Employee participation schemes - new tax regulations from 2024 onwards

published on 21 June 2024 | reading time approx. 4 minutes

Employee share ownership is still an attractive instrument for retaining employees in the company in the long term and allowing them to participate in the company's success. The tax appeal of this participation has been rather limited to date. With effect from 1 January 2024, the legislator has improved a number of regulations relating to employee participation in start-ups with the Future Financing Act (Zukunftsfinanzierungsgesetz, ZuFinG), which have already found their way into tax legislation in 2021 as part of the Fund Location Act (Fondsstandortgesetz). The main tax regulations and their requirements are presented below.

Tax allowance according to § 3 no. 39 ITA

If an employee receives a participation in the employer's company free of charge or at a reduced price in return for making their labour available, this benefit constitutes income from employment (§ 19 ITA).

From the 2024 assessment period, an annual allowance of € 2,000 (previously € 1,440) will be granted for this (§ 3 no. 39 sentence 1 ITA). Certain asset participations within the meaning of the 5th Capital Accumulation Act (5. Vermögensbildungsgesetz) are eligible; these include shares, convertible bonds and profit participation bonds, profit participation rights, GmbH participations and silent partnerships. So-called virtual shares do not benefit from the regulations.

It is required that the participation is generally open to all employees (with unlimited or limited income tax liability) who have been employed by the company for at least one year without interruption at the time of the offer. The participation structure for individual employees can be differentiated (e.g. with regard to the amount of an "additional payment"), provided there are objective reasons for this under labour law. The fair market value of the shareholding is decisive for the assessment of whether it is a discounted or gratuitous transfer.

Deferred taxation in accordance with § 19 ITA

The Fund Location Act reintroduced the provision of § 19a ITA. This stipulates that the taxation of non-cash benefits from certain asset investments can be deferred under certain conditions (e.g. to the time of sale) in order to avoid the taxation of so-called "dry income". The scope of application is now being extended by the ZuFinG to include older and already grown start-ups.

Beneficiaries are employees who are in a current employment relationship. In addition, the employee must agree to a deferral of the tax due as part of the wage tax deduction procedure.

In general, the subsidy only applies if the employer's company does not exceed certain thresholds in relation to the definition of micro, small and medium-sized enterprises (SMEs) at the time of the transfer of the shareholding or in one of the six preceding calendar years (§ 19a para. 3 ITA, Art. 2 para. 1 of the Annex to the Commission Recommendation of 6 May 2003 - OJ L 124, 20.5.2003, p. 36 - as amended). These limits include a maximum annual turnover of € 100 million (previously € 50 million), a maximum annual balance sheet total of € 86 million (previously € 43 million) and a maximum number of employees of 1,000 (previously 250). Furthermore, the company's relevant founding period may not be more than 20 years (previously 12 years) prior to the date of the investment.

In future, participations granted by the (founding) shareholders will also be favoured (§ 19a para. 1 sentence 1 ITA). The provision is supplemented by the clarification that the regulation should also apply to so-called restricted shares where the transfer is limited by corresponding provisions, which is not uncommon for start-ups (§ 19a para. 1 sentence 3 ITA).

As described above, the non-cash benefit is initially not subject to taxation in the calendar year in which the shareholding is transferred and is deferred (§ 19a para. 1 sentence 1 ITA). The tax-free amount pursuant to § 3 no. 39 ITA must be deducted when determining the non-cash benefit. However, it should be noted that the non-cash benefit is subject to regular social security contributions in the calendar year of the transfer. The deferral does not apply here.

Subsequent taxation

Taxation is made up for or the deferral is cancelled (§ 19a para. 4 sentence 1 ITA) if

the investment is transferred in whole or in part (for fee or free of charge),
15 years (previously 12 years) have passed since the transfer of the shareholding or
the employment relationship is terminated.

If the fair market value of the asset participation less any additional payments made by the employee in the case of a discounted transfer is lower at the time of subsequent taxation than the non-taxed salary pursuant to § 19a para. 1 ITA, only the fair market value less any additional payments made is subject to taxation (§ 19a para. 4 sentence 4 ITA). This means that reductions in value are generally taken into account. This does not apply if the reduction in value is not business-related or is based on a measure under company law, in particular a distribution or return of capital contributions (§ 19a para. 4 sentence 6 ITA).

Note: Interim increases in value are not subject to wage tax deduction. These are generally taxed as investment income when they are realised.

If the shares are repurchased by the employer, a shareholder of the employer or a company within the meaning of § 18 AktG, the remuneration actually paid by the employer is decisive for taxation, not the fair market value (§ 19a para. 4 sentence 4 ITA).

No taxation before transfer

The ZuFinG also introduced the possibility for the employer to submit a declaration of liability for the wage tax due, so that the employee is not subject to subsequent taxation if the shares are sold or the employment relationship is terminated (§ 19a para. 4a ITA). Only the subsequent transfer of the asset participation then triggers taxation. In this case, the permanent establishment tax office can make a direct claim against the employer as the liable debtor.

Wage tax call information

In order to obtain legal certainty regarding the amount of the non-taxable non-cash benefit in accordance with § 19a para. 1 ITA, employers and employees can file a wage tax information request (§§ 19a para. 5, 42e ITA). This procedure makes sense in order to have legal certainty in connection with the assessment of the non-cash benefit.

Conclusion

With the revision of § 19a ITA as part of the ZuFinG, the legislator is taking the right step towards strengthening the competitiveness of Germany as a start-up location and is providing important impetus for strengthening employee participation. However, there is still a need for improvement with regard to synchronisation with social security, the explicit inclusion of shareholdings in group companies or the extension to virtual shareholdings.