The Future Financing Act (Zukunftsfinanzierungsgesetz) was passed by the German Bundestag on 17 November 2023, and received consent from the Bundesrat on 24 November 2023. The act aims to – among other things – enhance employee participation in equity. But while the new act delivers a number of tax incentives, it does not fully implement the more ambitious approach proposed in the draft legislation.
Employee participation plans: Tax exemption increased to EUR 2,000
- Employees’ monetary benefits resulting from acquiring free or discounted shares in their employer company or another group company are subject to wage tax to the extent the tax exemption amount is exceeded. The tax exemption, which was increased to the current amount of EUR 1,440 per calendar year in 2021, will now be further increased to EUR 2,000. However, this exemption is contingent – among other things – on the condition that the employee shares are offered to all employees who have been with the company for at least one year. This requirement will not be changed.
- The aforementioned tax exemption can also be applied in full (as is the case under the current law) to equity participation by means of deferred compensation (Entgeltumwandlung). The original bill provided for a higher exemption of EUR 5,000, but required (i) that the employee shares under certain circumstances be financed from additional compensation not originally owed by the employer – and under certain circumstances excluded the application of the tax exemption for deferred compensation – and (ii) provided for a three-year holding period (which was dropped in the final bill).
- Although the increased exemption does not reach the size of similar exemptions in other European countries and in particular is not being increased as much as the government bill had proposed (EUR 5,000), it still further contributes to the attractiveness of share-based compensation plans.
- The increased exemption will apply to shares granted from 1 January 2024.
Start-ups: special provisions for ESPPs expanded
- Applicable law already contains a special provision for the taxation of employee participation plans at start-ups that monetary benefits from the award or discounted acquisition of shares are generally only subject to wage tax when (i) the employee leaves the company (ii) the employee sells the shares or (iii) after a period of 12 years has lapsed since the transfer of shares – provided that the start-up itself meets certain criteria (“deferral of taxation”).
- The aforementioned tax exemption also applies when determining such monetary benefits, provided the respective requirements are met.
- As before, these special provisions for start-ups will not apply to deferred compensation. Both the current and new laws cover only shares issued in addition to the salary owed.
More start-ups to qualify
- The act aims to increase the number of start-ups that can benefit from the special provision by raising the companies’ maximum age from 12 to 20 years. Furthermore, the applicable thresholds and the period during which such requirements must be fulfilled will also be amended: Under the new legislation, the special regime will apply to companies with (i) less than 1,000 employees and (ii) annual sales of no more than EUR 100 million or total assets (on their balance sheet) of no more than EUR 86 million, in each case for the year in which the equity compensation is granted or in one of the six preceding calendar years.
Deferred taxation
- The taxation of the monetary benefit derived from receiving free or discounted shares can be deferred by up to 12 years. This period will now be extended to 15 years.
- In addition, if the employer voluntarily and irrevocably declares to assume liability for the wage tax to be withheld, only the subsequent “sale” will be taxable even if this sale occurs later than 15 years after receipt of shares or even after the employee has left the company.
Tax reduction for (bad) leavers
- Wage tax is generally assessed based on the value of the shares at the time they are granted or the value of the shares at sale or other taxable event, whichever is lower. However, if the employee is required to transfer the shares back to the employer at an amount below market value when they leave, only the lower amount is subject to wage tax.
Maximum volume of stock option programmes
- Additional leeway for structuring employee participation programmes is also provided by an increase of the permissible volume of conditional capital for funding stock option plans. Such conditional capital – which must be linked to an exclusion of subscription rights – could previously only comprise up to 10% of share capital; this limit has now been increased to 20%. It can be assumed that conditional capital will be an alternative sourcing option particularly for young companies that may not yet be listed on the stock exchange.
Application
- The new rules for start-ups will enter into force on 1 January 2024 and will be first applied to the 2024 assessment period and to wage tax deductions for 2024.
Equity-based compensation plans are a popular and effective tool for long-term staff retention and incentivising top performers. Gleiss Lutz offers its clients comprehensive advice on structuring national and global equity-based compensation plans. In addition to designing and assisting with all relevant legal aspects of the implementation of regular ESPPs, we advise extensively on long-term incentive plans for executives as well as management incentive programmes. Gleiss Lutz combines specialist expertise in corporate, tax, employment, capital markets, data protection and financial supervisory law, among others, with an integrated full-service approach – enabling us to deliver tailored and cost-effective solutions to our clients.
Feel free to contact us if you have any questions on equity-based employee participation plans or the impact of the proposed legislative changes on your current ESPP, or if you intend to take advantage of the improved framework for implementing ESPPs in Germany. Our experts are always happy to assist.
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