Employee shares – Changes due to the German Future Financing Act
Taxation of employee shares
In 2021, a special provision was introduced, via Section 19a of the Income Tax Act (Einkommenssteuergesetz, EStG), on the tax treatment of capital participations. This provision promoted the acquisition of real company shares where equity participations (e.g. shares or interests in a GmbH [German private limited company]) are directly transferred to employees. In contrast to this, there are also so-called virtual shares where the employees participate in the company’s success via special payments that depend on how the business performs; however, here the employees do not receive any shares. In actual fact, few companies have made use of the provision that promotes transfers of real shares because employees were frequently faced with the problem of so-called dry income. What is meant here is when, from a tax perspective, the benefit from the participation that has been received is deemed to have already been realised even though the capital gain has not yet been paid to the employee. This would be the case, for example, when moving to a new employer or when a time-limit has expired. Consequently, tax would have to be paid even though there has been no liquidity inflow. As a result, employees could be faced with considerable financial challenges.
The provisions relating to employee shares were adjusted and expanded via the Future Financing Act (Zukunftsfinanzierungsgesetz, ZuFinG). The aim of the lawmakers was thus to mobilise more private capital, make Germany a more attractive financial centre and invigorate the equity culture in Germany.
Changes for start-ups due to the Future Financing Act
The aim of the changes is to create, in particular, better conditions for start-ups as well as for small and medium-sized enterprises (SMEs).
Defusing the dry income problem
With a view to defusing the dry income problem of Section 19a EStG, the ZuFinG provided for the adjustment or additions to the following provisions:
- Taxation of the non-cash benefits from capital participations at the very latest after 15 years instead of previously after 12 years (Section 19a(4) sentence 1 no. 2 EStG).
- In the case of a buy-back of the shares by the employer, solely the remuneration paid will be relevant and no longer the fair market value (Section 19a(4) sentence 4 EStG).
- No taxation after the end of the employment relationship or the back tax deadline if the employer declares that it is willing to assume responsibility for paying the payroll tax related to a subsequent sale (Section 19a(4a) EStG).
- Now, besides shares in a company itself, the more favourable tax treatment has also been extended to transfers of shares from shareholders to employees (Section 19a(1) sentence 1 EStG).
- The tax deferral will also be granted for shares with restricted transferability (Section 19a(1) sentence 3 EStG)
Broadening the scope of application
In addition to the deferred taxation provisions, the scope of application of the rules has been broadened. In future, more companies will have the opportunity to benefit from the preferential treatment. It will be possible to make use of the privileges in future if the thresholds listed below have not been exceeded on the transfer date or in the six preceding calendar years. The founding date of a company may now already be 20 (previously 12) years ago (Section 19a(3) EStG).
| Thresholds | Previously | Now |
|---|---|---|
| Annual revenues or total assets | max. €50m or €43m | max. €100m or €86m |
| Number of employees | 250 | 1,000 |
Requirements linked to the type of participation
In order to be able to make use of the privileges, the employee has to hold an actual interest in the capital of the company and not just virtual shares. For example, in the case of a GmbH, an employee would have to be granted genuine capital interests; this would require an agreement authenticated by a notary. The privileges under Section 19a EStG would also apply if the interest is granted indirectly via a partnership – this is normally done by means of a simple written agreement.
Please note: The extension of the provision under Section 19a EStG to companies in a group where the staff member is not employed had been included in the draft of the legislation, however this was not implemented.
Changes for all companies
Apart from the provision described above for young companies, the tax-exempt amount for shares in the employer’s company – which are obtained free of charge or transferred at a discount within the scope of the employment relationship – was increased generally for all companies, pursuant to Section 3 no. 39 sentence 1 EStG, from €1,440 to €2,000 per calendar year. Here, in contrast to Section 19a EStG, shares in companies defined in Section 18 of the German Stock Corporation Act are still privileged, too. This means that, for example, shares in group companies may also be transferred in cases where the member of staff is not employed.