On January 20, 2021, the German government passed the government draft of a law to strengthen Germany as a fund location – the so-called Fund Location Act.
The new Section 19a of the German Income Tax Act (EStG) is intended to promote employee shareholdings in start-up companies by taxing the non-cash benefit from the granting of the employee shareholding only at a later date.
In principle, this is intended to prevent the granting of the participation from leading to a tax payment without the employee having received liquid funds (so-called dry income taxation). If the conditions formulated in the provision are met, taxation only takes place when (i) the shareholding is transferred for a consideration or free of charge or is included in business assets or (ii) the employment relationship with the employer ends, (iii) at the latest, however, after the expiry of ten years after the granting.
When determining the pecuniary advantage, the tax-free allowance pursuant to Section 3 No. 39 of the German Income Tax Act may be deducted under the conditions specified therein. The tax allowance is to be increased from EUR 360 to EUR 720 p.a. by the fund local law.
In principle, the new regulation does not change the taxation of the non-cash benefit as wages according to the standard tax rate. However, the rate reduction for extraordinary income in accordance with Section 34 (1) of the German Income Tax Act (EStG) (so-called one-fifth rule) does come into consideration.
According to the government draft, the new regulation has no effect on social security, i.e. the non-cash benefit from the granting of employee participation is immediately subject to the obligation to pay contributions without any deferral.
In their recommendations of February 22, 2021, the Bundesrat committees suggested a number of changes to the planned Section 19a EStG. Among other things, the tax-free amount under Section 3 No. 39 EStG is to be raised to EUR 5,000. The founding of the start-up is to be allowed to take place fifteen instead of ten years ago, taxation is to take place after fifteen instead of ten years at the latest and the change of employer is to be deleted as an event triggering taxation. Furthermore, it is to be examined whether the principle of deferred taxation can also be extended to social security.