Profit participation certificate (Genussschein)

A Genussschein (profit participation certificate) is a security that grants the holder certain property rights, but no say whatsoever in the company.

Features:

• Profit participation: like a share (variable, linked to company profits)
• Loss participation: possible – in loss-making years the distribution can be cancelled
• No voting rights: no participation in annual general meetings
• No ownership: you are NOT a co-owner of the company
• Subordinated: in insolvency, after bonds, before shares

Historical significance:

• Particularly popular with German banks (Commerzbank, Deutsche Bank)
• Bertelsmann profit participation certificates were an investor favourite for decades
• Fewer new certificates are issued today

Tax treatment (Germany):

• Distributions are subject to the flat-rate withholding tax (25% + Soli + church tax if applicable)
• For the issuer: often tax-deductible as a business expense (if debt-like)

Risks:

• Distributions can be cancelled: in loss-making years there's nothing
• Subordinated in insolvency: often a total loss
• Low liquidity: some certificates are hardly tradable
• Complex terms: every certificate has its own individual rules