On November 17, 2023, the German Federal Parliament passed the “Act on the Financing of Investments to Secure the Future” (Future Financing Act); the German Federal Council gave its approval on November 24, 2023. The overriding objective is to strengthen Germany as a financial center through a comprehensive package of measures. For example, access to the capital market for start-ups and growth companies will be made easier by lowering the minimum amount of expected market liquidity for an IPO from the current EUR 1.25 million to EUR 1 million. In addition, financial market supervision is to be further modernized by removing barriers to digitalization and allowing English-language communication.
Furthermore, tax policy adjustments are planned, which we present below.
Tax Exemption for Employee Shareholdings
Currently, the employee’s benefit from the free or reduced-price transfer of asset participations in the form of shares or GmbH shares in the employer’s company is tax-free if this does not exceed a total of EUR 1,440 per calendar year (cf. Section 3 No. 39 of the German Income Tax Act (EStG)).
With effect from 2024, this amount is to be raised to EUR 2,000; EUR 5,000 was still planned in the government draft.
The previous requirements pursuant to Section 3 No. 39 EStG for the shareholding program continue to apply unchanged. In particular, the tax exemption only applies if the participation is open to at least all employees who have been continuously employed by the company for one year or more at the time of the announcement of the offer.
Under the current legal situation, the employee can dispose of tax-privileged asset participations transferred under Section 3 No. 39 EStG immediately after the transfer without losing the tax exemption, as there are no statutory lock-up or holding periods. To counteract this, the tax-free non-cash benefits are not to be included in the acquisition costs when determining the capital gain in the future if the asset participation was sold or transferred to a third party free of charge within three years (cf. Section 20 (4b) EStG, new version). As a result, withholding tax at a rate of 25 % will then be levied not only on any capital gain, but also on the portion of the salary that was previously left tax-free.
Special Rule for Income from Employment in the Case of Asset Participations
If an employee is transferred asset participations in the form of shares or GmbH shares in the employer’s company free of charge or at a reduced price by the employer (= micro, small and medium-sized enterprises (SMEs)) in addition to the salary owed anyway, the resulting non-cash benefits are initially not subject to income taxation at the time of the transfer (cf. Section 19a EStG). Taxation only takes place at a later point in time, namely upon disposal (in particular upon sale), termination of the employment relationship or after twelve years at the latest. However, a corresponding benefit should also be deemed to have accrued if it is legally impossible for the employee to dispose of the shareholding. Accordingly, the granting of restricted shares as an employee shareholding also falls under this. Irrespective of the deferred taxation, the tax allowance pursuant to Section 3 No. 39 EStG is already taken into account in advance.
The regulations in Section 19a EStG aim to promote SME companies by improving employee recruitment and retention and also to defuse the so-called dry-income problem for employees. Both are to be expanded with the present draft law:
- The subsidy can still only be granted if certain thresholds are not exceeded. In the future, however, the SME threshold will no longer be the single threshold, but rather double the threshold in terms of annual sales and annual balance sheet total, and four times the threshold in terms of the number of employees. Accordingly, the companies may employ up to 999 employees and may achieve an annual turnover of no more than EUR 100 million or an annual balance sheet total of no more than EUR 86 million. In addition, the time component of the threshold has been extended from two years to seven years.
- The relevant period of formation of the company is to be extended from currently twelve to in future twenty years prior to the date of participation.
- In future, the non-cash benefit from asset participations will only be taxed after fifteen years (at the latest). The postponement of the taxation date is also to apply to asset participations that are or were transferred before 2024.
In the event of termination of the employment relationship and a related repurchase of the shares, only the remuneration actually paid to the employee shall be decisive for taxation. This shall also apply to asset participations that are or were transferred before 2024.
In both cases, there should no longer be any taxation overall if the employer irrevocably declares on a voluntary basis that it assumes liability for the wage tax to be withheld and remitted.
Tax Exemption for so-called INVEST Grants
Grants paid from public funds for the acquisition of a share in a corporation amounting to 20 % of the acquisition costs, up to a maximum of EUR 100,000, are tax-exempt, provided that the conditions defined by law are met (cf. Section 3 No. 71 letter a) EStG).
In addition, the so-called exit grant on the occasion of the profitable sale of a share in a corporation is also tax-exempt (cf. Section 3 No. 71 letter b) EStG) if
- the seller is a natural person,
- the sold share was sold no earlier than three years and no later than ten years after the acquisition of the share,
- the capital gain amounts to at least EUR 2,000 and
- the grant is limited to 80 % of the acquisition costs.
It is planned that already for the assessment period 2023 the conditions for tax exemption pursuant to Section 3 No. 71 EStG will be adapted to those of the INVEST funding guideline (funding guideline for the subsidization of venture capital of private investors for young innovative companies), which came into force on February 6, 2023, so that in particular with regard to the acquisition grant the gap that may not be subject to tax exemption will be eliminated and with regard to the exit grant a limit of 25 % of the investment amount will be set.
The Future Financing Act is intended to further promote the still weak equity culture in Germany. In particular, the new regulations on employee participation in capital/assets are extremely encouraging. However, the measure announced in the key issues paper of the German Federal Ministry of Finance to introduce an allowance for gains from the sale of shares and equity fund units held as private assets has not yet been implemented; the same applies to the proposed abolition of the separate loss offsetting group for losses on the sale of shares.