Start-ups are generally subject to revaluation more often than conventional companies. Every injection of fresh equity as part of a capital increase leads to an implicit new valuation of the company.
Start-ups are generally subject to revaluation more often than conventional companies. Every injection of fresh equity as part of a capital increase leads to an implicit new valuation of the company. The issue of shares via employee participation programs has a comparable effect. The valuation of the newly issued shares is transferred to the company as a whole. This also applies from a tax perspective and can, in certain constellations, result in tax payments for the management, the existing shareholders or the employees involved in the company. The reason for this is the system prescribed by the German Valuation Act (BewG).
Shares acquired by employees or founders working in the company must be acquired at the market price. The market price is measured in accordance with Section 11 BewG on the basis of the current stock market price or, if this is not available, on the basis of comparable transactions within one year prior to the transfer of shares. As a rule, a new share and company value can only be set after the expiry of this one-year period by means of a valuation report. The tax authorities often use the simplified income approach for their own valuations, which often leads to unrealistically high values or is not applicable in the case of start-ups due to negative results. For this reason, IDW S1 appraisers are increasingly being used, which are accepted by the tax authorities, albeit not without scrutiny.
A capital increase is considered a share valuation within the meaning of Section 11 BewG. This value is therefore also relevant for the transfer of shares to management or employees, which is often carried out as part of capital increases. In this way, key employees should be more closely tied to the company and incentivized. If employees or founders receive the shares below the market price, the difference between the selling price and the market price may be subject to income tax in the case of employees and salaried founders. This can lead to tax payments that are not offset by an inflow. It should also be noted that in this case the wage tax is owed by the company and ultimately by the management personally.
One way to avoid this risk is to agree a virtual employee stock option program (ESOP). If structured accordingly, tax payments are only due when the options are exercised at the time of exit.
If there is no employment relationship, gift tax would have to be examined in the case of transactions below market prices. This is relevant if the value of the benefits of the transaction is disproportionate and is justified by the relationship between the contracting parties. To assess this disproportion, the tax authorities base their assessment on transactions within a year within the meaning of Section 11 BewG and often carry out their own valuations after the end of the annual period using the simplified income approach. Here, too, it is necessary to provide evidence of the lower value by means of IDW S1 appraisals and to observe the one-year period pursuant to Section 11 BewG.
The issue of shares to employees requires a valuation of the company. Shareholder changes with external third parties within one year prior to the issue are used as a valuation benchmark. After a period of 12 months, the value can be determined using valuation reports. Appraisers in accordance with the IDW S1 standard are accepted by the tax authorities.
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