Government encourages employees to engage in fledgling businesses
The German government has announced a tax reform aimed at encouraging employee participation in start-ups and small businesses. The changes, part of the draft of the Fund Location Act, are expected to make employee equity compensation more tax-efficient and strategically effective, bolstering the "war for talent" in the tech and start-up sectors.
According to calculations by the Finance Ministry, the new regulations are expected to result in revenue losses of 200 million euros next year, with these losses reducing to 585 million euros from 2023. These figures take into account the changes in tax treatment, such as the use of employee stock ownership plans (ESOPs) and profit participation rights under Section 19a of the German Income Tax Act.
One of the key features of the reform is the introduction of growth shares or hurdle shares. These instruments allow employees to receive real shares or equity-like instruments with deferred wage tax implications. This means that gains from employee shareholdings will only be taxed when the shares are sold at a profit.
The president of the German Startups Association, Christian Miele, described the new regulations as an important step to make employee participation more attractive for start-ups. Miele stated that this reform is necessary for start-ups to keep up in the global 'war for talent'. He also mentioned that these changes are crucial for Germany to maintain its competitive edge as an innovative tech hub.
Venture capital funds will also benefit from the changes, as they will no longer have to pay VAT on their management fees. This move is expected to encourage more investment in start-ups and small businesses.
The success of a start-up is said to depend crucially on attracting highly qualified specialists. To support this, the federal government has agreed to increase the tax-free maximum amount for asset participations in start-ups and small businesses from 360 euros to 720 euros, effective mid-2021.
The new regulations were reported by the "Handelsblatt" in its Friday edition. Miele made these comments to the "Handelsblatt" newspaper, emphasising the importance of these changes for the future of start-ups in Germany.
In summary, the German tax reform enhances the framework for employee equity participation in startups and small businesses, supporting talent acquisition and retention efforts fundamental to the ongoing "war for talent." The reform's complexity reflects its dual role as both a financial and strategic tool for startups to compete effectively in a tight labor market.
[1] Source: Handelsblatt, Friday edition.
Other sectors of the business industry may observe the German tax reform's impact on the tech and start-up sectors, considering the introduction of similar finance practices to attract and retain talent. The growth in technology, with its constant evolution, necessitates strategic use of financial tools to maintain competitive edge in the global market.
