“FlexCo” and employees – A step forward

Young, innovative and growing start-up companies often do not dispose of the necessary financial means to be able to offer monetary incentives to committed employees. The possibility of granting company shares to employees through employee share purchase plans is not particularly profitable given the current legal situation, since employees have to pay income tax when acquiring employee shares at no cost or at a discount. The new Start-Ups Promotion Act is to provide relief from 2024.

From a company law perspective, a new company form with the internationally appealing name “Flexible Company”, or “FlexCo” for short, with a minimum share capital of EUR 10,000 is to be introduced.

Employee shares in FlexCos

As of 1 January 2024, employees of FlexCos will have the opportunity to participate in a stock corporation’s commercial success through the issuance of company shares more easily, and receive tax advantages. If certain prerequisites concerning the size of the start-up company are met, company shares can be granted to employees at no cost within the first ten years from company formation. A maximum of 25% of the “FlexCo’s” capital can be held by the employees, with a maximum of 10% participating interests per employee.

Income tax

As of 1 January 2024, income tax is no longer due at the moment of transfer of company shares to the employee, but at the later moment of actual disposal of these shares or when other conditions are fulfilled (such as termination of employment).

Disposal proceeds or the fair market value at the moment of realisation of the taxable event (disposal or e.g. termination of employment) are to be used as the tax basis.

At the moment of disposal, the duration of employment must have been of at least three years. At least five years must have passed since the first issuance of the company shares to the employee concerned. In the event of termination of employment, only the three-year period is relevant.

• If these terms are fulfilled, 75% of the assessment base are to be taxed at the special tax rate of 27.5% as other earnings and no non-wage labour costs are due.
• For the remaining 25%, income tax at the regular rate is to be withheld and non-wage labour costs are to be charged.

The regulations on delayed taxation planned in case of termination of employment are still leaving questions unanswered as to the practical implications for the employer and employee, which need to be clarified beforehand.