Startups in particular tend to retain highly deserving employees via co-participation in the company. There are various models, starting with the conventional bonuses and other forms of royalties, through the agreement of phantom shares to the issue of GmbH shares. Especially the issuance of GmbH shares can then also be accompanied by a taxation of the employee. Because if this subsidizes the shares or even receives free of charge, then this is payroll tax subject. This is often also about high tax amounts. In fact, the employee has not yet achieved any monetary profit from his GmbH participation. The legislature has now adopted a new law, namely § 19a EStG.

§ 19a EStG enters into force soon with the validity of the regulations from 01.07.2021. It postpones the date of taxation for a maximum of 12 years. The company may not be more than 12 years old in the year preceding the transfer of the shares, employ fewer than 250 people and show either an annual turnover of EUR 50,000,000 or a balance sheet total of 43,000,000.

Startups live from their innovative, often unique ideas. However, taking them from the idea to a successful company is often a difficult path. Rather than just the available capital needed to build such a company, employees often determine success. Because in most cases you also have to rely on innovative know-how in order to achieve the entrepreneurial goals. And this special knowledge brings employees into the startup, which can hardly be replaced, at least in the short to medium term.

That is why in the startup scene, in addition to the search for suitable investors, the retention of employees who are particularly important for the company is one of the most important topics. So, what do you do to bind valuable employees to the company as long as possible?

There are a number of options that can be used to convince a deserving employee that staying in the company is also worthwhile for him. For example, you can agree on an employment contract that he will receive a bonus or other royalties when he reaches certain entrepreneurial goals. However, this applies quite regularly wage tax. As we will see in a moment, this is also the case with most other options. At least the associated payroll tax deduction is covered by an actual inflow received on the part of the employee.

Furthermore, you can engage employees via Phantom Shares. These are virtual holdings, but they basically flow to the employee like a bonus once the startup makes an exit. So the start-up’s selling price decides the amount of the advantage for the employee. Here too, salary is recorded in the context of payroll tax.

Real investments in the company are also more attractive – at least for the employees addressed. However, this variant also has side effects. Because often investors appreciate when a startup has as few shareholders as possible, because this makes the negotiations much easier. An employee with shares in the company who has co-determination rights under company law usually opposes this general wish.

In some cases, it helps to bring a number of participations to the group of preferred employees via a GbR. Because with a GbR you as an entrepreneur can with simple means retain and exercise control over the participations contained in the GbR pool.

But what we would like to focus on in this article is the free, but at least cheaper transfer of real GmbH shares to the favorite employee.

Let’s look in detail at what happens. A fictitious example should bring us closer to this in an easy way.

Ms. Schlau founded a startup last year that works straight away with its concept. But her esteemed employee, Ms. Perle, has also made an enormously important contribution to this. Since this contribution is also invaluable for the success of her GmbH in the future, Ms. Schlau would like to make Ms. Perle a particularly tempting offer - you know - that she cannot refuse. So she offers her that she should receive 10% of the shares in the GmbH; free of charge.

Negotiations with an investor are also ongoing at the same time. Finally, Mrs Schlau and the investor agree that he should receive a 45% share in the company against a cash contribution of EUR 9,000,000. Ms. Schlau also retains 45% of the GmbH shares. The remaining 10% is to be given to Mrs Perle.

But this is basically already an evaluation of the company, and thus also of the GmbH shares that Ms. Perle receives. Because Mrs. Schlau now transfers these shares to Mrs. Perle, Mrs. Perle receives a value for her work. Which in turn corresponds to a situation that is subject to wage tax. Anyone who has ever calculated knows that Mrs Perle's payroll now shows an extraordinary amount of EUR 2,000,000 as gross wages, which she has to tax quite regularly. Mrs Perle has not actually received a single euro. How is it supposed to pay the top tax rate?

Yes, that sounds very unfair. You should pay taxes on a value that you received, but which by no means flowed as money. Incidentally, this is also called a taxation of Dry Income. Even the legislator realized that this is a baseless state of affairs. That is why he initiated the new § 19a EStG and recently had it approved by all legislative authorities in order to counter this maladministration.

But what exactly is the subject of the new § 19a EStG? And who benefits in what way from the new regulations of § 19a EStG? Let's look at that in detail.

In fact, § 19 a EStG is concerned with the fact that employees who normally have to pay wage tax on the receipt of asset shares from their employers can only do so at a later date. The employee can postpone the time when he should pay the tax by up to 12 years into the future. Thus, it is the employee who receives a participation in the company for his work performance who benefits from the new regulation of § 19a EStG.

Now, however, it is the case that the new § 19a EStG only applies under certain specifications.

4.2.1. § 19a EStG – Company may exist for at least 12 years

The first condition concerns the age of the company at the time of granting the reduced transfer of company shares to the employee. Only if the company exists for less than 12 years at this time can the employee benefit from suspensive taxation under § 19a EStG. Thus, this scheme is clearly tailored for companies that have only recently been able to celebrate their creation. In other words, it is tailored to the needs of startups. However, in principle, companies whose foundation dates back more than 12 years can also see a design variant with which they can circumvent this restriction by establishing a new subsidiary.

4.2.2. § 19a EStG – Limitation of the number of employees

The next aspect concerns the number of employees in the company. Thus, at the time of the transfer of the investment in the company to the preferred employee, the number of employees may not exceed 249. But now it is the case that even for startups this limit can be exceeded quite quickly. In particular, if investors with their capital entry create the conditions for the company to expand quickly with regard to the equipment with employees, one should pay attention to this condition in § 19a EStG.

In any case, this component of § 19a EStG is only partially adapted to the realities of a startup. But here too, this cliff can be circumnavigated by means of an advantageous design. Because if the startup founds an independent company that provides the workforce, then the solution is also quite simple. The only question is whether a company intends to go down this path if the sole purpose of this project is to enable the prioritized employee to receive suspensive taxation.

4.2.3. § 19a EStG – alternative parameters: turnover or balance sheet total

Finally, a condition where you can choose between two options and two times. On the one hand, the suspensive effect of § 19a EStG only applies if either the annual turnover in the year of the transfer of shares or in the previous year remains below a certain threshold or if this applies to the balance sheet total. The value of EUR 50,000,000 must be adhered to for the annual turnover. Alternatively, the balance sheet total should not exceed EUR 43.000.000.

At the end of our contribution to the new § 19a EStG, we would like to add some general comments. Thus, in addition to the addition of the new § 19a EStG, there is also an amendment to § 52 paragraph 27 EStG. This paragraph stipulates that § 19a EStG is valid for capital transfers from 01.07.2021.

In addition, the new § 19a EStG also includes capital transfers in which the employee receives the shares indirectly through a partnership. Thus, the GbR pooling is also affected by the new § 19a EStG.

Of course, the value of the transferred shares as a basis for taxation corresponds to the common value, i.e. the market value instead of the cheaper value at which an employee receives it.

Finally, a very important note: The employee must actively demand and apply the provisions of § 19a EStG immediately when calculating the wage tax. A subsequent attempt to postpone the taxation of the shares in the context of filing the income tax return is legally excluded.

Incidentally, the limits on the number of employees and the annual turnover or balance sheet total, which the legislature provides for § 19a EStG, come from a definition that the EU Commission issued as a recommendation in 2003. The aim was to harmonise the definition of what should be considered microenterprises within the EEA and what should be considered small or medium-sized enterprises.