The following article provides brief and concise information on the relationship between investments and depreciation in perpetual retirement.
In addition to financing rounds, employee participation programs are the most common trigger for share revaluation
Start-ups are generally subject to revaluation more often than traditional companies. As a rule, every injection of fresh equity as part of a capital increase results in an implicit new valuation of the company. The issuance of shares via employee participation programs has a comparable effect. In doing so, the valuation of the newly issued shares is transferred to the entire company. This also applies from a tax perspective and, in certain constellations, may result in tax payments at the expense of management, existing shareholders or even employees involved in the company. The reason for this is the system prescribed by the Valuation Act (BewG).
An expert assessment is applicable 12 months after the transaction
Shares must be acquired by employees or founders working in the company at market price. According to Section 11 BewG, the market price is calculated on the basis of the current stock exchange price or, if such price is not available, on comparable transactions within one year before the share transfer.
As a rule, a new share and enterprise value can only be set after this one-year period has expired by means of valuation reports. As part of its own assessments, the tax authorities use the simplified income value process, which often leads to unrealistically high values or is not applicable in the case of startups due to the negative results. There is therefore increasing use of so-called IDW S1 reports, which are accepted by the tax authorities, although not unaudited.
Value reductions entail the risk of back tax payments
A capital increase is considered a share valuation within the meaning of Section 11 of the BewG. This value is therefore also relevant for the transfer of shares to management or employees, which are often carried out as part of capital increases. This is intended to tie key employees more closely to the company and to incentivize them. A levy below the value of the capital increase is often envisaged here.
If employees or founders receive shares below the market price, the difference between the selling price and the market price may be subject to payroll tax in the case of employees and salaried founders. This can lead to tax payments that are not precluded by an inflow. In addition, it should be noted that in this case, payroll tax is personally owed by the company and, ultimately, by the management.
Virtual employee shareholdings reduce tax risks
One way to avoid this risk is to agree on a (virtual) employee option program (ESOP). If arranged accordingly, tax payments are only accrued when exercised at the time of exit.
If there is no employment relationship, gift tax would have to be examined in the event of transactions below market prices. This is relevant if the value of the services of the transaction is disproportionate and is due to the relationship between the contracting parties. In order to assess this mismatch, the tax authorities refer to transactions within one year within the meaning of Section 11 BewG and, after the end of the annual period, often carry out their own valuations using the simplified income value process. Here, too, it is important to prove the lower value by means of an IDW S1 report by means of your own assessments and to comply with the one-year period in accordance with Section 11 BewG.
Conclusion
Issuing shares to employees requires an assessment of the company. For this purpose, changes of shareholders with external third parties within one year before issuance are used as a measurement criterion. After a period of 12 months, the value can be determined by means of appraisal reports. Reports in accordance with the IDW S1 standard are accepted by the tax authorities.