Virtual participation scheme

VSOP / VSIP and ESOP are all employee participation schemes. VSOP stands for Virtual Stock Option Plan. And VSIP stands for Virtual Share Incentive Plan. Both are virtual participation schemes, which grant employees a share in the development and appreciation of the company, without making them shareholders. The VSOP or VSIP solely grant contractual claims to employees. The terms of a VSOP or VSIP plan can differ significantly from case to case. ESOP stands for Employee Stock Option Plan. Within an ESOP employees receive options on real shares in the company.

Virtual participation is a form of employee participation. The special thing about virtual shares is that they only grant contractual claims to employees. However, they take part in the increase in value of the company. In the event of an exit, i.e. when the company is sold, employees receive a part of the purchase price.

The aim of virtual shares is to give employees a share in the development and appreciation of the company. This is supposed to motivate them to become personally engaged and to perform outstandingly. That is because if the company develops well thanks to their commitment, employees will benefit from this development, too. Moreover, virtual shares constitute an incentive to stay with the company until the end, in order to receive a part of the proceeds. On top of this, virtual shares may systematically serve as a wage component. Virtual shares may be offered to individual employees instead of offering them a higher wage.

Virtual shares are not real shares in a GmbH (limited liability company). They are notably issued to employees in the context of a virtual participation scheme. In the event of an exit, i.e. if the company is being sold, employees receive a portion of the proceeds thanks to their virtual shares. This means that part of the purchase price will be paid out to the employees.

Virtual shares held by employees are treated by tax authorities as a wage component. Payments from the virtual shares are subject to income tax. Frequently, the income of employees will be exceptionally high in the year they receive a payment from the virtual participation scheme. As a result they will be subject to the top tax rate of 42% or even the so-called rich tax rate of 45%. Additionally, the virtual shares must be considered with regard to social security contributions. Therefore, virtual shares are not tax optimised. However, their big advantage is that they do not trigger any dry income. I.e. the tax burden only arises, once the employees actually receive a cash payment from their virtual shares.