Start-ups continue to enjoy increasing popularity. In Austria, too, the boom in start-ups continues unabated and the trend is upward. After recurring complaints in the past about Austrian corporate law being too inflexible for start-ups and a lack of tax incentives, the Austrian legislator has now taken the initiative to change this. The introduction of a new type of company - the Flexible Company - and tax benefits for employee shareholdings are intended to make start-ups more attractive and flexible.

Current draft legislation under review

As of a few days ago, two pieces of new legislation are under review, the Flexible Capital Companies Act (FlexKapGG) (Flexible Kapitalgesellschafts-Gesetz – FlexKapGG; Gesellschaftsrechts-Änderungsgesetz 2023 – GesRÄG 2023, Änderung (276/ME) | Parlament Österreich) and the Start-Up Promotion Act (Start-Up-Förderungsgesetz, Änderung (275/ME) | Parlament Österreich). Both laws have as their clear objective to facilitate the establishment of start-ups. The general conditions for start-ups under corporate law and tax law are to be made significantly easier.

Corporate law - flexible corporation

Planned measures

The following measures form the core of the current start-up initiative in terms of corporate law:

• The share capital for an Austrian GmbH shall be permanently reduced from EUR 35,000 to EUR 10,000. The previous provisions on establishment privileges, which provided for the possibility of establishing a GmbH with a reduced share capital for a limited period of time, shall be repealed.
• The Flexible Capital Companies Act (FlexKapGG) introduces a further corporation in addition to the GmbH and the AG, the Flexible Capital Company (FlexCo).

The FlexCo

The FlexCo is primarily subject to the provisions of the GmbH, supplemented by provisions of the Austrian Stock Corporation Act, such as provisions on the acquisition and holding of treasury shares, authorized capital and conditional capital increases. The aim is to combine the best of both worlds in a single corporate form. Above all, the flexible instruments from the AG for carrying out capital increases, such as authorized capital, which have a high practical relevance for start-ups, are to become more accessible.

In addition, a long-standing requirement was implemented. The transfer of shares in a FlexCo no longer requires a notarial deed. The drawing up of a corresponding deed by a notary or a lawyer is sufficient.

The FlexCo also paves the way for the elimination of further formalisms. The articles of association of the FlexCo can stipulate that the consent of all shareholders is no longer required for a written resolution (circular resolution). This will significantly facilitate the administration of written resolutions. However, it must be en-sured that all shareholders can participate in the voting.

Facilitated Employee Participation – Company Value Shares

The core of the FlexCo and the main instrument of future employee participation are the company value shares, which were previously unknown in Austrian corporate law.

These may be issued in an amount of up to 25% of the share capital. The smallest nominal amount is only one cent, which allows a large number of company value shares to be issued even with a small share capital. Company value shares do not carry any voting rights, nor do they confer any right to challenge shareholder resolutions. In return, they are neither liable for default nor obliged to make additional contributions. However, they do have the right to participate in the balance sheet profit and liquidation proceeds. In contrast to previous practice, which works with agreements under the law of obligations, this is intended to make it possible for employees to participate on a corporate basis with a significantly reduced economic risk.

The acquisition and transfer of company value shares has been simplified even further. It is sufficient to comply with the requirement of written form. The involvement of a notary or lawyer is not required. The owners of company value shares do not have to be registered by name in the company register, as would be the case with a GmbH. However, the FlexCo has to keep a corresponding book of shares. The Company Register only shows the extent to which company value shares have been issued.

In order to allow the owners of company value shares to participate in an increase in the value of the company, the articles of association must also provide for a mandatory right of co-sale if the original shareholders - who are to be specified in the articles of association - sell a majority of their shareholding.

According to the materials, successive sales are possible. The right of co-sale is then triggered by the transfer after which the original shareholders have a total of less than half of their initial capital contributions. The reason for this provision is not clear. The potential for circumvention through the retention of a small share is obvious. If the sale takes place successively, however, the holders of company value shares must at least be offered a price which corresponds to the weighted average of the (higher) prices in previous sales and the price in the current sale.

The inclusion of further triggers of the co-sale right in the partnership agreement is possible. The original shareholders must guarantee compliance with the right of co-sale.

In the event of termination of the employment relationship with holders of company value shares, the articles of association shall provide for a mandatory possibility of sale. In addition to the persons obligated to purchase, it must also be specified in particular how the purchase price is to be determined.

Tax law – deferral of taxation

Due to a lack of liquidity, start-ups and young SMEs are often not in a position to provide appropriate compensation for highly qualified employees in cash. Employees are therefore often offered a share in the company. In this case, however, the immediate taxation of the non-cash benefit leads to an additional liquidity requirement for the recipient ("dry income" problem). The Austrian Start-Up Promotion Act is intended to address this issue by granting a deferral of taxation. 

However, this deferral of taxation is subject to a number of conditions:

• The shares may only be granted to employees free of charge or at par value and there must be objective, business-related reasons.
• The company may not be part of a corporate group, nor may more than 25% of the company's capital or voting rights be held by companies that are to be included in consolidated financial statements.
• Certain size criteria must not be exceeded (e.g. no more than 100 employees, annual sales revenue no more than EUR 40 million).
• The shares will be issued within 10 years from the establishment of the company.
• The shareholding of an individual employee may not exceed 10%.
• The transfer of the shareholding may only be possible with the consent of the employer (transfer restriction).

The deferral of taxation applies primarily until the actual sale of the shares. In addition, there are other triggers for taxation, such as the lifting of the restriction on transferability (if there is no sale or termination of employment in the same calendar year), exceeding the 10% shareholding threshold, the death of the employee or the liquidation of the company. Taxation also occurs in the event of termination of the employment relationship. However, this does not apply to company value shares in a FlexCo (see point "Facilitated Employee Participation – Company Value Shares" above). With regard to such shares, the employee has the right to defer the taxation - among other things - until the actual sale. However, in this case, the employee must also personally carry out an assessment.

The complexity of assessing the non-cash benefit is reduced by a flat-rate rule. In the case of the sale of shares, the non-cash benefit is measured on the basis of the proceeds of the sale, and in all other cases on the basis of the fair market value at the time when the tax deferral ceases to apply. If the employee dies or if the employment relationship has lasted at least three years and if the deferral of taxation ceases at the earliest after the expiry of five years from the first granting of shares, the pecuniary benefit is to be recorded as other remuneration at 75% with a fixed rate of 27.5%. The remainder is subject to the income tax rate.

Summary

Overall, the proposed changes are to be welcomed. However, it remains to be seen whether the FlexCo will actually be adopted or whether it would not have been better to reform the existing corporate forms.