Tax aspects at a glance
German Federal Ministries have published the draft Financing for the Future Act (“FFA”; Zukunftsfinanzierungsgesetz), which aims at strengthening the performance of the German capital market and increasing the attractiveness of Germany as one of the most important financial centers in Europe. Against this background, improved tax conditions, particularly for employee participation schemes, shall make start-ups, scale-ups and other SMEs (small and medium-sized enterprises) more appealing for highly qualified personnel. This includes the expansion of a preferential deferred taxation regime and the increase of tax-free allowances. Further, state subsidies for wealth creation shall be expanded to generally all employees. The aforementioned tax provisions of the draft FFA shall have effect generally as of 2024.
Deferred taxation for certain employee participation schemes
Most importantly, the long-existing downside of taxable dry income resulting from many common employee participation schemes shall be addressed for an increased number of enterprises (like start-ups, scale-ups and other SMEs) by expanding a deferred taxation regime and introducing various further improvements (like a preferential lump sum tax rate).
Taxable benefits in kind resulting from the free or discounted grant of employee participations shall be eligible for the deferred taxation regime if the relevant enterprise (1) was founded not more than 20 years ago and (2) has, in the current or in at least one of the six preceding years, (a) employed fewer than 500 people (full-time equivalents) and (b) either generated annual revenues of not more than EUR 100 million or showed a balance sheet total of not more than EUR 86 million. This will be a remarkable improvement compared to the current terms. The employee participation needs to be granted in addition to the owed wages; this means that any kind of conversion of current or agreed future compensation is not allowed. The participation may be granted by the employer or by a shareholder of the employer. The participation may relate to the enterprise of the employer or an affiliated company.
With the prior consent of the employee, the benefit in kind resulting from the free or discounted grant of the employee participation (to the extent not already tax free under the allowance described below) can be deferred and does not have to be taxed before (a) the participation is disposed of in full or in part, (b) 20 years have lapsed since the grant of the participation or (c) the employment contract has been terminated. Further, if the employer assumes a secondary liability for the wage tax, the scenarios mentioned under clauses (b) and (c) above shall not qualify as a taxable realization event (i.e., the income tax is payable not before the employee actually disposes of the participation). In order to further reduce the risk of dry income in so-called leaver events, the draft FFA provides that, if the participation is reacquired by the employer or one of its affiliates, the consideration actually received by the employee (rather than the fair market value of the participation at the time of the grant) shall be decisive for calculating the taxable benefit in kind.
The benefit in kind resulting from the grant of the participation is generally treated like salary income. However, under the current draft FFA (which may still change), the employer shall be entitled to opt for a special flat lump sum wage tax rate of 25%, which would be identical to the flat tax rate applicable to investment income and generally more favorable than the employee’s ordinary progressive income tax rate of up to 45%. If this special lump sum rate survives the legislative process, it will significantly incentivize employee participations in various forms of SMEs.
Increase of tax-free allowance
The annual amount of a tax-free allowance for the gratuitous or discounted grant of a participation in the enterprise of the employer (or an affiliate of the employer) shall be increased from EUR 1,440 to EUR 5,000. This allowance will be available only if the participation is offered in addition to the owed wages (no conversion of cash salary). Moreover, the participation must be offered to all employees who have been working for the employer for at least one year (principle of equal treatment). If the employee disposes of the participation, gratuitously or for a consideration, within a holding period of three years after its acquisition, the previously tax-free benefits in kind shall be subsequently taxed (i.e., they will not be taken into account when deducting the acquisition costs from the (deemed) disposal proceeds). The capital gain resulting from the disposal of a participation is subject to a favorable tax regime (compared to the regular taxation of salary income). Depending on the percentage of the employee participation, the capital gain will be taxable either pursuant to the flat tax regime for investment income (generally at a tax rate of 25%) or pursuant to the similarly preferential partial income regime (Teileinkünfteverfahren).
Extension of the employee savings bonus (Arbeitnehmer-Sparzulage)
Pursuant to current law, the employee savings bonus is only available if the employee’s taxable income in the relevant year does not exceed certain thresholds. These income thresholds shall be abolished for most of the qualifying investments (vermögenswirksame Leistungen). Further, the annual amount of qualifying investments (vermögenswirksame Leistungen) that participate in the employee savings bonus shall be increased from EUR 400 to EUR 1,200, resulting in a maximum employee savings bonus of EUR 240 (EUR 1,200 x 20%) per year.
No incentives for stock investments
The draft FFA does not include any particular incentives for stock investments, although, in 2022, the Ministry of Finance had announced that a tax-free allowance for stock and stock fund investments shall be introduced and that the heavily criticized loss limitation rules for stock investments, future contracts etc. shall be abolished.