Draft German Financing for the Future Act published: Attractive tax rules for employee share ownership

Published Date
Apr 28, 2023
With the draft version of the Financing for Future Act (Zukunftsfinanzierungsgesetz; ZuFinG) recently published by the German Federal Ministries of Finance (Bunsdesministerium der Finanzen; BMF) and Justice (Bunsdesministerium der Justiz; BMJ), the German legislator aims to strengthen German capital market performance and increase Germany's attractiveness as a financial centre and a major player on a strong European financial market. The act's defined objective is to make it easier for companies, and in particular for start-ups, high-growth companies and small and medium-sized enterprises (SMEs) as drivers of innovation, to access the capital market and to raise equity.

In addition to amendments and adjustments to the legislation governing financial markets and corporations, the draft bill also plans to expand the provisions of section 19a of the German Income Tax Act (Einkommensteuergesetz; EStG) on deferred taxation of employee shareholdings and thus improve the situation relating to so-called "dry income". Employee share ownership is a popular instrument for attracting highly qualified staff, particularly among start-ups because such companies are often not yet in a position to pay standard market salaries. Granting corporate shareholdings (gesellschaftsrechtliche Unternehmensbeteiligungen) in this context addresses the problem because, in contrast to virtual shareholdings (virtuelle Beteiligungen) for instance, where employees are paid a bonus depending on how the company value performs, no liquidity is required.  One difficulty in this context, however, is that under current law, the granting of corporate shares to employees on more favourable terms or even free of charge generates taxable income for the employee as of the date on which such shares are transferred, although the transfer did not involve any liquid funds (and thus represents "dry income").

In order to alleviate this problem, a new provision was already introduced mid-2021 in the form of section 19a EStG providing for the deferral of taxation on employee shareholdings. This is achieved by permitting the employee to opt for taxation of the shareholding to be waived in the year in which it was transferred and for tax to be levied retrospectively on occurrence of a certain event. On account of the fact that the requirements are very narrowly defined and relatively impractical, however, deferred taxation pursuant to the current version of section 19a EStG is barely relevant.

The proposed changes, which are set out below, could substantially increase the provision's attractiveness and practicability and set a precedent – both nationally and internationally – for facilitating the recruitment of highly qualified staff.


By broadening the scope of application, in particular, the number of enterprises to whom the benefits set out in section 19a EStG may apply, should increase substantially.

  • Future recording of cases whereby employees are granted shareholdings in group companies (section 19a (1) sentence 3 of the EStG draft): Under the current law, it is not clear whether the tax deferral provided for in section 19a (1) EStG is only possible if the employee holds shares directly in the employer's company. Due to the fact that no specific mention of group companies is made, the tax authorities at least were of the opinion that shareholdings in other companies belonging to the group as set out in section 18 of the German Stock Corporation Act (Aktiengesetz) do not currently fall within the scope of application of section 19a EStG (see BMF circular dated 16 November 2021, BStBl. I 2021, 2308, margin no. 34). By introducing a new "groups clause", the draft bill now clarifies that section 19a EStG will in future also apply to all cases in which shares are awarded not in the employer company itself but also in a different group company.
  • Doubling the qualification thresholds for SMEs (section 19a (3) of the EStG draft): Under current legislation, the provision only applies if the employer company falls within the European Commission's definition of a small or medium-sized enterprise (SME) and thus does not exceed certain thresholds (section 19a (3) EStG). These thresholds are to be doubled according to the draft bill. In future, therefore, the provision will apply to employer companies which employ a staff of up to 500 rather than 250, which generate annual turnover of up to EUR 100m rather than EUR 50m and report an annual balance sheet total of up to EUR 86m rather than EUR 43m. 
  • Extending the period during which the thresholds may be exceeded without consequence (section 19a (3) of the EStG draft): Where such SME thresholds are exceeded at the time the employee shareholding is transferred, section 19a EStG can at present still be applied if such thresholds were complied with at any time in the calendar year preceding the transfer. This period is to be extended to cover the six preceding calendar years. This will be particularly relevant for successful start-ups, which typically display strong growth and thus exceed the SME thresholds on employee numbers and balance sheet totals relatively quickly, while not generating corresponding turnover. The new provision ensures that such start-ups do not fall outside the scope of application of section 19a EStG too quickly.
  • Increase in the company age limit (section 19a (3) of the EStG draft): At present, section 19a EStG is only applicable if the employer company was established not more than twelve years previously. This period is to be increased to 20 years. The provision will then apply not only to start-ups but also to new companies in general. As we understand it, the SME thresholds and company age limit of 20 years will, under the draft bill, still only apply in respect of the employer company, even where employees are granted shareholdings in group companies. This is in particular relevant in cases where a start-up is acquired and integrated into an existing group structure, and the employee continues to be employed by the start-up.


