Change in taxation of employee participation programs

In Germany the taxation of employee participations has been reformed. In order to avoid that Austria is not placed at a disadvantage as a business location, swift action must now be taken. Find below the most important changes in Germany in this context and why there is a need for action in Austria now.

1. tax dilemma with employee participations

In general due to the granting of shares at a reduced price or free of charge, beneficiaries who are employees may receive a monetary benefit (market value of the shares granted minus any purchase price) in the form of a taxable benefit in kind.

This means that at the time the share is granted without cash inflow, high tax amounts and payroll taxes would have to be paid under certain circumstances, although investments in startups are often exposed to a corresponding value risk at this time. In addition often neither the startup nor the beneficiary have the necessary liquidity to pay corresponding taxes (these cases are also referred to as „dry income“).

Worst case scenario is that a benefit in kind is assumed by the financial authorities at the time the share is granted, but ultimately the startup does not make the breakthrough, so that the hoped-for cash inflow does not occur. The employee would therefore be faced with a double risk: on the one hand, pre-taxation without cash inflow and on the other hand a cash inflow that is too low with regard to the originally taxed benefit in kind.

2. Current changes in Germany – tax allowances and tax break

As of July 1, 2021, there will be tax breaks that are particularly attractive for start-ups. The annual tax allowance for employees to take over company shares increases from 360 euros to 1,440 euros. The exceeding benefit in kind initially remains tax-free. The benefit in kind will be calculated at granting date, but payroll tax is not yet levied. Social security contributions, on the other hand, are not subject to any special treatment. This applies to shares, GmbH participations, certain convertible bonds, profit participation rights and silent participations.

However, important is that only young small and medium-sized enterprises (SMEs) benefit from this new regulation. The German legislator defines young SMEs as companies that meet the following requirements:

  • the company was founded no more than twelve years ago
  • the EU criteria for SMEs are met (full-time employees < 250 and annual turnover ≤ EUR 50 million or annual balance sheet total ≤ EUR 43 million)

Furthermore, the benefits are only granted if the free or reduced-price transfer of the shareholding is made in addition to the salary owed in any case.

From when the tax hits

A postponed taxation is made up in following cases:

  • 12 years after the granting date
  • employee transfers or gives away all or part of the shareholding
  • if the company is liquidated
  • in case the shareholding is placed in a business as asset
  • if the employee leaves the company (in this case there is an attractive exception: if the employer pays the previously unstated payroll tax at the end of the employment relationship, this does not lead to any further benefit in kind, which normally arises in net wage agreements)

More advantages

Due to the new regulation, a limitation of assessment and thus also the deferral interest is avoided.

If the fair market value of the shareholding less any additional payments made by the employee has fallen below the originally untaxed benefit in kind at the time of taxation, only the (then lower) fair market value of the shareholding at the time of taxation less any additional payment made is subject to taxation. This income tax-reducing effect only does not apply if the reduction in the value of the investment is not due to a business measure or if it is based on a measure under company law (in particular distribution or restitution of deposits).

The German legislator has added a further bonus: If employees hold the employee shareholding for at least 3 years, then employees with shareholdings benefit from a one-fifth rule. Only one fifth of the non-cash benefit affects the progressive tax rate. This means that employees benefit from a more favourable tax rate.

3. Call for action in Austria

Our neighbouring country Germany has evidently recognized the importance of this topic for the startup world and the urgent need for action, by implementing above mentioned regulations.

Against this background putting startups and their employees at a disadvantage compared to neighbouring countries such as Germany leads to an unjustified locational disadvantage for Austria. Since the Austrian legislature has not yet become active, there is an urgent need for action in order to avoid further locational disadvantage. Therefore the new German tax regulation could suit as role model.

 

Authors:

Christoph Puchner, Managing Director and Tax Advisor
& Katharina Geweßler, Tax Advisor from ECOVIS Austria