Government encourages employees to invest in and collaborate with new businesses

The German government has announced a series of tax reforms aimed at bolstering the country's start-up and small business sector. Key among these changes is the increase in the tax-free maximum amount for asset participations from 360 euros to 720 euros, effective from mid-2021.

Prior to this change, the tax-free maximum amount for asset participations stood at 360 euros. This move is part of a broader strategy to improve the tax treatment of employee capital investments in start-ups and small businesses, a crucial step in attracting highly qualified specialists.

One of the significant changes is the exemption of gains from employee share participations from the annual income tax return. Instead, employees will only be required to pay taxes on their shares when they are sold at a profit, a shift from the current system where taxes were levied as part of the annual income tax return, even if the shares were not sold.

The success of a start-up is often contingent on attracting highly qualified specialists. By easing the tax burden on employees, the German government hopes to make employee participation in start-ups more attractive.

In addition to these changes, venture capital funds will no longer have to pay Value Added Tax (VAT) on their management fees. This measure is expected to provide a more favourable environment for venture capital investments in start-ups.

These reforms are outlined in the draft of the Fund Location Act, a detail of which was reported in the Friday edition of Handelsblatt. Verena Pausder, the president of the German Startups Association, welcomed these changes in an interview with Handelsblatt, stating that they are an important step towards making employee participation in start-ups more appealing.

However, these tax measures are expected to result in revenue losses for the state. In the coming year, the state is projected to lose 200 million euros due to these changes, with reduced revenues of 585 million euros from 2023 onwards. Despite this, the government believes that the long-term benefits of a thriving start-up ecosystem will outweigh these short-term financial implications.