II.vii).

17 Section 49(1) No. 4(c) of the ITA.

18 See Section 50(2)1 of the ITA.

19 See Sections 50(2)2 No. 4(b) and 50(2)7 of the ITA. For example, eligible non-resident executives may decide to apply for a tax assessment in order to claim a deduction for income-related expenses, which may result in a lower tax base and therefore in overall tax savings.

20 See Section 26(1) of the ITA.

21 See Sections 50(1)3 and 32 of the ITA.

22 See Sections 1(3) and 1a of the ITA.

23 In such situation, an executive may consider holding the substantial participation through a personal holding company in order to benefit from a tax treaty, or a 95 per cent participation exemption under German domestic law applicable to corporations deriving capital gains from the sale of corporate shares. The use of personal holding companies requires careful tax planning. In particular, substance requirements need to be observed. The 95 per cent participation exemption may also not be available in certain scenarios.

24 See Section 1(1) of the ITA.

25 For example, see Article 4(2) of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. For further details, see also Federal Ministry of Finance Circular IV B 2 I – S 1300/08/10027 of 12 November 2014 (Ann. 9 et seq.).

26 See Article 15(1) of the OECD Model Tax Convention.

27 If the employment income is taxable in the state where the employment is exercised, the state of residence frequently does not exercise its taxation right and applies the exemption method (cf. Article 23A of the OECD Model Tax Convention). In other cases, a tax credit is granted by the state of residence (cf. Article 23B of the OECD Model Tax Convention). Certain tax treaties provide that the exemption method only applies if the income was actually subject to tax in the state where the employment is exercised (subject-to-tax clause). Moreover, German domestic law provides that the exemption method is only applied if an executive can demonstrate that the employment income was either taxed abroad or that the other state has waived its taxation right (cf. Section 50d(8) of the ITA).

28 See Article 15(2) of the OECD Model Tax Convention.

29 The exact calculation mechanism can vary depending on the specific tax treaty concerned (e.g., the 183-day limit may either relate to the tax year or the calendar year; the 183-day limit sometimes relates to the employee's presence in the relevant state and sometimes to the duration of the employment).

30 For example, Germany's tax treaties with Denmark and Switzerland contain special rules for certain high-level executives pursuant to which executive remuneration can be taxed in the employer's jurisdiction of residence. Various other German tax treaties contain special rules for management board members and cross-border commuters.

31 See Ministry of Finance Circular IV C 5 – S 2369/10/10002 of 14 March 2017 (Ann. I.2.). See also BFH BStBl. II 86, 479.

32 See Ministry of Finance Circular IV C 5 – S 2369/10/10002 of 14 March 2017 (Ann. I.6.).

33 According to Federal Fiscal Court decision BFH BStBl. II 2013, 289, an executive may consider realising the value of a stock option up front (when it may still have a rather low intrinsic value) by contributing it to a personal holding company. A subsequent realisation of additional gains at the level of the holding company could then benefit from lower corporate tax rates and, possibly, a 95 per cent participation exemption (which is not available in all cases). The holding company should not be solely used to acquire the option, given increased risk that the structure is disregarded. The valuation of the option (and, therefore, the determination of the wage withholding tax base at the time of the contribution of the option) can be difficult if the underlying consists of non-listed shares. Arguably, the Black–Scholes formula can be used for valuation purposes in such cases.

34 See Ministry of Finance Circular IV C5-S 2347/09/10002 of 8 December 2009 (Ann. 1.3) for further details regarding the determination of the stock's fair market value. A tax-free allowance of up to €360 per annum may apply to the non-discriminatory grant of discounted stock (including under a stock option programme). Executive incentive schemes frequently do not meet the non-discrimination requirement for such tax-free allowance. More importantly, stock options and SARs with a vesting period of more than one year may result in extraordinary income (Section 34(2) No. 4 of the ITA) potentially benefiting from reduced tax rates depending on the individual circumstances.

35 Federal Ministry of Finance Circular IV B 2 – S 1300/08/10027 of 12 November 2014 (Ann. 195). The Federal Fiscal Court does not generally distinguish between tradable and non-tradable stock options (BFH BStBl. II 09, 382).

