On 12 April 2023, the Federal Ministry of Finance and the Federal Ministry of Justice published the draft bill for a law on the financing of future-proof investments(Zukunftsfinanzierungsgesetz - "ZuFinG-E").
The draft pursues the ambitious goal of strengthening the performance of the German capital market and increasing the attractiveness of the German financial location in the European financial center through a large number of proposed amendments to company, financial market and tax law.
Among other things, improved tax framework conditions for employee equity participation are intended to make it easier for young companies to attract employees and to hold their own in the international competition for talent.
In the following, we provide an overview of the main proposals for improving the tax framework for employee share ownership in the ZuFinG-E.
The improvement of the tax framework for employee equity participation (hereinafter also referred to as "employee shares") is intended to make asset formation more attractive for employees. In addition to the increase of the tax exemption, the problem of dry income taxation when granting employee shares is to be alleviated.
I. Increase of the tax exemption for employee shares to €5,000
The tax exemption for granting employee shares provided for in section 3 no. 39 sentence 1 EStG is to be increased from € 1,440 to € 5,000 per year and per employee (section 3 no. 39 sentence 1 EStG-E).
In order to avoid windfall effects from targeted deferred compensation and to promote long-term participation in the employer company, the following supplementary regulations are intended:
- The allowance is only to be granted if theemployee shares are granted in addition to the salary (i.e. exclusion in the case of targeted deferred compensation).
- In case of a sale of the employee shares, the monetary benefit, which is tax-exempt according to section 3 no. 39 EStG, shall only be taken into account as acquisition costs after 3 years (section 20 (4b) EStG-E).
If the employee shares were sold before the minimum holding period of 3 years was reached, there would be no subsequent taxation with wage tax. However, the original tax-exempt amount - for lack of consideration as acquisition costs - would be indirectly subject to the withholding tax (25% plus solidarity surcharge and, if applicable, church tax) due to the higher capital gain.
The increase in the tax-exempt amount would noticeably increase the attractiveness of granting employee shares for both employers and employees. The requirement of a partial sale of shares to cover wage tax (so-called sell to cover) would only be necessary for individual grants of more than € 5,000. This would particularly benefit companies for which a sell-to-cover has so far only been possible with considerable effort due to the low trading volume of their shares.
II. Easier tax deferral when granting employee shares
The ZuFinG-E is also intended to facilitate the possibility of a tax deferral when granting employee shares under Section 19a EStG. Section 19a EStG, introduced in 2021, is intended to make it possible for employees of start-up and growth companies to receive employee shares through tax deferral without dry income taxation. From the point of view of the employer company, this will also have a liquidity-saving effect.
A significant expansion of the scope of application of section 19a EStG is intended:
i) In addition to shares granted by the employer, shares in the employer's company granted by a shareholder of the employer are also to be favored. This takes into account that employee shares in the employer company are often not granted by the employer company itself but by the (founding) shareholders.
ii) The tax deferral option is to be extended to the granting of shares in affiliated companies of the employer within the meaning of section 18 AktG. In the future, the granting of shares to employees in multi-level group structures would thus also be favored.
iii) The thresholds for classification as a beneficiary employer are to be raised (Section 19a (3) EStG-E):
- In the future, the employer company may not exceed twice the SME threshold (new: less than 500 employees, annual turnover not exceeding €100 million; annual balance sheet total not exceeding €86 million). Up to now, the single SME threshold has been applied here.
- The observation period for exceeding the threshold is to be increased from 2 to 7 years.
- The founding of the company must not date back more than 20 years (previously 12 years).
The maximum tax deferral period is to be extended from currently 12 years to 20 years from the date of transfer of the asset interest (Section 19a (4) sentence 1 no. 2 EStG-E). This is also to apply to shares that were and will be transferred before 2024. However, taxation will continue to apply automatically if the employment relationship with the previous employer is terminated (especially in leaver scenarios).
In the future, the employer shall have the right to choose to pay the wage tax on the non-cash benefit at a flat tax rate of 25%, whereby it remains possible to pass on the flat wage tax to the employees. This is intended to alleviate high one-off wage tax burdens. The tax exemption under section 3 no. 39 EStG would be taken into account in advance to reduce the tax burden.
In the case of a repurchase of the shares by the employer, not the common value of the shares but the remuneration granted by the employer is to apply for the determination of the basis of assessment (Section 19a (4) sentence 4 2nd half sentence EStG-E). Here, too, the common practice is taken into account, according to which (bad) leaver regulations regularly provide for a value determination for the reacquisition that deviates from the common value.
The draft bill on the ZuFinG is now subject to interdepartmental coordination and is expected to enter into force as early as 2024 after the completion of the legislative process. We look forward to keeping you informed about the developments of the ZuFinG!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.