The "Start-up Package" introduced a new tax-based employee participation model and a new corporate form (FlexCo). The FlexCo is intended to provide startups with more flexibility (e.g., simplified share transfers, new financing options, non-voting company value shares, etc.). For this reason, existing startups are currently considering whether converting an existing GmbH into a FlexCo will have negative tax consequences. The following section will therefore examine the tax aspects associated with such a conversion.

Conversion of GmbH into FlexCo from a tax perspective

From a tax perspective, the conversion of an existing GmbH into a FlexCo constitutes a so-called "change of legal form" that leaves the identity of the legal entity unchanged. Such a conversion does not require the tax benefits of the Reorganization Tax Act.

Such a change of legal form is possible without any income tax implications for the company and its shareholders. Furthermore, there are no adverse effects on existing loss carryforwards or any retention periods (e.g., for foreign investors with regard to the capital gains tax exemption under Section 94(2) of the Income Tax Act).

Due to the lack of a transfer of assets, no VAT-capable exchange of services takes place, meaning the change in legal form does not constitute a VAT-capable transaction. Furthermore, the requirements of the Fees Act and the Real Estate Transfer Tax Act (in the event that the startup owns real estate assets) are not met.

Based on the explanations of the government proposal, no special measures to protect creditors (such as a restructuring balance sheet, security claim or foundation audit) are required.

For information purposes, the change in legal form can be disclosed to the responsible tax office by means of a short letter.

Employee participation

In the FlexCo segment, it is possible to incentivize selected key employees with actual shares (so-called "enterprise value shares") in the startup as part of an employee participation program. The advantage of this is that such enterprise value shares are non-voting and all enterprise value shares are reported together (so that the cap table remains "clean").

The new tax incentive for startup employee participation pursuant to Section 67a of the Income Tax Act applies, for example, not only to GmbH shares but also to company value shares and is broadly structured in this regard (although the application requirements must be observed). Taxation is carried out using the following preferential flat-rate regime, provided certain conditions are met:

Virtual participation programs are currently not eligible for the preferential tax regime under Section 67a of the Income Tax Act, so that a higher tax burden can be expected for such virtual participation programs compared to real participation programs.

Whether the conversion of virtual participations into equity shares can be considered tax-neutral under Section 67a of the Income Tax Act (EStG) remains an open legal question. Clarification from the tax authorities in this regard would be helpful for the startup industry.

Conclusion

The change in legal form from a GmbH to a FlexCo is easy to implement and does not involve any negative tax consequences. FlexCo offers startups more flexibility (e.g., simplified share transfers, new financing options, non-voting company value shares, etc.). However, currently only genuine employee participation programs (and not virtual participations) are covered by the newly introduced tax regime. Clarification from the tax authorities regarding the conversion of virtual participations into equity shares would be helpful.

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.