September 2023 Blog

Revolution in employee participation through the Future Financing Act ("ZuFinG")?

The Future Financing Act ("ZuFinG") is intended to eliminate the existing tax law "showstoppers" for genuine employee share option plans (ESOPs). This is intended to make employee share ownership schemes more attractive. In practice, however, ESOP programmes are unlikely to replace virtual share option plans (VSOPs) across the board.

In order to incentivise employees, German start-ups, usually in the legal form of a GmbH, rely on VSOP programmes. VSOPs are characterised by the fact that the employee's participation in the GmbH is purely financial ("virtual"). The employees merely acquire a contractual claim to a portion of the proceeds realised in the event of a sale (so-called exit) by the shareholders. In ESOP programmes, on the other hand, employees receive options that entitle them to acquire real shares in a GmbH if certain exercise conditions are met. In contrast to VSOP programmes, employees in ESOPs become full shareholders of the GmbH if they exercise their options.

New tax regulations due to the Future Financing Act

The discounted transfer of an employee shareholding to an employee constitutes a non-cash benefit for the employee, which is generally taxable immediately, even though the employee does not initially receive any money (so-called dry income). To prevent this, Section 19a of the German Income Tax Act (EStG) provides for a deferral of taxation under certain conditions. The scope of application of this provision is significantly expanded by the ZuFinG and is therefore much more relevant in practice. However, the option of lump-sum taxation of 25% still provided for in the draft bill is no longer included and the increased tax allowance is restricted by a blocking period provision.

Extension of the scope of application to "grown-ups", "late-stage" and growth companies
According to the ZuFinG, the relevant thresholds for Section 19a EStG will be multiplied: in future, all companies that employ fewer than 1,000 employees and have an annual turnover of no more than EUR 100 million or an annual balance sheet total of no more than EUR 86 million will be able to benefit from the tax concessions. In addition, the look-back period will be extended from one to six years: Section 19a EStG will apply if the company in question has not exceeded the new thresholds in any of the last six years. This applies to all companies for which up to 20 years have passed since their foundation.

Solution to the dry income problem

The taxation of the non-cash benefit from the shareholding will be deferred for up to 20 years under the new regulation. This is also to apply to shareholdings that have already been transferred. Furthermore, so-called leaver events, i.e. an employee leaving the company or the expiry of the 20-year period, will in future no longer trigger immediate taxation for the employee if the employer irrevocably assumes liability for income tax in relation to the shareholding in the event of the actual sale of the shareholding.

Increase in the tax-free allowance and introduction of a blocking period
The annual tax-free allowance for the acquisition of employee shareholdings will be increased from EUR 1,440 to EUR 5,000. However, this tax-free allowance will be cancelled retroactively if the employee sells the shareholding within three years of the transfer, as the tax-free amount will be deducted from the acquisition costs when determining the capital gain.


Even if the new tax regulations make ESOP programmes more attractive, VSOPs continue to be more flexible and simpler participation instruments.

A genuine participation of a large number of employees in the company - as is the case with ESOPs - will not be desired by founders or investors. As shareholders, employees would be entitled to all property and membership rights under company law. This means that employees not only have a right to profit participation, but also voting and participation rights in the shareholders' meeting and (comprehensive) rights to information and disclosure. In extreme cases, employees can influence or even block decisions made by the founders and investors. Although it is conceivable to create non-voting shares for employees, the participation rights and comprehensive information and disclosure rights of a shareholder cannot be excluded. In the case of VSOPs, such property and membership rights do not exist.

The larger the group of shareholders of a GmbH, especially with a large number of micro-shareholdings by a large number of employees, the more incapable of acting the company becomes. In order to maintain the ability to act, it is possible to bundle the employees in voting pools or in employee companies. This ensures that voting rights are exercised in a coordinated manner at the shareholders' meeting and the absence of individual shareholders (e.g. due to holidays) does not prevent the shareholders from passing resolutions. However, the implementation of shareholder pools or in employee companies increases the administrative burden.

The creation of genuine shares intended for employees also involves a great deal of effort. New shares can be created as part of capital increases and offered to employees. The articles of association can provide for authorised capital for this purpose, which makes it somewhat easier to create new shares. Alternatively, the company can acquire its own shares, which are transferred to employees when they exercise their ESOP options. However, this always requires a notarised share transfer agreement. The notarisation requirement results in corresponding notarial costs, which must be borne by the parties involved. Due to their purely contractual nature, VSOPs do not have to be created in the first place. It is sufficient if allocation agreements are concluded between the beneficiary employee and the company. These allocation agreements are not subject to any formal requirements.


Despite the welcome tax benefits of ESOPs, the administrative burden of ESOP programmes remains unchanged compared to virtual participations and is disproportionately high for a large number of companies. However, the ZuFinG will make ESOPs more attractive for the participation of individual key employees. The ZuFinG creates a further structuring option for employee share ownership programmes in order to tailor them to each individual company, taking into account all tax and company law advantages and disadvantages.

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