Financial Services | Startups

Future Financing Act Adopted

Employee Equity Participation

On November 24, 2023, the Federal Council approved the Act for Financing Future-Securing Investments (Future Financing Act/ZuFinG). The aim of the new Future Financing Act is to facilitate access to the capital market, particularly for start-ups and small and medium-sized enterprises (SMEs). Additionally, investments in renewable energy will be promoted. The key changes in tax law concern tax-free employee equity participation. Specifically, the following applies from 2024:

Increased Tax Exemption

The ZuFinG provides for an increase in the tax exemption for employee equity participation from the current €1,440.00 to €2,000.00 (§ 3 No. 39 Sentence 1 of the Income Tax Act/EStG). The restriction proposed in the original draft of the law, which required that the benefit be provided in addition to the employee’s regular salary, is no longer included in the final version. Therefore, equity participation benefits up to the specified limit will continue to be tax-free even if they are financed through salary conversion. It remains the case that participation opportunities must be available to all employees who have been with the company for at least one year.

New Holding Period

With § 20 Abs. 4b EStG, a new holding period is introduced for employee equity participation. This is intended to prevent shares from being sold tax-free immediately after they are granted. The new statutory holding period is at least three years. If the equity is sold or transferred within three years, a flat tax of 25% will be levied not only on the capital gain but also on the previously tax-free portion of the salary.

Deferred Taxation

Significant changes were also made to the special provision in income tax law for earnings from dependent employment related to equity participation (§ 19a EStG). Among other things, the focus will now be on the doubled SME threshold, and the time component of the threshold will be extended from two to seven years.

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