  • Extension of the maximum tax deferral period (section 19a (4) sentence 1 no. 2 of the EStG draft): Under the current legislation, any employee shareholding benefiting from section 19a EStG will be taxed when such shareholding is transferred (in particular in case of sale), when the employment relationship ends or at the latest after 12 years. In future, the maximum period for tax deferral is to be increased to 20 years. According to the grounds relating to the draft bill, this extension is also to apply to shareholdings that are/were granted prior to 2024.Back in 2021, the Bundesrat's Committee on Economic Affairs pointed out that at 12 years the maximum permitted tax deferral period was too short, since the growth phase of start-ups often only begins many years after their establishment and thus it is very unlikely that an exit event will occur within 12 years (cf. BR?Drucks. 354/1/21 p. 4). The requested extension of the deferral period is now to be implemented.
  • Lump sum taxation at 25% (section 19a (4a) of the EStG draft): At present, the individual wage tax deduction criteria are to be applied when the tax is retrospectively determined. The draft bill now provides for lump sum taxation at a rate of 25%. As in the other cases that already allow for lump sum taxation under income tax law (cf. section 40 EStG), the employer is solely liable to pay such lump sum wage tax.


  • Additional tax deferral if employer accepts liability for wage tax (section 19a, new (4b) in the EStG draft): The draft bill includes a new provision stating that the "expiry of the 20-year maximum tax deferral period" and "termination of the employment relationship" may not trigger retrospective taxation upon occurrence, but only once the employee shareholding is transferred (in particular by way of sale). This is only the case, however, if the employer has voluntarily and irrevocably declared that it accepts liability for the employee's wage tax. According to the grounds relating to the draft bill, this arrangement should also facilitate further alleviation of the dry income problem, since tax may still be levied without liquid funds having been received if the 20?year period expires and the employment relationship is terminated.
  • Favourable calculation of tax due on share buyback (section 19a (4) sentence 4 of the EStG draft): Another new provision in the draft bill aims to ensure that where the shareholding is bought back, only the amount actually paid by the employer is taken into account for tax purposes, as this often deviates from the market value.
  • Increase in annual tax-free allowance (section 3 no. 39 of the EStG draft): Notwithstanding the aforementioned provisions, the annual tax-free allowance for employee shareholdings is to be increased from EUR 1,440 at present to EUR 5,000. In deviation from current practice, however, this should only apply to any payments made in addition to the salary already owed (and will thus not apply to the conversion of a proportion of earnings into pension contributions (Entgeltumwandlung) for instance).


The planned tax-related amendments to section 19a EStG set out in the draft bill for a Financing for the Future Act are to be welcomed wholeheartedly. The current version of section 19a EStG, with its narrowly defined requirements and ignorance of group companies, is divorced from commercial reality and is thus rarely applicable in practice. Together with the planned increase in the annual tax-free allowance to EUR 5,000, employee share ownership could become attractive for many younger enterprises in Germany and facilitate recruitment of qualified staff. We must keep our fingers crossed that the proposals are implemented in practice.

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