Is the draft fund location law a "pipe burst"?

The Fund Location Act is intended to make working for start-ups in Germany much more attractive. However, the German start-up scene considers the current draft to be unsuitable. An overview of the controversial points.

Conflict has been simmering for weeks over the federal government's draft of the Fund Location Act. With this law, the government wants to make jobs at start-ups more attractive by promoting employee participation. This is intended to make start-ups more interesting for skilled workers as employers in an international comparison. This is because employees in countries such as the USA often receive such shareholdings to compensate for their low wages, for example, while in Germany they have been a rarity up to now, partly because of complex tax regulations.

Christian Miele, president of the Federal Association of German Start-ups, already called the draft published on 20 January on Twitter a "pipe burst". This would only lose everyone a lot of time and not help the start-ups. CDU Secretary-General Paul Ziemiak spoke to Handelsblatt of a "manifesto of despondency". In response to a small question from the FDP on one of the controversial points, the Ministry of Finance under Olaf Scholz, which is in charge, did not initially show any understanding and thus gave little hope for major changes .

Six suggestions for improvement had already made the start-up association in December. According to Christian Miele, the Ministry of Finance ignored all of them. But the association does not give up, has now limited itself to three points

and organized on Wednesday evening together with the Federal Association of Employee Participation (AGP) and the umbrella organization of managers (ULA) a virtual panel discussion on the fund location law. The financial politicians Fritz Güntzler for the CDU, Wiebke Esdar for the SPD and Katja Hessel for the FDP, who all sit on the Finance Committee of the Bundestag, also took part. Neither the committee chair Katja Hessel nor Fritz Güntzler wanted to speak of a pipe-cracker. They called the draft a "placebo". It is certainly not the announced big hit, said Hessel, and even SPD politician Wiebke Esdar, who joined the round later, still sees room for improvement in the current bill, which her party colleague Olaf Scholz is in charge of.

Amount of the tax-free allowance too low

Among other things, the draft of the Fund Location Act plans to increase the tax allowance for the purchase of discounted employee shares from 360 euros to 720 euros. Much too little, find start-up representatives. Although it has since been announced that the limit is to be raised to 1,440 euros, this is still little by international comparison. In Austria, for example, there is a subsidy of up to 4,500 euros per year, in Great Britain up to 3,500 euros and in Spain even up to 12,000 euros. Katja Hessel of the FDP would have liked to see 5,000 euros for Germany. CDU politician Güntzler did not want to switch to a bazaar where everyone outbids each other with a higher sum, but a CDU/CSU working group had suggested 3,500 euros. Only Wiebke Esdar of the SPD was more reserved and spoke of the need to keep in mind the budgetary impact of too large tax allowances.

The planned deferral regulation does not go far enough

According to the current draft, employees should only have to pay tax on their shareholdings after ten years. This would apply, for example, to the acquisition of shares in a limited liability company (GmbH) or shares in a stock corporation. CDU politician Güntzler thinks that this period is too short. He would have preferred 15 years. Because if the taxation would always accrue already after ten years, the danger of a "dry income" threatens in his eyes. This is always the case when an employee does not receive money from his employer, but rather a non-cash benefit such as a share in the company, and the employee has to pay taxes on it too early - in other words, the employee does not yet have the real money to pay the tax amount. This effect can lead to both founders and their employees preferring to keep their hands off employee stock ownership plans.

When a startup employee leaves their employer, the federal government wants to tax them immediately, according to the current draft. The ten-year deferral won't kick in in that case. "I have a lot of sympathy for taking that out," said CDU politician Güntzler in the panel discussion, but sees little chance of doing so: because taxation currently runs through payroll tax and that is difficult to capture when an employee changes employers. If it goes after some start-up representatives the taxes should become due in principle only if an employee drew an actual profit from its participation, thus if it sells it.

Some start-ups are at risk of falling through the cracks

As the current government draft provides, the relief is to apply only to start-ups that are younger than ten years. The Federal Ministry of Finance had recently confirmed this once again in response to a small question from the FDP. "The federal government assumes that the founding and growth phase is regularly completed after ten years," it apparently says in the letter, which is available to Gründerszene

, among others. After this time, the companies themselves are in a position to compete internationally for talent, it says.

Complicating matters further is the fact that the draft law is based on the European definition of small and medium-sized enterprises (SMEs). Thus, a start-up with more than 250 employees or total assets of more than €43 million would no longer benefit from the regulations.

The good news for the start-up community is that at least the three members of the Bundestag present at the panel discussion seemed to agree that there is still room for improvement in the draft law. In the end, SPD politician Wiebke Esdar was optimistic that the law would be passed before the end of this legislative period. It will be a law "that achieves an effect in practice that we as legislators intend", she said. And the intention, she said, is clearly to make a big leap in employee ownership. "For employee share ownership, Germany as a location should become noticeably better."