The amended version since 2024 foresees several changes to promote management recruitment and retention of key personnel by optimizing the taxation of these individuals.

Highlighted changes to the law include the following:

1. A (SME) threshold extension to a maximum of 1,000 employees and annual revenues below €100m or balance sheet sum below €86m is foreseen that will allow for a much broader applicability as the regulation remains applicable up to seven years after exceeding these thresholds. More established companies will also benefit from the tax regime through the extension of the foundation date of the companies eligible to 20 years.
2. As regards any leaver cases, only the remuneration (effective net benefit) paid to the receiving employee is used as the assessment basis for taxation and not the FMV of the shares. This favours bad leavers in particular, who regularly have to transfer their shares at acquisition cost or at a considerable discount to the FMV.
3. The taxation period has been increased to 15 years which now represents the latest point in time at which a taxation occurs (if no other taxable event has been triggered earlier or employer has declared assumption of the wage tax liability).
4. To avoid the dry income situation, the new regulation opens the possibility to mitigate taxation until the receiving employee actually sells or transfers the shares. In leaver cases and in cases where the holding period extends 15 years, a declaration of the assumption of the liability by the employer, who can now irrevocably declare that the employer is liable for the relevant wage tax of the employee, can be issued to postpone taxation until the shares are actually sold or transferred and the employee has received income.

In addition to the amendments which already became effective in 2024 and despite the political turmoil in Germany, a new law was recently passed by the Federal Council (“Bundesrat”) on 22 November 2024 stating further simplifications: The granted shares do not have to be those from the employing company but may also be shares in affiliated group companies of the employing company. This simplification shall also apply retroactively as of the beginning of 2024.

While this addition should provide for even more flexibility for MPP structuring in multi-tier acquisition structures, such option would also be subject to the (cumulative) SME threshold and the 20-year foundation date. Nonetheless, eliminating the strict focus on granting shares in the employing company should generally be considered as a helpful widening of the scope and should offer more flexibility for structuring the reinvestment.

Since the introduction in 2021, the granted shares regulation has not yet become an attractive solution for Private Equity investments in Germany due to its many pitfalls.

The newly amended regulation is a more viable option to the current market approach on MPP and other employee participations. Further, the new scheme may offer more versatile structuring mechanisms for MPPs and post-deal integration for Private Equity funds. The newest amendments allow for a more diverse approach to help keep the management retention high and the tax burden low. This provides for attractive opportunities to incentivize founders, management and key personnel.

The latest amendment should further lead to more flexible reinvestments from a structural perspective, as shares could be granted in a higher- or lower- tier group company without being limited to shares in the employing company. This addition should also be helpful for Private Equity investors as the employing company typically deviates from the designated reinvestment company in most structures. At the same time, the new regulation harbors the risk that it could be less attractive for established companies or groups of companies, as these are more likely to exceed the relevant thresholds due to the consolidated approach.

With new options on the table, the German tax law offers a variety to set-up MPPs and other equity programs tailored to the specific needs of the Private Equity investor.