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The Fund Location Act – Draft law to support start-ups and SMEs

On 20.1.2021, the German government put forward draft legislation with the aim of making Germany a more competitive and attractive financial centre and hub for investment funds. To this end, there are plans for supervisory but also tax measures such as, among other things, increasing the maximum tax-exempt amount for employee share ownership plans (ESOPs).

VAT exemption for venture capital funds

According to the current national regulations, VAT exemption extends to investment funds within the meaning of the UCITS Directive and to the management of such alternative investment funds (AIF) that are subject to the same conditions of competition. Up to now, management services provided to venture capital funds in Germany have been VATable; this has been a key disadvantage for Germany compared to other European locations. That is why the VAT exemption for investment fund management will be extended to venture capital fund management.

Strengthening ESOPs

Unlike profit sharing, ESOPs are rather rare in Germany. An ESOP is understood to mean a plan under which a company’s employees own shares in that company and where this is on the basis of a contract, usually, for the long term. To strengthen the appeal of such plans there is an intention to increase the annual maximum tax-exempt amount for capital participations from €360 to €720 with effect from 1.7.2021. 

Here, a particular focus will be placed on start-up enterprises where equity participation for employees is used relatively frequently. That is why there will be legal provisions to allow employees at start-ups (but generally at small and medium-sized enterprises, too) to defer the payment of tax on the gains from the transfer of capital participations in the employer’s company if employees wish to do so. Tax will usually only be paid when the employee shares are sold, although, at the very latest, this would be after ten years, or when the employee switches employers. Here, the taxable remuneration will fall within the scope of the rate reduction in the form of the so-called ‘one fifth rule’ (a form of top slicing relief) if at least three years have elapsed since the transfer of the capital participation. The aim is to apply the rate reduction already in the payroll tax deduction system on condition that the capital participations have been granted in addition to remuneration due in any case. 

Please note: Salary sacrifices would consequently not be accorded tax privileges.

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