When and how to implement the new EIPs under § 19a EstG
The reform of § 19a EStG introduces a significant opportunity for tech companies inGermany to adopt Equity Incentive Plans (EIPs) that offer compelling tax advantages. These changes can be difficult to understand and make it hard to decide if you should implement the EIP and what disadvantages may come with it.With this second part of our series of articles about the new EIP we want to dive deeper into all topics related to the actual implementation of the newEIP. Let’s get started.
Content:
1. When to implement the new EIP
2. Necessary steps for implementation
3. Conclusion
When to implement the new EIP
A quick recap: The reform of Sec. 19a EStG and the new EIP can create great tax benefits for participants in an employee incentive program. With the new EIP you can reduce the tax burden of your participants by up to 50%. You can read more about this in our article here.
To fully capitalize on these benefits, timing is crucial. Implementing EIPs early in your startup's lifecycle can greatly enhance the tax efficiency for your employees and the company vs. doing this at a later stage. The reason for that is, that the tax benefits diminish over time: The crux of the tax advantage under § 19a EStG lies in the distinction between income tax applicable to the value of the shares at the time of the EIP implementation and the capital gains tax applied to future value appreciation. As your startup grows and increasesing value, the portion of equity subject to higher income tax rates correspondingly expands. Implementing EIPs early can minimize the income tax burden, as a larger fraction of future gains will be eligible for the more favorable capital gains tax treatment.
At the same time, EIP implementation is not the cheapest form of employee incentives. The structure is quiet complex and should not be implemented without getting legal and tax advice. You also will have to set up a special purpose vehicle (SPV) to pool the employees and avoid having them as direct shareholders on your captable. You can find out more about the costs associated with implementing an EIP on our dedicated EIP page here.
So you will have to balance out the costs of the EIP and the potential benefits. We at GAIA believe that the right time for early stage founders to implement an EIP is as soon as you want to hire your first key hires and have your first external investors investing a significant amount in your company, this can be your pre-seed or seed financing round.
For all companies which exist a while already: Get the EIP as quickly as possible, as your value will only go up and the tax benefits are fundamentally larger then the costs associated with implementing an EIP.
Steps to implement EIPs effectively
So you decided to implement an EIP at your company. Congratulations! But what do you have to do and consider next? Let us guide you through the steps.
Assessment and Planning: Begin with a comprehensive assessment of your current equity structures and how they might transition into an EIP compliant with § 19a EStG. This involves getting a detailed overview of your current VESOP or ESOP and how many options have been granted and vested. You should involve HR in the process as quickly as possible.Transitioning an existing VESOP or ESOP means a lot of communicative work of your people & culture team. Therefore you must understand any time restrictions or missing resources early on.
Legal and Tax Advisory:Engage with legal and tax advisors who specialize in EIPs and § 19a EStG. They will help navigate the complexities of the law, ensuring your plan is compliant and optimized for tax benefits. This step is crucial for drafting the plan documents and employee agreements. We have a dedicated EIP offering with our partner law firm PXR in place. You can find more about it here: And get on the waitlist.
Designing the EIP Structure: Together with your legal and tax advisors you will design your EIP. This will include setting up an SPV which will hold the actual shares in the company. Drafting a Limited Partnership Agreement for such SPV and the actual EIP Offering letters.Next to legal necessities you should insist on drafts that are easy to understand for your employees and your HR team in the future. In the documents you will eligibility criteria, vesting schedules, and the scope of participation. Ensure the plan is flexible enough to adapt as your company grows.
Get your Investors on board:With the finalized drafts for your EIP you need to get your Investors on board.Together with your lawyers you should explain the changes and benefits to themas you need their approval to implement the new structure.
Communication and Education:Develop a communication strategy to introduce the EIP to your employees. This should include educational sessions that explain the benefits and implications of the plan, addressing any questions or concerns they might have. Transparent communication is key to ensuring employee buy-in.
Implementation and Administration:With the plan designed and communicated, move forward with implementation. This includes administrative tasks such as updating payroll systems, setting up mechanisms for tax withholding, and reporting, as well as issuing equity according to the plan's terms.
Ongoing Management and Review:EIPs require ongoing management to adjust for changes in legislation, company valuation, and employee participation. Regularly review the plan to ensure it remains compliant and continues to meet the objectives of both the company and its employees.
Conclusion
Implementing an Equity Incentive Plan under the new § 19a EStG presents a strategic advantage for tech companies in Germany. By optimizing tax benefits and enhancing employee incentives, startups can foster a culture of ownership and commitment that supports long-term growth. The steps outlined above provide aroadmap for companies ready to embark on this journey, ensuring that they maximize the benefits while navigating the complexities of implementation.
