Future Financing Act – Modernising Germany’s Capital Market

On April 3, 2023, the Federal Ministry of Finance (Bundesfinanzministerium, "BMF") and the Federal Ministry of Justice (Bundesjustizministerium, "BMJ") published a joint key points paper (the Joint Paper) for a Future Financing Act (Zukunftsfinanzierungsgesetz).

The purpose of the Act is to increase the attractiveness of Germany as financial centre by modernising and digitising the capital market. The result could be far-reaching positive changes in the German capital market landscape in particular in the area of asset management and tokenised distribution. Various other areas would also benefit from these plans. The measures relate to corporate law, capital markets law and tax law.

What is particularly interesting is the short timeline envisaged for implementation. The new Acts are intended to come into force within the first half of the Parliamentary term, which comes to an end in October 2023. In practice, it would be a huge step if the new acts came into force in 2024.

We summarise below the key elements of the Joint Paper.

1. Facilitating access to the capital market for companies, especially start-ups, growth companies and SMEs

• Simplifying listing requirements and post-admission obligations, in particular, for growth companies and SMEs.
• Reducing regulatory requirements and in particular the costs to access the capital market.

2. Strengthening the financial centre and improving the legal framework for financial instruments and transactions, especially with regard to financing opportunities for start-ups, growth companies and SMEs

Simplifying investments especially for institutional investors.

• To improve the conclusion and execution of standardised contracts between market participants, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin") would accept standard market contracts, in particular model master agreements for trading in financial instruments provided these are balanced and widely used.
• Such contracts would be exempted from the application of German ToBs rules.

3. Digitalisation of the capital market

The plan is to enable companies to issue shares based on blockchain technology. The Ministries want to jointly examine how they can further improve the transferability of crypto securities nationally and in Europe.  Attention is also paid to the reduction of written form requirements in order to avoid media breaks.

• Further digitalisation of the capital market. Rules already in place allowing tokenisation of bonds and fund units will be extended to also capture "normal" securities.
• The transferability of crypto securities will be improved.
• Special rules will be created to simplify the transfer of monetary claims securitised under the EU's Securitisation Regulation (2017/2402/EU).

4. Improving the possibility of raising equity capital by facilitating capital increases and introducing dual class shares

• According to the BMF and the BMJ, the possibility of raising equity capital via the capital market is a core function and an important incentive for companies to go public.
• Supporting growth companies and start-ups by allowing dual class shares whilst ensuring investor protection with the aim to accelerate the time to go public.
• Simplifying capital increases and granting more flexibility with regard to conditional capital increases

5. Removal of barriers to digitalisation and expanding the opportunities to use English when communicating with the BaFin

• The Joint Paper accepts that supervision requires an up to date technical approach.
• The aim is to further reduce digitalisation obstacles in supervisory laws by, for example, abolishing written form requirements. The intention is to allow digital communication with the BaFin on a much wider scale.
• In order to make Germany a more attractive location for international investors and companies, rules regarding the required use of the German language when communicating with the regulator will be abolished.

6. Improving investments in shares and savings plans from a tax perspective

• Incentivising equity investments by introducing an allowance for capital gains when selling shares or investment funds.
• Abolishing the separate loss offset circle for losses on the sale of shares.
• To achieve a significant simplification in relation to the withholding tax procedure, it is intended to abolish the separate loss offsetting circles for losses from forward transactions and debts.
• To improve the attractiveness of the German market from a tax perspective, the VAT exemption for venture capital funds would be extended as far as is permissible under EU law.

7. Improving the tax framework for employee share ownership

• It is planned to expand employee share ownership so that employees participate more in the success of their company. At the same time, companies can better attract and retain the employees they want.
• To foster employee share ownership, the tax-free allowance for employee share ownership will be increased from currently EUR 1,440 to EUR 5,000.
• The regulation on deferred taxation of non-cash benefits from employee asset participation will be expanded - this should make it more attractive to offer share participations as a remuneration component.
• The plan is also to increase the employee savings allowance, which is beneficial for employees, and to expand the group of those eligible for this allowance.