I. Summary of the new regulation

• increase in the tax-free allowance from EUR 1,440 to EUR 2,000
• reduction of the “dry-income” problem
• extension of the material and temporal scope of application of § 19a EStG
• increase in threshold values and extension of the look-back period
• but: no flat-rate taxation, but taxation at the individual tax rate
• but: no social security benefits to date

II. In detail

The increased tax-free allowance of EUR 2,000 can be used once per calendar year.

a) Taxation date

The non-cash benefit from the granting of the participation is taxed if the asset participation is transferred in full or in part against payment or free of charge and otherwise only when cash is received.

Apart from that , taxation is generally deferred for up to 15 years. The decisive factor is not the market value of the shares at the time of acquisition, but at most the remuneration actually paid to the employee.

Even in cases where (i) the employee leaves the company (leaver event) and (ii) the 15-year period expires, the employee will not be taxed immediately if the employer assumes liability for income tax in the event of the sale of shares.

b) Favored shares

§ 19a EStG only covers shares in the employer’s company, but includes shares, that are granted by a shareholder of the employer. The originally planned so-called group clause, on the other hand, was deleted by the Finance Committee without replacement, but is still under discussion, as the Federal Government has stated that it will “observe” the effects of the deletion.

§ 19a EStG also applies to shares with restricted transferability. In practice, shares with restricted transferability are often chosen as part of employee participation programs. These prevent the employee from being able to dispose of the shareholding without the employer’s consent, so that the employer always retains control over the shareholder structure. Uncertainties exist because the Federal Council has stated that, in the case of shares with restricted transferability, there is generally no accrual of the non-cash benefit – a view which, in our opinion, is not supported by case law.

c) Affected companies

The regulation only applies to companies which were founded no more than 20 years ago, employ fewer than 1,000 employees, have an annual turnover of no more than EUR 100 million or a balance sheet total of no more than EUR 86 million.

The look-back period is seven years: If the company has not exceeded the thresholds in one of the last seven years, § 19a EStG is applicable. This not only covers “start-up companies” and SMEs (micro, small and medium-sized enterprises), but also extends the scope of application, in particular to “grown-ups”, “late-stage” and growth companies.

d) Taxation consequences of loss of value

§ 19a para. 4 sentences 4 to 6 EStG limits subsequent taxation in the event of negative performance of the asset participation. Accordingly, the amount of tax is limited to the fair market value of the asset participation less any additional payments made by the employee in the event of a reduction in value. In simple terms, taxation is only based on the lower value at the time of the acquisition or after a reduction in value. In the event of a complete loss in value of the shares (e.g. in the event of insolvency), there is therefore no taxation. For income tax purposes, however, no value below EUR 0 is to be recognized, so no loss is to be taken into account. The final consideration of losses in value at the asset level continues to apply in accordance with §§ 17, 20 para. 2 EStG.

e) Conversion of a VSOP into a preferential ESOP in accordance with § 19a EStG

A VSOP (virtual stock option program) always leads to taxation at the general tax rates when paid out, i.e. to a full wage tax burden, comparable to a bonus commitment. § 19a EStG, on the other hand, requires the granting of an equity participation, i.e. an ESOP. The conversion of a VSOP into an ESOP can make sense from a tax perspective in individual cases in order to benefit from the advantages of §19a EStG. The prerequisite is that the conversion of a VSOP into real shares does not qualify as a realization of the VSOP. This must be examined on a case-by-case basis.

f) What needs to be considered for social insurance?

The provision of § 19a EStG only shifts the time of taxation for income tax purposes, but not for the purpose of determining social security contributions. Accordingly, as before, social security contributions are not only due on the sale, but also on the transfer of the shareholding. This applies insofar as the contribution assessment limits have not already been exceeded. However, the Federal Government intends to examine whether the deferred taxation should apply to social security contributions as well.