Implementation of Management Equity Participation in Germany
A management equity participation program is a very important instrument when doing deals for a private equity investor. Management is key for the success of an investment, and therefore the intention is to have management participate in the success of the investment. And at the end of the day, the higher the after-tax returns, the higher the incentive.
What does a typical German MEP look like?
There are three options to structure a management equity program in Germany. The first option is if management subscribes and acquires equity or debt instruments. This is the option that’s typically chosen if the intention is to provide a tax beneficial result. The second option is manager signs an agreement that mimics the economics of an equity or debt participation. And the third option is pretty simple — management gets a bonus payment.
Why is an MEP beneficial from a German tax standpoint?
The basic idea is allowing management to earn income from equity or debt instruments, which are both subject to beneficial tax rates of 26.5–28.5%, as opposed to ordinary income, which is subject to a tax rate of up to 47.5%.
What are the specific requirements that have to be taken care of?
I think what’s so difficult about management equity programs in Germany is that managers need to acquire beneficial ownership in the instruments. That includes all rights and restrictions that the instrument is subject to — plus managers have to acquire at fair market terms, they have to sell at fair market terms. But at the end of the day, it’s an overall concept. It has a lot of grey areas, and people need to look at all the intricacies.
How will the environment for MEPs change in Germany?
It’s going to be very interesting to see how management equity programs develop in Germany. I think that sweet equity features will be at the focus of tax practitioners, and I think we are perfectly equipped here at Kirkland & Ellis with the teams that we have to help our clients understand all those issues and potential solutions.