Changes under the Future Financing Act – Employee equity finally future-proof?

With the recently published draft of a "Future Financing Act", the federal government has reacted to the criticism on the tax treatment of equity instruments granted to employees. From the perspective of young companies, the envisaged amendments are very positive.

In the battle for the best talent, startups and scaleups rely on innovative compensation models to retain employees in their company. In addition to traditional bonus payments, it is possible to grant phantom shares or to issue "real" shares in a company.

In an international context, such compensation elements are common and proven. From a German perspective, they are associated with some tax pitfalls.

If an employee is granted equity (e.g. shares in a limited liability company) in addition to their regular salary, either free of charge or at a reduced price, this granting is generally subject to income tax. Taxes must be paid even though no liquidity is received (dry income), and, in extreme cases, loans may even have to be taken out to settle the tax debt.

Consequently, the granting of equity instruments has so far not been particularly attractive from a tax perspective.

Current legal situation

The 2021 newly inserted Sec. 19a of the German Income Tax Act (“ITA”) addresses this crucial criticism of the industry by granting preferential treatment of income from equity instruments for employees. The central element of Sec. 19a ITA is the granting of a tax deferral. Equity instruments granted to an employee in the employer's company are not to be taxed at the time of their grant to the employee.

The tax deferral currently only applies to participations in employer companies that:

  • employ less than 250 people and either generate an annual turnover of no more than 50 million euros or whose annual balance sheet total does not exceed 43 million euros; and
  • were founded no more than 12 years ago.

If the tax deferral applies, currently, taxation will only take place when:

  • the equity instrument is sold or contributed to business assets;
  • 12 years have passed since the transfer of the equity instrument; or
  • the employment relationship with the previous employer ends.

The handling of Sec. 19a ITA has not proven to be particularly simple. Unfortunately, the Federal Ministry of Finance has so far resolved a number of doubtful issues in applying the provision to the detriment of the taxable employees.

Proposed changes by the Future Financing Act

The recently published "Draft Law on Financing Investments for the Future" (Zukunftsfinanzierungsgesetz, “Future Financing Act”) proposes a number of amendments to Sec. 19a ITA that provide for a broader basis of application of the tax deferral:

  • Since in practice it is often the founders or investors who grant a shareholding, in future the granting by a shareholder of the employer is also to be privileged (Sec. 19a (1) sentence 1 of the draft (“ITA-D”)).
  • In addition, shares in affiliated companies are also to be covered (Sec. 19a (1) sentence 3 ITA-D). This should particularly please startup founders, who could also transfer their own shares in other companies to employees in the future by taking advantage of this tax privilege.
  • The thresholds for the application of Sec. 19a ITA are to be doubled (Sec. 19a (3) ITA-D). Companies that currently or in the past six calendar years have fewer than 500 employees and either an annual turnover of no more than 100 million euros or an annual balance sheet total of no more than 86 million euros are now to fall within the scope of application.
  • In future, the company may even have been founded up to 20 years ago (Sec. 19a (3) ITA-D).

Furthermore, the Future Financing Act provides for the following simplifications in (payroll) tax treatment:

  • Wage tax may be levied at a flat tax rate of 25% (Sec. 19a (4a) ITA-D).
  • The long stop date for tax deferral is to be extended to 20 years (Sec. 19a (4) sentence 1 no. 2 ITA-D).
  • There shall be no taxation without a disposition of the equity instruments if the employer irrevocably declares to be liable for the due wage tax in the event of a disposition without being able to evade liability. This is relevant, for example, if the employee moves abroad and the tax office cannot collect the taxes due there. In these cases, it is also possible to apply the flat-rate taxation at 25% (Sec. 19a (4b) ITA-D).
  • In addition, the tax-free allowance in Sec. 3 no. 39 ITA for the free or reduced-price transfer of equity instruments is to be increased to 5,000 euros per calendar year. It is important, however, that the benefit received tax-free in this way is not to be included in the acquisition costs when determining the capital gain if the equity instrument is further transferred within three years (Sec. 20 (4b) ITA-D). This leads to a higher capital gain.

Our evaluation

The changes are very pleasing and clearly tailored to the needs of all parties involved. The significant expansion of the scope of the tax deferral is very positive. The low threshold values have been a central point of criticism. The changes should be particularly interesting for scaleups, whose employees could also benefit from the tax deferral in the future. In addition, companies will gain significantly more flexibility through the inclusion of participations in affiliated companies and the granting by shareholders of the employer.

It remains to be seen what modifications will be made during the legislative process. Ultimately, the innovations still have to pass the field test. There will continue to be a great need for advice for young companies that wish to grant equity instruments to their employees.

Overview of the amendments

Scope of application


Current legal situation

Future Financing Act (draft)


Less than 250 employees and

  • Annual turnover < 50 Mio. euros or
  • Annual balance sheet total < 43 Mio. euros


Less than 500 employees and

  • Annual turnover < 100 Mio. euros or
  • Annual balance sheet total < 86 Mio. euros


Observation period for meeting the thresholds

Current or previous calendar year

Current or previous six calendar years

Age of the company

Up to 12 years

Up to 20 years

Granting of shares by shareholders of the employer possible?



Granting of shares in affiliated companies possible?




Scope of tax privileges


Current legal situation

Future Financing Act (draft)

Long Stop Date

12 years

20 years

Extension option?


Yes, in case of expiry of 20 years or termination of employment until later disposal, if employer assumes liability for wage tax; flat-rate taxation at 25% possible

Flat tax rate possible?


Yes, 25%

Tax allowance

1,440 euros

5,000 euros

Please note: Tax-free benefit received does not count towards acquisition costs


Authored by Mathias Schoenhaus and Vanessa Rinus.


This website is operated by Hogan Lovells International LLP, whose registered office is at Atlantic House, Holborn Viaduct, London, EC1A 2FG. For further details of Hogan Lovells International LLP and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2024 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.