Startup package: FlexCo and new employee participation regime from 1.1.2024

The government bills for the startup package were recently passed in the National Council. In addition to a new company form (FlexCo), a new taxation regime for employee participations will be introduced, which is intended to counteract the dry-income issue. These laws are primarily intended to meet the special needs of startups and offer an internationally competitive option. The new regulations will apply from January 1, 2024. 

Flexible corporation 

The government bill provides for the creation of a new company form. The FlexCo can be seen as a hybrid form of a GmbH and AG. 

a.) Foundation of a FlexCo 

A FlexCo can be founded by one or more persons. In order to ease the financial burden on the founders, the share capital of the FlexCo has been reduced to EUR 10,000, of which at least EUR 5,000 must be paid in. Similarly, the minimum corporate income tax, which is based on the share capital, has been reduced to EUR 500. The share capital contribution per shareholder has also been reduced - for FlexCo this is EUR 1 instead of the EUR 70 previously stipulated for GmbHs.  

The advantages of a simplified formation in accordance with § 9a Limited Liability Companies Act (GmbHG) can be utilized during the formation. The articles of association only have to consist of the minimum content and the formation and application for entry in the commercial register can be made in electronic form and does not require a notarial deed. The company must have the legal form supplement "Flexible Kapitalgesellschaft" or "Flexible Company" (“FlexKapG” or “FlexCo” for short).  

b.) Enterprise value shares (Unternehmenswert-Anteile) 

In addition to traditional shares, there will also be so-called enterprise value shares as a further form of participation. By granting such shares, shareholders will participate in the net profit and liquidation proceeds, but will not be able to participate in the decision-making process of the company (as these are non-voting shares).  

This share class must be regulated separately in the articles of association. The share may not account for more than 25% of the share capital. The capital contribution of each participant must be at least EUR 0.01 and must be paid immediately. There is no provision for naming in the company register - all shares of this share class are listed together in a share register. The share register (list of names and shares) must be submitted to the company register annually and is included in the collection of deeds but not published.  

A co-sale right is provided for shareholders of enterprise value shares, which is intended to ensure that the shareholders participate in any sales proceeds generated by the founding shareholders.  

The transfer of enterprise value shares should be kept as simple and cost-effective as possible, which is why only the simple written form without a notarial deed is provided for.  

c.) Other aspects 

In order to create more flexibility for shareholders, the law also provides for the possibility of acquiring own shares (eigene Anteile). In most cases, the acquisition and sale of own shares is subject to a resolution by the Annual General Meeting. 

Furthermore, certain capital measures are also available for a FlexCo (e.g. authorized or conditional capital increase). 

Apart from this, in the case of a FlexCo, the transfer of shares by means of a (private) deed is more simply only possible through a notary or lawyer (the notary or lawyer has specific obligations to instruct, check and identify, which must be documented in the deed). 

Employee participation NEW 

The second part of the startup package includes a new tax benefit for employee participations in start-ups. The granting of a participation in a startup to an employee at a reduced price or free of charge generally constitutes a taxable non-cash benefit. In order to minimize the tax risk, various models have been considered to date (e.g. agreement of a negative liquidation preference). 

To counteract this dry-income problem, a new employee participation regime for tax purposes with deferred taxation is to be introduced. This is intended to support start-ups that are struggling with liquidity problems, especially at the beginning, and are therefore unable to pay the highly qualified employees they need.  

a.) Prerequisites 

In order to be eligible for the new employee participation regime, the following requirements must be met at start-up level (in relation to the financial year preceding the date on which the participations is granted):  

• revenues up to EUR 40 million 

• less than 100 employees 

• no inclusion in consolidated financial statements 

• no group companies as shareholders with more than 25 % of the shares (capital and voting rights) 

With regard to employees, it should be noted that only employees for tax purposes are covered and not freelancers or contract workers. The shares can be granted to a single employee or to several employees, whereby this must be for objective or business-related reasons. These could be, for example, special skills or the many years of experience of an employee.  

