Future Financing Act: German Federal Ministries of Finance and Justice publish draft bill for a more attractive capital market
On April 12, 2023, the long-awaited draft bill for the German law on the financing of future-securing investments (Future Financing Act – “ZuFinG”) has been published by the German Federal Ministry of Finance (“BMF”) and the German Federal Ministry of Justice (“BMJ”).
The Future Financing Act’s draft bill mainly pursues the goals of strengthening the German capital markets’ performance and increasing the attractiveness of Germany as a financial center as an important part of a strong European financial center. To this end, the draft bill provides for extensive measures and regulations from corporate, capital market and tax law in order to facilitate access to the capital market and the raising of equity capital for start-ups, growth companies and small and medium-sized enterprises (SMEs).
At a glance: The new Future Financing Act’s goals and measures.
Following the publication of the White Paper on the Future Financing Act on June 29, 2022 by the BMF and the BMJ, the draft bill on the Future Financing Act has now been published. The aim of the Future Financing Act is to make both the German financial market and Germany as a business location more attractive for national and international companies and investors.
In accordance with the German federal government’s start-up strategy adopted by the Federal Cabinet on July 27, 2022, the draft bill on the Future Financing Act recognizes the particular importance of start-ups for the German economy’s growth and provides, in addition to financial market law adjustments and the further development of corporate law, also for regulations improving the tax-related legal framework.
The planned adjustments to financial market law are intended to facilitate access to the capital market as well as financing opportunities for start-ups, growth companies and SMEs, at the same time accelerating the capital market’s digital transformation. Furthermore, the draft bill provides for corporate law measures by facilitating the raising of equity capital and improving the tax-related legal framework through tax breaks and employee share ownership.
Adjustments to financial market law
As part of the adjustments to financial market law, the draft bill provides for simplifications to the listing requirements and to the post-admission obligations. To this end, for example, the minimum capital for an IPO is reduced from currently EUR 1.25 million to EUR 1 million and regulations are introduced for special purpose acquisition companies (“SPACs”) serving companies to prepare an IPO.
In addition, the draft Future Financing Act provides that registered shares may in future be issued in both forms of electronic securities under the German Electronic Securities Act (eWpG), i.e., as central register securities and as crypto securities. Since the issuance of bearer shares also as crypto securities would raise a large number of issues under corporate and money laundering law, electronically issued bearer shares are to be restricted to central register securities. At the time of its introduction, the eWpG’s wording already allowed for selective amendments to the eWpG and the Stock Corporation Act to be sufficient.
Furthermore, the draft bill of the Future Financing Act contains an exemption for general terms and conditions (GTC) from the GTC control pursuant to Art. 307, 308 no. 1a and 1b of the German Civil Code (BGB), which are used in contracts for transactions requiring a license pursuant to the German Banking Act (KWG), the German Securities Institutions Act (WpIG) and the German Payment Services Supervision Act (ZAG). The exemption covers GTCs in all contracts for financial services concluded with large financial enterprises or with small and medium-sized financial entrepreneurs, provided they have regulatory approval for the transaction that is the subject matter of the contract.
The Future Financing Act also pursues the goal of digitalizing and internationalizing financial market procedural processes. To this end, the draft bill provides for the replacement of written form requirements with electronic communication procedures, the provision and use of standard forms by the Federal Financial Supervisory Authority (BaFin), and communication in English as the international working language.
Further development of corporate law
Since the raising of capital is very important for the growth companies and start-ups which are in the focus of the Future Financing Act, they are to be provided with more flexible structuring options. To that end, the draft bill provides for an eligibility of dual class shares as well as facilitated and accelerated capital increases. The previous threshold for a simplified exclusion of subscription rights will be increased from 10 percent to 20 percent of the share capital.
The limits for conditional capital in the case of business combinations and for subscription rights of employees and members of management also increase from 50 and 10 percent to 60 and 20 percent, respectively. Furthermore, disputes regarding the appropriateness of the issue amount in connection with capital measures pursuant to Art. 255 of the German Stock Corporation Act (AktG) will no longer be admissible within the scope of an action for avoidance but will instead be decided by expedited shareholder action.
Improvement of the tax-related legal framework
The Future Financing Act is also intended to improve the tax-related legal framework for growth companies and start-ups. To this end, the tax allowance for employee share ownership and shares as an investment pursuant to Art. 3 No. 39 of the German Income Tax Act (EStG) will be raised from currently EUR 1,440 to EUR 5,000.
Furthermore, the scope of application of the deferred taxation rule (Art. 19a EStG) will be significantly expanded in order to largely solve the so-called dry-income problem, which is particularly obstructive for start-ups and growth companies. The improved tax conditions are intended to make it easier for young companies to recruit employees and stand their ground in the international competition for talent.
The introduction of an allowance for gains from the sale of shares and equity fund units held as private assets, which was announced last year, has not been implemented in the BMF’s draft bill. The same applies to the abolition of the eligibility requirement for the offsetting of losses from the disposal of shares, which had also been announced.
In addition, by amending Art. 4 No. 8 lit. h German VAT Act (UStG), the management services of alternative investment funds (AIF) pursuant to Art. 1 (3) of the German Investment Code are to be exempt from VAT. Under the current legal situation, the scope of the VAT exemption extends to investment funds within the meaning of the UCITS Directive and to the management of AIFs being subject to the same competitive conditions.
Outlook and effective date
The draft bill for the Future Financing Act has met with a positive response from both the financial sector and the start-up industry and offers the opportunity to strengthen the German financial market and make it more attractive and thus more competitive for international participants. The draft contains specific improvements and plans creating better framework conditions on the supply side, in particular for financing start-ups, growth companies and SMEs, while at the same time providing incentives for investors to build up assets with securities.
According to the draft bill, the planned measures of the Future Financing Act are to come into force in the first half of the current legislative period. Prior to the final version of the Future Financing Act, the (federal) states, (federal) institutions, associations and organizations now have the opportunity to comment as part of the so-called departmental consultation.
We will keep you informed of further developments and will be happy to answer any questions you may have on the Future Financing Act or other regulatory issues.