Christian Lindner’s reform plans – Up to 20 percent less tax on investments?
Dusseldorf The new tax plans for the start-up industry from the Federal Minister of Finance Christian Lindner (FDP) ensure debates – in the parliamentary groups in the Bundestag, but also in the start-up scene. “If this law had already existed, I would probably have had a seven-figure sum Steer saved in the past,” says the former start-up manager Philipp Klöckner in his well-known podcast “Doppelganger Tech Talk”, criticizing the lack of tax justice.
At the beginning of the year, Lindner presented proposals for new “regulations on employee capital participation” in a previously unpublished key issues paper, which is available to the Handelsblatt. His proposals would result in a de facto tax cut for employees who are directly involved in a start-up.
At its core, Linder’s proposal is about the tax conditions under which start-ups can invest their employees in the company. This has been discussed for years. From the point of view of the industry, previous reforms were not sufficient.
The background: It is international practice that employees receive options that they can convert into company shares, for example in the event of an IPO. However, German start-ups have been complaining about being disadvantaged by the so-called “dry income” problem for years.
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What is meant is that under current tax law, start-up employees in this country may have to pay taxes on their options before they can turn them into money. Instead of real shares (employee stock options, ESOP for short), companies issue complex virtual shares (VSOP) for which the problem does not arise because they only have to be taxed at the time of sale.
Lindner now wants to clean that up. The framework conditions for ESOP should be so good that no company will resort to the virtual participations. They might even be better than the scene hoped for.
>> Read also: The federal government suspends the grant program for start-up investors – the start-up scene is running out of money
In concrete terms, Lindner’s key issues paper provides for the “possibility of flat-rate taxation with a tax rate of 25 percent for all taxation facts”. That could mean a tax reduction of 17 or even 20 percent. At the moment, the personal income tax rate applies to employees with virtual shares. For many of those affected, this should correspond to the top tax rate of 42 percent or the tax on the wealthy.
In the case of ESOP, too, the wage tax rate is at least partially applied. More specifically: Employees pay income tax on the value of the options granted. If the value of these shares increases over time, only withholding tax is due on this gain, i.e. a tax of 25 percent.
Until Lindner’s suggestion, there was no such thing as reducing the tax on the total amount.
Should start-up employees pay less tax than other employees?
Does Lindner now want employees in the start-up sector to pay less tax on wage components than other employees? The Federal Ministry of Finance did not want to comment on the Handelsblatt request. One thing is certain: the paper hardly allows any other possible interpretations.
To this day, I still don’t understand why I, as a privileged tech person, should have a lower tax rate. Start-up founder Philipp Klöckner
Klöckner, who has held various management positions for Idealo.de and the start-up forge rocket internet says: “To this day, I still don’t understand why I, as a privileged tech person, should have a lower tax rate.” Apart from him, hardly anyone from the tech scene wants to complain loudly about it.
Internally, there is also more intense discussion in the industry as to whether it is even right to present the shares as wages: in many cases, nothing comes out of it in the end. Some say that this must also be made much clearer to employees and applicants.
>> Read also: Employee stock ownership is riskier than you think
Verena Hubertz, deputy leader of the parliamentary group SPD-Bundestag faction, makes it clear that even with a possible change in the law, no false incentives should be set: “A wage should be paid that you can live on. The participation is an upside.” She means a kind of bonus that you can’t count on.
The founder, who moved into the Bundestag in 2021, is campaigning for her party to accept Lindner’s proposals. “We want to leave the virtual shares behind.” The reforms so far have not resulted in more start-ups wanting to use ESOP.
Politically, Lindner’s proposals are also discussed with regard to the question of who the improved capital participation conditions should apply to in the future. Some see the danger that even established companies with up to 500 employees could make use of it and pay employees tax-deductible shares.
More: Motivation through participation: Ledgy wants to make it easier for employees to participate