GERMANY Trends and Developments Contributed by: Felix Blobel and Sascha Leske, Noerr
and legal tech, can be expected to enhance effi - ciency in VC deal making in future. Employee incentive schemes – the quest continues Germany’s start-up segment has long struggled with comparatively unattractive tax rules for employee equity participation schemes. His - torically, employees receiving shares would be taxed at the time of grant – regardless of liquid - ity – resulting in the infamous “dry income” tax burdens that rendered equity packages imprac - tical. This placed German start-ups at a struc - tural disadvantage compared to peers in the UK, France, or the US, where stock options and simi - lar instruments are often tax-deferred or more lightly taxed. While first attempts of a reform have already been introduced in 2021, its practical impact had been limited due to strict eligibility crite - ria and low effectiveness in mitigating the dry- income-effect. In January 2024, Germany intro - duced long-awaited changes to the taxation of employee equity participation schemes aimed at relaxing the eligibility criteria and increasing the effectiveness of the available taxation relief. Under the new regime, taxation on qualifying employee share grants can be deferred until a liquidity event, such as a sale or IPO, occurs. Only the deferred tax burden, based on the val - ue of the allocated shares at the point in time of the grant, is subject to the employee’s per - sonal income tax, while the additional accrued value realised in the liquidity event is taxed at a flat capital gains rate of approximately 27.5%. The eligibility criteria were expanded to cover a broader range of companies. Companies must have fewer than 250 employees, less than EUR50 million in turnover and assets of less than EUR43 million at the time of the grant or in any of the six calendar years prior to the grant. At
the time of the grant the company must be less than 20 years old. The German start-up ecosystem has called for additional reforms to expand ESOP eligibil - ity and simplify compliance. Uncertainties and costs around determining applicable valuations at grant and structuring complexities where companies wish to roll out ESOP schemes with real shares to a larger number of employees while keeping their cap table manageable often result in the need for pooling arrangements or Management Companies as intermediaries. Moreover, leaver cases trigger taxation and thus require additional structuring or workarounds. As a result of these developments, the current German start-up landscape displays a mixed pattern of tools and approaches to employee incentive schemes. In light of the perceived shortcomings of the recent reforms relating to real equity grants, many companies still rely on virtual participation schemes (phantom shares or “VSOPs” ), which do not grant actual equity and are more flexible in structuring and administra - tion, but lack the alignment incentives and tax advantages of real equity. Some market partici - pants have pushed for hybrid instruments such as profit participation rights ( Genussrechte ), to be able to combine the tax advantages of real shares provided by the new rules with the easy and cost-efficient administration applica - ble to virtual instruments. As things stand now, the “golden formula” for employee incentive schemes in Germany has not yet been found, so the dialogue on this topic between market participants, tax authorities and regulators is set to continue. The role of AI in VC operations While AI remains a dominant investment theme in Germany’s VC landscape, it is increasingly
239 CHAMBERS.COM
Powered by FlippingBook