German Financing for the Future Act provides for improvements in capital procurement and the dry-income problem in connection with employee share ownership for start-ups and scale-ups

  • 01/25/2024
  • Reading time 11 Minutes

The long-awaited Act on the Financing of Future-Proof Investments (Financing for the Future Act) opens up new opportunities, in particular for start-ups and young growth companies (“scale-ups”) and significantly improves the general framework for investment and growth. Both access to the capital market and the raising of equity will be facilitated. From the perspective of start-ups, another important component of the reform is the improved tax incentives for employee share ownership in order to solve the so-called dry-income problem.

While the company law related changes largely came into force on the day after their announcement in the Federal Law Gazette on December 14, 2023 (BGBI. No. 354), the tax regulations have now also been applicable since January 1, 2024. 

What are the most important improvements for start-ups and scale-ups under the Future Financing Act? (Summary) 

  • The possibility of creating so-called conditional capital is extended from 50 % to 60 % for mergers and from 10 % to 20 % for employee subscription rights (employee share ownership) (Art. 192 (3) AktG (German Stock Corporation Act), as amended). 
  • Raising of equity capital without significant loss of entrepreneurial influence through the introduction of multiple-vote shares (Art. 135a AktG, as amended). 
  • Introduction of a shell corporation (German SPAC) in order to facilitate access to the stock exchange (Art. 44 et seq. BörsG (German Stock Exchange Act), as amended). 
  • Facilitated equity procurement by extending the simplified exclusion of subscription rights from previously 10 % to 20 % of a listed stock corporation’s share capital (Art. 186 (3) AktG, as amended). 
  • Mitigation of the so-called dry-income problem by extending the deferred taxation of non-cash benefits from the free or discounted transfer of employee shareholdings, in particular by increasing the thresholds of eligible companies and extending the deferral to up to 15 years (Art. 19a EStG (German Income Tax Act), as amended). 
  • The allowance for employee share ownership as an investment has been increased from € 1,440 to € 2,000 (Art. 3 no. 39 EStG, as amended). 

Extended options for approving conditional capital 

The Financing for the Future Act increases the limits of conditional capital for mergers and for subscription rights of employees and members of the management (stock options). Conditional capital can now be authorized for mergers up to a limit of 60 % of the share capital instead of the previous 50 % (Art. 192 (3) sentence 1 AktG, as amended). 

Furthermore, the increase in the limit for subscription rights for employees and management board members from 10 % to 20 % is particularly relevant for scale-ups in the legal form of a stock corporation (Art. 192 (3) sentence 1 no. 2 AktG, as amended). This creates a broader framework for these companies to set up employee share ownership plans, which can be used in the context of real employee share option plans (ESOPs) and thus offers more opportunities to attract talented employees. Even if ESOP programs are becoming significantly more attractive under the new regulations, it can be assumed that in practice start-ups will continue to rely on the more flexible and simpler virtual share option plans (VSOPs) in order to incentivize employees in the future. 

Introduction of multiple-vote shares 

The prohibition of multiple-vote shares (Art. 12 (2) AktG, old version) has been deleted; Art. 135a AktG, as amended, creates the possibility of granting shares with up to ten times the “normal” voting rights. This is intended to create incentives for raising equity via the capital market. Among others, the legislator wants to enable founders to raise equity without losing significant entrepreneurial influence and thus continue to contribute their expertise to the company. Multiple voting rights must be regulated in the articles of association and require the approval of all shareholders (Art. 135a (1) sentences 2 and 3 AktG, as amended). 

Introduction of a shell corporation (German SPAC)  

The hype about so-called SPACs (Special Purpose Acquisition Companies) reached a peak in 2020/2021, when up to 613 SPAC IPOs raised between USD 80 and 160 billion in the US. The SPAC IPO was seen as an attractive, faster alternative to the traditional IPO. In order to make such simplified access to a stock exchange listing more attractive for German companies, the new legal form of a shell corporation (Börsenmantelaktiengesellschaft, “BMAG”) was introduced. The aim is to facilitate a company’s access to the capital market by shortening the listing process, providing a (German) legal framework and ensuring appropriate shareholder and investor protection in order to create legal certainty for entrepreneurs and investors. 

The provisions of Art. 44 et seq. BörsG, as amended, apply to a stock corporation whose articles of incorporation provide for a business purpose in accordance with Art. 44 (1) BörsG, as amended, (management of own assets as well as preparation and implementation of the IPO and completion of the takeover transaction), the time limit for the target transaction’s implementation within a period of between 24 and 36 months in accordance with Art. 44 (3) BörsG, as amended, as well as the possibility of a virtual general meeting in accordance with Art. 118a AktG and whose securities have been admitted to trading on a regulated market (Art. 44 (4) BörsG, as amended). 

Expansion of simplified exclusion of subscription rights 

The limit for the simplified exclusion of subscription rights for listed stock corporations’ existing shareholders has been increased from previously 10 % to 20 % of the share capital, thereby lowering the hurdles for cash capital increases (Art. 186 (3) sentence 4 AktG, as amended). In particular, this is intended to accelerate the capital raising process as the two-week period granted to the existing shareholders to exercise their subscription rights (Art. 186 (1) sentence 2 AktG) no longer applies.  

Mitigating the dry-income problem of (real) employee share ownership plans 

The Financing for the Future Act significantly mitigates the so-called dry income problem. Dry income refers to the employees’ obligation to pay taxes on the transferred company shares although they do not (yet) receive any liquidity. This will in future be avoided to a larger extent than before, as the provisions for a deferred taxation of the non-cash benefits from the free or discounted transfer of certain employee shareholdings to employees pursuant to Art. 19a EStG, old version, have been extended. However, the risk of the received capital shares’ valuation remains problematic due to the time lag between the date of the salary’s receipt and the realization of the proceeds from the shares’ sale. 

