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Financial Participation

Employee financial participation, in this case employee share ownership, is supported by the state under certain circumstances under the new Employee Share Ownership Law (“Mitarbeiterkapitalbeteiligungsgesetz”) which came into force in 2009. The decision to introduce a participation scheme rests however with the company or the social partners. Legislation can only support the introduction of such a scheme and provide incentives by granting bonuses or tax breaks.

This is achieved on the one hand by a state-funded bonus on employee savings as foreseen in the Fifth Asset Accumulation Law (VermBG) and on the other hand by partial tax and social security contribution relief when an employer voluntarily participates employees in company equity as stipulated in §3.39 of the Income Tax Law. The new law also supports deposits in supra-company funds.

The new Employee Share Ownership Law came into effect in April 2009, complementing existing legal and fiscal framework conditions with the following provisions:1

(a) Income Tax Law (Einkommensteuergesetz or EStG): tax-free allocation by the employer

When an employee receives a free or reduced-price non-cash benefit from the company he works for, the difference between the actual value and the purchase price represents a non-cash benefit and is subject to tax and social security contributions. The tax incentive previously provided by (new) §3 No. 39 EStG applied here, with non-cash benefits up to a value of €360 being exempted from tax and social security contributions.

The tax- and social contribution-free highest amount with regard to the allocation of workers’ participation by the employing company was raised from 135 to 360 euros by the reform. Employers’ allocations cannot be offset against employees’ claims under collective agreements or individual contracts, however. In this case the requirement of equal treatment must be complied with; in other words, all employees who have been with the company more than 1 year must be offered this opportunity. In 2010 the German government made a change in accordance with which, in the case of an employer’s allocation of employee shares even by way of deferred compensation, employees can invest the 360 euros tax-free but not free of social security contributions.

This basically meant that the ban on converting wages introduced by the then CDU/CSU-SPD coalition was revoked. The new regulations allow part of wages or bonuses (up to a maximum amount of €360) to be invested by employees in shares of the company they work for.

Employee participation schemes can involve company shares, quoted convertible bonds, participation certificates/rights, debentures, stakes in cooperatives, shares in limited companies and dormant partnerships.

(b) 5th Asset Accumulation Law (5. Vermögensbildungsgesetz or VermBG): employee savings (Sparzulage) used to finance participation in company shares

State support for employee share ownership is part of the Asset Accumulation Law. The starting point for the incentives is the asset accumulation payments made by employers on behalf of their employees on a monthly basis pursuant to the Asset Accumulation Law. According to this Law, employees are entitled to conclude an asset accumulation savings contract, into which the employer pays part of the employee's wages. Employees may opt to top up the payments for which the state-funded bonus is paid with a further portion of their wages.

A number of collective agreements provide for employers making - either fully or partially - the asset accumulation payments on top of regular wages. The only requirement is that the employee must have concluded an asset accumulation savings contract.

The reform led to the state-funded bonus being increased from 18% to 20% (a maximum of €80 a year). There are however income thresholds in force with regard to the stated-funded bonus. These were raised by the reform from €17,900 to €20,000 for single employees and from €35,800 to €40,000 for married ones. Employee payments can be made up to a maximum of €400 out of net income (after deduction of tax and social security contributions).

The state-funded bonus is only accorded if the assets acquired are held for a minimum of 6 (in certain cases 7) years. Payment of the bonus is only made after expiry of this holding period.

The two incentives (tax and social security exemption pursuant to §3.39 EStG and the state-funded bonus pursuant to the 5th Asset Accumulation Law) may also be combined.

Eligible incentivised company-level investments include employee loans, debentures, participation certificates/rights, dormant partnerships, shares in cooperatives or limited companies, and stocks. Tax-advantaged supra-company investment forms include quoted stocks and shares in share funds.

(c) Investment Law (Investitionsgesetz or InvG): Regulations governing "employee participation funds" (Mitarbeiterbeteiligungs-Sondervermögen)

A new employee financial participation instrument was introduced into the Investment Law in 2009: trust-managed employee participation funds (treuhänderisch verwaltete Mitarbeiterbeteiligungs-Sondervermögen) Employees should thus be able to purchase shares in a fund which invests the capital in the employing company or another company, for example in the same region or the same sector.

The intention behind this form of supra-enterprise participation was to achieve greater dissemination of employee share ownership, especially in SMEs and to open up the opportunity to participate in productive capital to more employees. At the same time, the idea was also to open up the possibility of employee share ownership with regard to which the risk of loss in the event of bankruptcy is significantly less due to diversification. Furthermore, the connection between participation and employment in the employing company was not to be diluted completely. Finally, the idea was to ensure that the shares can be traded (important for unquoted companies); and the administrational burden for the employing company reduced as much as possible. The tax incentives apply to both company and supra-company participation. however, a number of technical restrictions were imposed: After 3 years, the fund must invest at least 60% of the capital in the companies underwriting their workers' participation in the fund. In addition, the fund must take certain investment rules reducing the investment risk into account. Unquoted shares in companies and unquoted stocks of participating companies must be limited to 25% of the fund's total value.

A participating company has no statutory entitlement for the fund to invest in it. A maximum of 40% of the fund may be invested in quoted stocks or bonds of other companies. Similarly, any investment in a non-participating company must not exceed 5% of the total fund.

In practice these ideas have not yet been implemented. To date there is still no workers’ participation fund.2 According to experts, this is due to the multitude of technical and economic requirements in the law that in reality appear very hard to achieve. Such participation funds are not really compatible with the requirements of either the providers of the funds (that is, the investment funds) nor the customers, that is, companies and employees.3

In the recent public debate it was often discussed whether the introduction of such funds is really necessary and whether the form made available by the legislator is appropriate and in particular whether SMEs are attracted by such funds. In general doubts have been expressed whether the goal of the legislator, to link employee share ownership with the advantages of an investment fund and also to make available a new source of financing for SMEs can be achieved. Critics say that the fund model in the form available to date is not practicable.

The problems involved in implementing workers’ participation special funds have also been noted in the political arena since 2011. In this context the Finance Ministry presented a draft law implementing the EU directive 2011/61/EU on the administration of alternative investment funds (AIFM Umsetzungsgesetz). In the wake of that the regulations on workers’ participation special funds were abolished in July 2013.

The public debate on the legislative reform is focused more on the critical aspects than on the chances offered. Critics doubt whether the goals associated with the law will be achieved in the foreseeable future. In their view, the main stumbling block of the revised legislation is the low level of tax and social security incentives for employee share ownership (a mere €360 a year). This is very low in comparison with other EU countries, and not high enough to represent a real incentive.

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.