36 BFH BStBl. II 09, 282. See also Ministry of Finance Circular IV C5-S2347/09/10002 of 8 December 2009 (Ann. 1.3, 1.6).

37 Federal Fiscal Court decision of 30 June 2011 (BFH BStBl. II 11, 923). See also Federal Ministry of Finance Circular IV B 2 – S 1300/08/10027 of 12 November 2014 (Ann. 214).

38 See Federal Ministry of Finance Circular IV B 2 – S 1300/08/10027 of 12 November 2014 (Ann. 214 et seq.). See also Federal Ministry of Finance Circular IV B 2 – S 1300/08/10027 of 3 May 2018 (Ann. 258 et seq.). In addition, the international allocation of taxation rights with respect
to restricted stock subject to an absolute restraint on disposal is not free from doubt.

39 See BFH BStBl. II 09, 282.

40 Special rules that restrict the tax deductibility of compensation payments to supervisory board members and similar persons do not apply to ordinary executive remuneration (see Section 10 No. 4 of the Corporate Income Tax Act).

41 See BFH BStBl. II 2017, 69.

42 BFH BStBl. II 11, 215. By contrast, virtual stock options result in a tax-deductible expenses.

43 Sections 14(2) and 9(1) of the Dismissal Protection Act.

44 Section 25n(1) of the Banking Act.

45 Service agreements, however, occasionally give the management board member the right to receive a severance payment if the company does not renew the agreement beyond its original term without having cause for the non-renewal.

46 The GCGC is a non-binding set of recommendations summarising best practices for the management and supervision of listed companies. It is reviewed and updated annually by a corporate governance commission appointed by the federal government. Listed companies must disclose on an annual basis whether they comply with the recommendations of the GCGC (comply or explain).

47 See G.13 of the GCGC-new.

48 Recently, the GCGC was fundamentally revised as a result of a public consultation, and the revised version of the GCGC has been published online by the corporate governance commission. The GCGC-new will come into force upon its publication in the German Federal Gazette.

49 See G.14 of the GCGC-new.

50 Section 23 of the Trade Secrets Act.

51 While the non-compete obligation of the management board members of a limited liability company is considered to be a part of their fiduciary duty towards the company, Section 88 of the German Stock Corporation Act includes an explicit regulation for the management board members of a stock corporation. Section 4.3.1 of the GCGC also provides for a non-compete obligation. The statutory non-compete obligation of regular employees is derived from Section 60 of the German Commercial Code.

52 As regards conflicts of interest of members of the management board and the supervisory board, see also Section 4.3 (management board) and Section 5.5 (supervisory board) of the GCGC, and Principle 19 and E. of the GCGC-new.

53 BGHZ 91, 1, 5.

54 Sections 74 to 75d of the Commercial Code.

55 Section 74(2) of the Commercial Code.

56 If an employee is released without cause on his or her part (such as in the event of redundancy), the post-termination non-compete arrangement will only be enforceable if the employer offers an increased compensation of 100 per cent of the employee's last total remuneration under the employment agreement.

57 Section 74c(1) of the Commercial Code.

58 See G.13 of the GCGC-new.

59 Regulation (EU) No. 2017/1129.

60 Directive 2003/71/EC.

61 Article 3(1), Articles 20, 21 and 25 of the European Prospectus Regulation.

62 Article 1(4) of the European Prospectus Regulation and Section 3 of the Securities Prospectus Act. When relying on an exemption to publish a prospectus in the context of an offer of securities to the public, it is important to bear in mind that a prospectus may nevertheless be required with respect to the admission to trading on an EU-regulated market of such securities.

63 If the instrument offered should not qualify as a security within the meaning of the European Prospectus Regulation, a public offer of such instrument may nonetheless require a prospectus pursuant to the German Asset Investment Act. The Asset Investment Act, however, provides for a comparable employee offering exemption.

64 The European Securities and Markets Authority (ESMA) has published recommendations as to the content of such information document.

65 Article 1(4)(i) of the European Prospectus Regulation.

66 Note, however, that a prospectus may be required in connection with the admission to trading on an EU regulated market of such securities.

67 Article 1(5)(h) of the European Prospectus Regulation. This exemption is particularly relevant for issuers with a listing on an EU-regulated market.

