Update 3.0: Future Financing Act – Focus on Employee Participation

Update 3.0: Future Financing Act – Focus on Employee Participation


With the start of the new year on January 1, 2024, the majority of the Future Financing Act (“ZuFinG”) – highly anticipated by the German start-up scene in particular  —came into force. One of the ZuFinG’’s legislative objectives was to simplify the tax framework for granting equity investments to employees (Mitarbeiterbeteiligungen) (“Employee Participation”).

The German Bundesrat approved the law on November 24, 2023, after the German Bundestag passed the draft law on November 17, 2023. We reported in detail on the draft bill of April 12, 2023 (“Referenten-E”), and the government bill of August 17, 2023 (“Regierungs-E”). Click here for the report on the Referenten-E and here for the report on the Regierungs-E. 

The version of the ZuFinG that is now in force contains significant adjustments compared to the Referenten-E. The changes relate in particular to the tax framework for granting Employee Participation in sec. 3 no. 39 EStG and sec. 19a EStG. The key elements of the legislative amendments that have come into force are summarized below.

In Depth


Increase in Tax Allowance for Employee Participations

Instead of the increase in the tax-free allowance for granting eEmployee Participations to EUR 5,000 per year and per employee envisaged in the Regierungs-E, the allowance has only increased to EUR 2,000 (previously EUR 1,440). As a result, it will be necessary in many cases to sell shares to cover the wage tax for the tax advantage not covered by the tax-free amount (so-called sell to cover). In practice, such a sell to cover can only be realized with significant effort, especially for companies with low trading volumes.

In the final version of the law, however, regulations to avoid windfall gains were omitted. The Regierungs-E had stipulated that the tax-free non-cash benefit in accordance with sec. 3 no. 39 EStG should only be taken into account as acquisition costs if the shares granted are sold after the lapse of a 3-year period. The requirement to grant Employee Participation in addition to salary already owed was also removed in order to avoid the targeted conversion of compensation (Entgeltumwandlung).

Facilitation of Tax Deferral for Granting Employee Participations

In addition to increasing the tax-free amount, the ZuFinG extended the options for tax deferral when granting Employee Participations in sec. 19a EStG. This is intended to further mitigate the problem of so-called dry income (i.e., tax burden due to a non-cash benefit when shares are granted without a receipt of liquidity) and in an ideal case to defer taxation until the shares are sold.

ZuFinG considerably extended the scope of application of sec. 19a EStG:

1. Instead of the previous link to the “simple” threshold for small and medium-sized enterprises (fewer than 250 employees, maximum annual turnover of EUR 50 million and maximum annual balance sheet total of EUR 43 million), the following thresholds now apply for classification as a beneficiary employer:

• Fewer than 1,000 employees;

• Maximum annual turnover of EUR 100 million; and

• Maximum annual balance sheet total of EUR 86 million.

Sec. 19a EStG does not apply if the above thresholds have been exceeded in the year in which the Employee Participation was transferred and/or the previous six calendar years. Previously, only the year of granting and the previous calendar year had to be taken into account.

2. The company may not have been founded more than 20 years ago (previously 12 years).

3. In future, Employee Participations granted to employees by their employer’s shareholder will also be eligible. This considers the common market practice where Employee Participations in the employer company are not granted by the employer company itself but by the (founding) shareholders. However, the corporate group clause envisaged in the legislative process, according to which the transfer of Employee Participations to employees of affiliated companies should also be covered by sec. 19a EStG, was not implemented.

In line with the previous system, taxation of the non-cash benefit is deferred until one of the following events occurs:

• Transfer of the Employee Participations by the employee against payment or free of charge;

• Expiry of 15 years since the Employee Participations was granted (previously 12 years), compared to the 20 years planned in the legislative process; or

• Termination of the employment relationship with the employee.

In addition, at the end of the 15-year period and in the event of termination of the employment relationship, taxation may be deferred until the employee transfers the Employee Participations against payment or free of charge if the employer irrevocably declares that it is liable for the wage tax without being able to avoid liability by notifying the tax office pursuant to sec. 38 no. 4 sent. 2 EStG. The ZuFinG adds a corresponding provision in sec. 19a no. 4a EStG.

A different calculation of the tax benefit in the event of the repurchase of shares granted has also been implemented. In the event of the repurchase of an Employee Participation by the employer, its shareholder or an affiliated company within the meaning of sec. 18 AktG, the subsequent taxable monetary benefit will be determined according to the remuneration granted for the retransfer. This takes into account the common market practice in which (bad) leaver regulations provide for a valuation for the repurchase that differs from the fair market value.


The ZuFinG has significantly improved the tax framework for granting Employee Participations.

However, some parts of the law’s final version fall short of the simplifications envisaged in the legislative process. These include, in particular, the increase in the tax-free amount in sec. 3 no. 39 EStG to just EUR 2,000 (instead of EUR 5,000) and the deletion of the corporate group clause in sec. 19a EStG. However, at least for the corporate group clause, a legislative adjustment has already been promised as part of the Annual Tax Act 2024.