Extension of the group of beneficiary companies

The group of beneficiary companies will be expanded significantly. Now, companies with up to 1,000 employees (previously 250) and maximum annual sales of € 100 million (previously € 50 million) or a maximum annual balance sheet total of € 86 million (previously € 43 million) can benefit from the privileged treatment under Art. 19a EStG, as amended. To that end, the threshold value must be met in the year of transfer or in one of the six calendar years (previously one calendar year) before the capital participation’s transfer (Art. 19a (3) sentence 1 EStG, as amended). The extended period for the privileged treatment for the issue of employee shares from previously twelve to now up to 20 years from the company’s formation is also a positive aspect (Art. 19a (3) sentence 1 EStG, as amended).

Extension to shareholders’ interests 

The scope application of Art. 19a EStG is also extended by the fact that the deferred taxation also applies to shareholdings employees receive from their employer’s shareholders (Art. 19a (1) sentence 1 EStG, as amended). This facilitates the handling in particular for start-ups, as the founders can transfer already existing treasury stock to employees.  

From a practical point of view, however, it is regrettable that the inclusion of a group regulation, which was still provided for in the draft bill, has been deleted. Such regulation would have allowed for the granting of shareholdings in other group companies pursuant to Art. 18 AktG to also be eligible for the privileged treatment (Art. 19a (1) sentence 3 EStG-E). This seems to confirm, at the taxpayers’ detriment, the German Federal Ministry of Finance’s (“BMF”) understanding that Art. 19a EStG is not to be applied in the sense of a group regulation (BMF, letter dated November 16, 2021, Federal Tax Gazette 2021 I page 2308, marginal note 34).  

Clarification in connection with restricted shares 

At the start-up sector’s insistence, the inclusion of a legal clarification in Art. 19a (1) sentence 3 EStG, as amended, expressly stipulates that shares with restricted transferability fall within the scope of application of Art. 19a EStG (so-called assumed accrual). This eliminates a considerable legal uncertainty that has existed in practice to date. However, the effects on the valuation date resulting from the assumed accrual must be taken into account. 

Deferral of the time of taxation to up to 15 years 

The deferred taxation of the non-cash benefit under Art. 19a EStG will be extended from previously twelve years to up to 15 years in future (Art. 19a (4) sentence 1 no. 2 EStG, as amended). However, as before, this only applies if no other reason interrupting the tax deferral pursuant to Art. 19a (4) sentence 1 no. 1 or no. 3 EStG has already occurred. However, this provision has already been corrected downwards, as the draft bill provided for a tax deferral of 20 years.  

However, in order to mitigate high tax burdens, Art. 19a (4a) EStG, as amended, allows for an extension of the tax deferral beyond the 15-year period if the employer irrevocably declares, no later than in the payroll tax return following the respective event, to assume liability for the payroll tax pursuant to Art. 42d EStG if the employee should sell the shareholding and cannot evade such liability.  

The law includes a regulation which is to be welcomed: in the event of the shares’ repurchase by the employer upon the employee’s resignation, the employee must only declare the remuneration granted by the employer instead of the fair value for taxation (Art. 19a (4) sentence 4 EStG, as amended).  

The provision of a possible flat-rate taxation with a tax rate of 25% for all cases mentioned in Art. 19 (4) sentence 1 EStG, as still provided for in the draft bill, was unfortunately not included in the law. 

No applicability to VSOP and social insurance contributions 

However, it must be taken into account that the provisions of Art. 19a EStG only apply to real equity participations and not to virtual stock option plans (VSOP) which are often used in practice. For real employee stock option plans (ESOP), the provisions apply from the moment of the beneficiary exercising their option.  

Furthermore, the deferral only applies to payroll tax, not to the payment of social security contributions. So far, the legislator has failed to provide for a consistent solution in this respect – also in connection with the Financing for the Future Act.  

Increased maximum amount for a tax-exempt transfer of employee shares 

The maximum amount for the free or discounted transfer of employee shares as non-cash benefit has been raised from currently € 1,440 to € 2,000 (Art. 3 Nr. 39 sentence 1 EStG, as amended). Thus, the new regulation provides for a significantly lower amount than the draft bill, which provided for a maximum amount of € 5,000. The allowance applies – as before – only under the condition that the employee share ownership is a voluntary benefit from the employer which is generally available to all employees in the company who have been employed by the company for an uninterrupted period of at least one year. Furthermore, it must be a capital participation in the own employer’s company which is granted to the employees in the form of benefits in kind. Tax-exempt employee share ownership can now continue to be fully financed by way of deferred compensation – in the draft bill, such option had been deleted.  


For start-ups and scale-ups, the Financing for the Future Act provides a reasonable basis in order to raise capital and recruit employees in Germany in a successful and less complicated way than before. However, to the regret of the start-up sector in particular, the Financing for the Future Act’s final version lags well behind the more far-reaching provisions still contained in the draft bill and government draft, particularly with regard to the tax relief for employee share ownership plans. There is still considerable potential for improvements in the next legislative round. 

We advise you and your company from the set-up of your corporate structure and employee share ownership plans, through the investment phase and operational activities to the exit or IPO from a single source in terms of corporate and tax law. Please feel free to contact us. 


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Authors of this article

Benedikt Hoffmann


Steuerberater, Rechtsanwalt, Fachanwalt für Steuerrecht

Daniela Stephan, LL.M.

Senior Manager

Attorney-at-Law (Rechtsanwältin)

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