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Article Germany: Act to Make Germany More Attractive for Investments Enters into Force

On December 15, 2023, the Act to Finance Futureproof Investments (Future Financing Act) (Gesetz zur Finanzierung von zukunftssichernden Investitionen (Zukunftsfinanzierungsgesetz, ZuFinG) entered into force in Germany. The Future Financing Act amends several laws to make Germany more attractive for investments. In particular, the act includes measures to facilitate gaining access to capital markets; raising equity; and attracting employees for start-ups, growth companies, and small- and medium-sized enterprises (SMEs) as “core drivers of innovation.” It should be noted that certain amendments will not enter into force until January 1, 2024; January 1, 2025; or November 1, 2025, respectively.

Amendments to the Income Tax Act

The Future Financing Act includes amendments to the tax treatment of employee participation plans in companies. According to the amended section 3 of the Income Tax Act (Einkommensteuergesetz, EStG), the tax-free amount is raised from 1,440 euros (about US$1,572) to 2,000 euros (about US$2,196). (Future Financing Act, art. 17, no. 1a).)

Furthermore, the possibilities of taking advantage of the tax deferral in SMEs are expanded by amending section 19a of the Income Tax Act. The changes are intended to avoid the “dry income” problem, meaning a situation when shares that employees receive in their company free of charge or at a discount are taxed at acquisition even though the employees have not yet received any liquid funds. (Explanatory Memorandum, at 61, 131.) Shares can be granted either by the employer itself or by shareholders of the employer. The definition of SMEs is revised to include companies that employ fewer than 1,000 persons (previously 250); have an annual turnover not exceeding 100 million euros (about US$109 million) (previously 50 million euros) and/or an annual balance sheet total not exceeding 86 million euros (about US$94 million) (previously 43 million euros); and were established no more than 20 years (previously 12 years) before the equity award was transferred to the employee. The taxation of employee equity awards is deferred for a maximum of 15 years until the shares are sold. Previously, the maximum time frame was 12 years. The employer must declare that they assume liability for the income tax incurred. The tax deferral is also applicable to restricted stock units. (Future Financing Act, art. 17, no. 2.)

The amendments to the Income Tax Act will enter into force on January 1, 2024.

Easier Access to Capital Markets

Gaining access to capital markets is facilitated by lowering the minimum capitalization of the shares for going public from 1.25 million euros (about US$1.37 million) to 1 million euros (about US$1.1 million). Furthermore, underwriters, such as syndicate banks, are no longer necessary for the initial public offering (IPO). (Future Financing Act, art. 4; art. 11, no. 6.)

Introduction of Multiple Vote Share Structures

The bylaws of the company may authorize the issuance of multiple vote shares (dual class shares) with a maximum voting ratio of 10:1. The decision to include such a provision must be made unanimously by the shareholders at a shareholders’ meeting. This amendment is intended to encourage start-up and SME founders to list their companies to raise equity without having the fear of losing control over their company. (Explanatory Memorandum, at 108.) Multiple voting rights of listed companies expire when the shares are sold or at the latest after 10 years (sunset clause). The deadline of 10 years may be extended and requires a three-quarters majority of the company’s share capital. (Future Financing Act, art. 13, no. 9.)

Electronic Registered Shares

In addition, the Electronic Securities Act (Gesetz über elektronische Wertpapiere, eWpG) and the Stock Corporation Act (Aktiengesetz, AktG) are amended to authorize the issuance of registered shares as electronic securities, both as central register securities and crypto securities. Companies will have the choice of issuing their shares in electronic or physical form. (Future Financing Act, art. 13, no. 1; art. 16.)

Introduction of SPACs

Furthermore, the Future Financing Act makes detailed amendments to the Stock Exchange Act (Börsengesetz, BörsG) to allow the establishment of special purpose acquisition companies (SPACs) (Börsenmantelaktiengesellschaft, BMAG) for IPOs. Even though SPACs have been previously used in some transactions in Germany, they were not defined in German law. This amendment is intended to provide market participants with legal certainty. (Future Financing Act, art. 11, no. 8; Explanatory Memorandum, at 100–102.)

Other Miscellaneous Amendments

Among other changes, the Future Financing Act introduces the possibility of communicating with the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) in English in certain cases, in particular when a failing or failed company is reorganized or resolved. VAT regulations for investment funds are harmonized with the regulations in other European Union member states. (Future Financing Act, arts. 18, 19.)

Jenny Gesley, Law Library of Congress
December 21, 2023

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