Improving of staff shareholding?

ESOP Reform / Fund Status Act: Improving Staff Ownership?

Compared to the international competition, Germany is far behind in terms of Staff Ownership opportunities. This is mainly due to the restrictive tax treatment. Those who nevertheless decide to involve their employees must resort to complex constructs such as “virtual employee options” (VSOPs), phantom shares or stock appreciation rights. After years of experts and start-ups drawing attention to this problem, the federal government has now decided to simplify the employee status with the draft of the so-called “Fund Location Act”.

Wie funktionieren Mitarbeiterbeteiligungen überhaupt?

Staff Ownership is essentially profit-sharing and serves as an incentive to recruit skilled workers. In the event of an IPO or exit of the start-up, the employees are then paid their shareholdings in the company.

What are the current complaints?

The main problem is the so-called dry-income problem. This concerns the taxation point at the time of allocation of concessionary shares or options. In principle, tax is already due at the time of allocation, i.e. before the (virtual) business share could bring in any money at all. This is problematic because before an exit, often neither the company nor the employee has sufficient funds to offset the short-term tax burden.

What should change now?

In particular, with regard to the dry income problem, the tax on the allocation of (virtual) shares should be able to be postponed into the future for the first time. According to the draft bill, the prerequisite for this is that the shares are genuine business shares, i.e. they are not merely options, and that the company is an SME, i.e. it employs fewer than 250 people, for example, and is not older than ten years.

Criticism of the draft

Although the planned reform leads to an improvement in some areas, it does not solve all the problems of Staff Ownership in Germany. On the one hand, the requirement that it must be an SME already excludes many “grow-ups” – an area in which Germany is already behind the international competition. On the other hand, the allocation of real shares is not unproblematic, so that many start-ups are likely to fail because of this requirement. In addition, the planned draft bill provides that the tax burden can be deferred for a maximum of 10 years from the time the shares are awarded. Statistically, however, many start-ups take longer than 10 years to exit; consequently, they also benefit only to a limited extent from the new regulation. In the worst case, this time limit of 10 years can even lead to successful start-ups being pushed into the exit phase too early.

Finally, the draft bill ties the possibility of deferring the tax burden into the future to remaining in the company. However, this practically leads to employees being forced to stay in a company because of taxes that would otherwise be incurred. This is precisely not the case with the VSOP solutions currently used under the law of obligations. Despite the planned draft bill, a departure from this seems unlikely in practice for this very reason.

Finance Minister Scholz plans to bring the new rules into force on 1 July 2021. Representatives of start-ups, however, are first demanding an amendment to the draft. Wir verfolgen die Entwicklungen und halten Sie auf dem Laufenden!