If the employee directly or indirectly (e.g. via an intermediary corporation or partnership) holds a stake in the startup of more than 10% at the time the shares are transferred, or held more than 10% at any time in the years prior to the transfer of the shares, the regulation should therefore no longer apply. If a shareholding of more than 10% in the employer's company is reached for the first time as part of the gratuitous transfer, a startup employee shareholding continues to exist insofar as the shares do not exceed this 10% limit. 

The new taxation regime applies to shares, interim certificates (Zwischenscheinen), GmbH shares, profit participation rights (Substanzgenussrechte) and enterprise value shares pursuant to Section 9 FlexKapGG. The shares must be granted free of charge, whereby the transfer in return for a consideration up to the amount of the nominal value attributable to the share transferred is deemed to be a free transfer for the application of this provision. Shares may be granted to employees either by the startup itself or by a shareholder. 

Furthermore, a start-up employee participation should only exist if the shares are sold within 10 years of the end of the calendar year in which the company was founded. 

It is also planned that the sale of the employee shareholding will only be possible with the consent of the employer (transfer restriction).  

b.) Taxation 

Under the new startup employee participation regime, the non-cash benefit from the granting of the startup employee participation is generally only taxed at the time the shares are sold (startup exit as the main event). 

However, taxation also occurs if one of the following substitute events occurs:  

• Termination of the employment relationship (termination can be problematic in the case of GmbH shares granted, but does not apply to shares that do not provide for voting rights and no general right to challenge or annul shareholder resolutions [e.g. enterprise value shares, profit participation rights], provided that the startup ensures subsequent taxation of the non-voting shares) 

• Cancellation of the transfer restriction 

• Liquidation of the company 

• Death of the employee 

• Relocation of the startup 

The assessment basis for taxation is the proceeds of the sale or, in the above-mentioned cases of a substitute event, the fair market value at the relevant time. 

The prerequisite for preferential taxation is an employment relationship of at least 2 years and a holding period of the shares of 3 years. The time limit begins from the time the shares are first granted, whereby in the case of successive share grants, it is sufficient for all shares if the time limit for the first share tranche is met. If the deadlines are not met (e.g. the 3-year deadline is not met in the case of an exit), taxation is deferred, but at the progressive income tax rate in full. Apart from this, it should be noted that the retention period is not relevant when the employment relationship is terminated and that both deadlines do not apply in the event of the employee's death. 

Taxation is based on the following preferential regime: 

c.) Outlook 

The new employee participation regime is intended to create an attractive opportunity for employees to participate in the company's success, which should also make it easier for start-ups and founders to find highly qualified employees. The new start-up employee participation regime is therefore an essential building block for a functioning Austrian start-up ecosystem and has long been demanded by the start-up community. With the new regulation, start-up employee participation has been placed on a secure legal basis from a tax perspective. The new regulation attempts to get to grips with the dry-income problem by only paying the "tax" when the actual exit takes place. However, alternative tax events dilute this objective. 

Due to the structure of the new startup employee participation, the application is not entirely straightforward (e.g. numerous application requirements, mixed calculation with regard to taxation, etc...). Roughly calculated, employees with an income tax progression of up to 50% will have a tax burden of around 35% as a result of mixed taxation (including non-wage labor costs). 

Finally there are still various detailed questions regarding the new startup employee participation that need to be clarified. 

Further information on this topic can also be found in the blog post New Startup Package: Employee Participation Models.

Authors: Christoph Puchner, Partner and Tax Consultant & David Gloser, Partner, Tax Consultant and Auditor at ECOVIS Austria, one of Austria’s leading tax consultancies for startups.

ABA webinar: Introducing the new FlexCo and its benefits, 1. Feb 2024

Do you want to know more about the new company form FlexCo? Then take the chance to register to our English webinar on February, 1^st where we will share the first experiences!