21. July 2023
The voices from the startup ecosystem on the amendment of corporate and tax law have been heard. The two currently available draft laws largely address the calls for a special corporate form for startups, the “FlexCo”, as well as tax benefits for employee ownership. Fact or fake? – what is actually behind the drafts?
Reducing bureaucracy, flexibility, international competitiveness, favorable tax treatment for employee shareholdings and incentives for private venture capital – these are the key points from the government’s 2020-2024 program. In the draft for the 2023 Company Law Amendment Act, the basis is to be a hybrid company form, the “Flexible Company” (or “FlexCo” for short), which combines the best of the worlds of GmbHs and AGs. And what makes up the best of both worlds now?
New: Non-voting company value shares
What was previously only possible with AGs is to apply similarly to FlexCos in the future. By creating a second share class, non-voting enterprise value shares can be issued. This share class is intended to make it easier and more flexible for employees to hold a maximum of 25% of the share capital. The aim of the legislator is to allow employees to participate in the profits, sales and liquidation proceeds of the startup in a tax-privileged manner by means of company value shares and thus to bind them to the startup for a longer period of time. In this context, the draft law also provides for information, inspection, disclosure and questioning rights in favor of the owners of the enterprise value shares and relaxes the formal requirements by requiring them to be in writing. For example, a simple handwritten signature or qualified e-signature is sufficient for the transfer of such shares, which is significantly less formal than the transfer of “normal” shares, which still requires the involvement of a notary or, more recently, a lawyer.
New: Reduction of the regular share capital
In the future, the regular minimum share capital is also to be lowered to EUR 10,000 and the requirement for a temporary foundation privilege is to be abolished, whereby Austria will move up to the middle of the field in terms of the requirements for raising minimum capital in an EU comparison. In detail, the draft law also contains a large number of other positive measures which, although they do not lead to the desired degree of debureaucratization, represent a step in the right direction overall.
New: Tax breaks for employee shareholdings
In the draft Start-Up Promotion Act, above all the so-called “dry income” problem has been solved by deferring taxation of the non-cash benefit until the time of the actual inflow (e.g. in the form of sales proceeds upon exit). Furthermore, a reduced taxation as well as a preferential treatment with regard to social security contributions and ancillary wage costs are provided for. Accordingly, 75% of the assessment base will be taxed at only 27.5% and 25% of the assessment base at the payroll tax rate. However, this regulation has a horse’s foot. The preferential tax rate only applies if the employment relationship has lasted at least three years and the employee participation has been held for at least five years. These conditions underline the legislator’s intention to strengthen employee loyalty. If company shares are not distributed equally to employees, any imbalance must be objectively justified (e.g. by professional competence).
Hurdles in detail
Overall, the regulations on tax benefits for employee shareholdings have turned out to be more complex than hoped. Therefore, employees who receive such employee shareholdings should independently check whether the tax concession is applicable at the time of receipt and sale in order to avoid serious surprises from the tax office.
Another point of criticism are the requirements for the existence of an “employee shareholding” relevant for the tax concession, since such a shareholding can only be issued by a company that has not been older than 10 years since its foundation, employs less than 100 employees on an annual average and has generated annual sales of less than EUR 40 million. Especially due to these size characteristics, scale-ups may quickly find that employees are not eligible for tax-privileged equity investments. In addition, older startups and SMEs are deprived of the possibility to grant employees a tax-privileged participation.
Ambitious, but expandable
The two draft laws largely meet the long-standing demands of the startup scene. However, complete debureaucratization has not been achieved, as in particular the incorporation process remains unchanged and communication with the company registry courts must continue to be conducted in German, as English is not (yet) recognized as an official language. Bilingual contracts will therefore continue to be a frequent requirement in the future. Furthermore, the requirements for tax incentives for employee shareholdings have turned out to be complex and create unobjective differentiations from “older” startups and SMEs. Finally, there is a lack of incentives for private venture capital in order to become more competitive on the international investor side. Although this was announced in the government program 2020-2024, concrete measures are still lacking here.
About the author:
Philip Rosenauer is a partner at PHH Rechtsanwält:innen and heads the practice group on startup and investor advisory. His expertise lies in advising young entrepreneurs, startups and investors regarding the entire process of company development and corporate financing. In addition, he advises national and international clients on issues related to M&A, corporate and company law as well as capital markets law. As a Capital Market Coach, he is an authorized advisor for issuers in the direct market plus of the Vienna Stock Exchange.