The intention to increase the attractiveness of employee participation for startups was already enshrined in the coalition agreement. This intention is now to be implemented with the Future Financing Act. The proposed legislation builds on the Fund Location Act (FoStoG), which was already passed in 2021, and improves the practicality of the regulations in some areas, but falls far short of expectations in others or even worsens them.
If an employee receives an asset participation in the employer's company in return for their work, this leads to income from employment in accordance with Section 19 EStG.
Steps towards independence
Employee share ownership: Increase in the tax-free allowance pursuant to Section 3 no. 39 EStG
The tax-free allowance will be increased to EUR 2,000 from the 2024 assessment period (see Section 3 no. 39 sentence 1 EStG, new version). If the non-cash benefit granted exceeds the tax-free amount, only the excess amount is subject to tax. The planned increase to EUR 5,000 was not implemented. However, the planned additionality requirement, which would have granted tax exemption for shareholdings worth between EUR 2,000 and EUR 5,000 only in the case of additional remuneration on top of the salary already owed, was cancelled. A holding period originally planned for the asset participations granted is also not part of the changes to the Income Tax Act as a result of the Future Financing Act. On the positive side, this means that deferred compensation can continue to be tax-free within the exemption limits; in terms of social security, however, contributions will continue to be made - an ugly mistake on the part of the legislator and a bureaucracy booster for companies in practice.
Deferred taxation of genuine capital shares
Furthermore, the regulations on deferred taxation of non-cash benefits in accordance with Section 19a EStG have been extended. These changes are intended to support startups and SMEs by improving the recruitment and retention of employees. At the same time, the so-called "dry income" problem, in which employees are taxed without an inflow of funds, is to be mitigated or avoided for employees. With the promulgation of the ZuFinG, the requirements and thus the scope of application of Section 19a EStG will be expanded to include older and already established startups. Previously, only a few companies were subject to this regulation, which is why subsequent taxation was hardly utilised in practice.
Before the ZuFinG, the subsidy generally applied to companies that were categorised as micro-enterprises or SMEs at the time the shares were granted. These size criteria have now been extended many times over with the ZuFinG:
- Maximum annual turnover of EUR 100 million (previously EUR 50 million)
- Maximum annual balance sheet total of EUR 86 million (previously EUR 43 million)
- Maximum number of employees: 1,000 employees (previously 250 employees)
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These extended characteristics must have been present either in the year of granting (1st opportunity) or in at least one of the previous six financial years (further six opportunities). Previously, only the previous year was recorded as the audit year. In addition, the company must not be "older" than 20 years, calculated backwards from the date of the investment to the date of foundation. The courts will probably have to decide whether or not tax-neutral reorganisations to form a new company are to be regarded as incorporation within the meaning of the law.
Probably the most practice-relevant changes relate to the granting of shares to startups: If shares are not granted by the company itself, but by the (founding) shareholders, this is now also an eligible participation scenario. The provision is made more specific by clarifying that the standard should also be applicable to shares with restricted transferability where the transfer is limited by corresponding provisions (e.g. the possibility of realising the shareholdings only after the company has given its consent; see section 19a (1) sentence 3 EStG, new version). This structure is almost always found in the case of shares in startups in order to avoid unwelcome transfers of shares and thus control the development of the group of shareholders by the founding shareholders or investors.
CONCLUSION
The increase in the tax-free amount is to be welcomed in principle, in particular the deletion of the temporary additionality requirement and the holding periods for preferentially transferred asset participations pursuant to Section 3 no. 39 EstG. This increases practicability and reduces bureaucracy; the latter would be even less if social security contributions were paid in the same way as wage tax.
In a European comparison, however, the increased allowance of EUR 2,000 is still very low. Austria, for example, grants an allowance of up to EUR 4,500, while Italy is currently discussing an increase to EUR 4,000. However, compared to the legal situation before 2021, when the tax-free amount in Germany was "only" EUR 360, this shows a positive trend. Whether the "dry income" issue has now been effectively resolved with the new Section 19a EStG will also depend in future on how the tax authorities and case law behave or judge in relation to the result desired by the legislator. In any case, it is clear that the future legal situation will not work without experienced tax advisors. Tax problems relating to employee shareholdings will therefore continue to be the order of the day and - from an international perspective - will not necessarily catapult Germany to the forefront as a startup location.