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Legal reform for employee participation in startups

An article by attorney Fiona Schönbohm

Startups are booming - Germany-wide, Europe-wide, worldwide. However, there is still a need for optimization of the tax conditions for start-ups in Germany - especially when it comes to alternative financing options for start-ups.

According to Finance Minister Scholz, a draft law from the Ministry of Finance is now to "strengthen Germany as a fund location". What comes in the guise of tax breaks for large investment funds, however, also implements essential demands of the start-up lobby and small and medium-sized businesses. We briefly present the main points of the draft.

Background: Importance of participation programs for start-ups

A significant change for start-ups, but also for smaller medium-sized companies, is coming for employee participation. It is becoming increasingly popular, especially for companies in the start-up phase, to allow employees to share in the success of the company in the form of real company shares or virtual shares. This binds the employees to the company for a longer period of time and can be a compensation for a lower payment at the beginning of the company.

From a tax point of view, however, it is precisely the real participation or a comparable virtual participation in the company that often presents the parties involved with a number of challenges. It is not uncommon for the share that the employee receives to be taxable at the time of transfer, i.e. at the beginning of the employment relationship. However, many employees are unable to bear this tax burden before they receive the actual profit from the share.

Tax reform for Employee participation

In the future, the tax-free allowance for such asset investments is to be increased from 360 euros to 720 euros per year. In addition, the taxes on the income from the investment are to become due only at a later date -- usually at the time of the sale, but at the latest after 10 years or when there is a change of employer.

This regulation is to apply not only to founding start-ups, but also to micro-enterprises and medium-sized businesses, as the Ministry of Finance recently announced.

Tax relief for investment funds

But also the big fish should participate in the new reform. According to the draft, investment funds will in future not have to pay VAT on the administrative costs of venture capital funds.

The change plays a role in the choice of location: According to the Ministry of Finance, the current regulation has led to many investment companies registering their headquarters in Luxembourg, Switzerland or on a Caribbean island because it is more attractive from a tax perspective. With the change, the Ministry of Finance wants to achieve a return of the companies to Germany.

When does the new regulation apply?

According to the Minister of Finance, the 120-page draft should come into force on July 1, 2021. However, the proposals from the Ministry of Finance are not yet final. First, experts and industry associations have until December 16, 2020 to comment on the proposals.

In addition, the draft law must still be submitted to the cabinet for approval. It remains to be seen whether an agreement can be reached by the end of the year.