In addition to employee participation programs with real shares, there is also the option of granting virtual shares (so-called "phantom shares"). For real shares, a new tax relief was created under Section 67a of the Income Tax Act with the start-up package implemented from 2024, which provides for a mixed calculation for taxation only in the event of an exit: 75% of the exit profit is subject to a 27.5% tax rate (excluding non-wage labor costs), and 25% of the exit profit is subject to full payroll tax and contributions (resulting in a total tax burden of approximately 35%).

In contrast, virtual shares have so far remained untouched. As soon as an exit-related payout occurs in virtual participation programs, they are subject to tax at the progressive income tax rate (usually up to 50%) and are also subject to social security contributions and non-wage labor costs.

In order to eliminate this adverse tax effect on virtual participation programs, the draft Tax Amendment Act 2024 was recently published.

New benefits through the conversion of virtual participation programs

The new tax relief is designed to allow existing virtual shares to be transferred, under certain conditions, to the existing regime for genuine employee participation in the period from January 1, 2024, to December 31, 2025, without the need for valuation and taxation of the non-cash benefit. Taxation will then only occur at the exit date (with a total tax burden of approximately 35%).

However, if employees with virtual shares in start-ups wish to take advantage of this new regulation and, for this reason, receive capital shares falling under Section 67a of the Income Tax Act (e.g. GmbH shares, stocks, company value shares, substance participation rights) instead of the virtual shares, all requirements for start-up employee participation must be met, e.g.:

• Start-up may not have more than 100 employees

• The start-up’s turnover may not exceed EUR 40 million

• Start-up must not be fully included in consolidated financial statements (apart from that, the shares in the start-up must not be held by more than 25% by companies that are to be included in consolidated financial statements)

• Start-up employee participation can only be granted to “real” employees

• Employee did not previously or at the time of granting shares hold more than 10% of the shares in the start-up

• Shares are granted within 10 years of the company being founded

• Restriction of employee participation required

• Written declaration from the employee regarding the use of the new start-up employee participation (including inclusion of the participation in the payroll account)

Conclusion

Against this backdrop, startups should analyze their existing virtual participation programs to determine the extent to which a conversion of the virtual shares into a "real" startup employee participation program within the meaning of Section 67a of the Income Tax Act (Einkommensteuergesetz) is feasible. However, due to the temporary timeframe, this conversion option is limited. Since the Tax Amendment Act is currently still in draft form, its final implementation remains to be seen.

This article was written by David Gloser (Partner, Tax Advisor and Auditor) and Christoph Puchner (Partner and Tax Advisor) of ECOVIS Austria. ECOVIS Austria is one of Austria's leading tax consulting firms in the startup sector.