68 Regulation (EU) No. 596/2014.

69 ESMA and the BaFin have published, and update on a regular basis, FAQs regarding MAR. Implementing Regulation (EU) 2016/523 contains a template that shall be used for the notification.

70 Article 10 No. 2 Delegated Regulation (EU) 2016/522 contains a non-exhaustive list of transactions triggering a notification requirement.

71 However, the obligation to publish managers' transactions does not apply as long as the total amount of the transactions by an executive and the persons closely related to him or her remains below a threshold of a total of €5,000 (no netting) within the calendar year.

72 Article 19(11) MAR. Articles 7 to 9 of Delegated Regulation (EU) 2016/522 provide guidance regarding certain hardship exemptions according to Article 19(12) MAR.

73 ESMA Q&A on MAR, last updated 29 March 2019, Q7.2.

74 Case C-19/11 Geltl v. Daimler [2012].

75 Article 9 MAR.

76 Directive on Criminal Sanctions for Market Abuse 2014/57/EU.

77 Section 8(1) of the German Ordinance regarding Remuneration in Financial Institutions (GORFI). BaFin has published detailed guidelines for the interpretation of the GORFI.

78 Section 4(4) of the Ordinance regarding Remuneration in Insurance Companies.

79 Note 92 of the AIFMD Remuneration Guidelines (ESMA/2013/232).

80 Note 94 of the UCITS Remuneration Guidelines (ESMA/2016/575).

81 Section 285 No. 9 and Section 314(1) No. 6 of the Commercial Code.

82 Going forward, G.25 of the GCGC-new.

83 Disclosure must also set forth separately the amounts attributable to base salaries, options and other share-based compensation components, insurance premiums paid by the company, expense allowances and other benefits, severance arrangements and change-in-control provisions.

84 Sections 288(1), 267(1), 293 of the Commercial Code.

85 Section 286(5) Sentences 1 and 2 of the Commercial Code.

86 The Act on the Appropriateness of Management Board Remuneration, inter alia, amended Section 87 of the Stock Corporation Act.

87 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of the long-term shareholder engagement.

88 See also Section 87a of the Stock Corporation Act-new (following entry into force of ARUG II).

89 Section 87(1) of the Stock Corporation Act.

90 Section 120(4) of the Stock Corporation Act.

91 Section 120a(1) of the Stock Corporation Act-new.

92 Article 9a of Directive (EU) 2017/828, and Section 120a(1) and (3) of the Stock Corporation Act-new.

93 Article 9b of Directive (EU) 2017/828, and Section 120a(4) of the Stock Corporation Act-new.

94 Section 120a(2) of the Stock Corporation Act-new.

95 Section 4.2.3 of the GCGC. See also G.2 of the GCGC-new.

96 Section 87(1) of the Stock Corporation Act.

97 See G.7 of the GCGC-new.

98 Section 193(2) No. 4 of the Stock Corporation Act, see also G. 10 of the GCGC-new.

99 Section 93(2) Sentence 3 of the Stock Corporation Act. However, it is common practice that board members take out private insurance to close the gap.

100 Section 87(2) Sentence 1 of the Stock Corporation Act.

101 Section 87(2) Sentence 4 of the Stock Corporation Act.

102 The GORFI applies to German credit institutions, German financial services institutions and German branches of non-EEA financial institutions.

103 See Section 25a of the Banking Act. For more detailed information on the European background, see the EU Overview chapter of this publication.

104 See Article 92(2) of CRD IV.

105 Article 94(3) and (4) of CRD IV-new (following the entry into force of CRD V).

106 Section 25a(5b) of the Banking Act.

107 Section 20(6) of the GORFI.

108 Nos. 7 and 8 of the Guidelines on sound remuneration policies under Articles 74 (3) and 75 (2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No. 575/2013.

109 See Section 16(1) and (2) of the Ordinance regarding Remuneration in Financial Institutions.

110 See Section 37 of the GCIA.

111 No. 11.2 of the UCITS Remuneration Guidelines (ESMA/2016/575).

112 See Section VII.i concerning the remuneration principles.

113 Section 20(6) of the GORFI.

114 See Section VII.i, concerning the EBA's view on role-based allowances.