Employee Ownership Cooperative Act (ZLZD): A Solution for Higher Employee Productivity?

Strategic Role of the ZLZD

The Slovenian economy is at a crossroads where the issue of ownership succession in small and medium-sized enterprises (SMEs) intersects with long-term national economic stability. More than half of all privately owned companies in Slovenia have owners older than 56, while nearly a fifth already exceed the age of 65. A particularly critical data point reveals that 67 percent of companies with owners in the oldest category lack a formalized succession plan. In this environment, the Employee Ownership Cooperative Act (ZLZD) emerges as a strategic legislative instrument, introducing the so-called Cooperative ESOP (Employee Stock Ownership Plan) into the Slovenian legal order.

Through the ZLZD, the legislator has established the legal and tax framework for the structural transformation of companies into employee-owned entities, addressing the lack of personal capital among workers for direct share buyouts. The model is based on the establishment of an Employee Ownership Cooperative, which acts as a dedicated holding company. Its exclusive purpose is to acquire and manage capital investments in the parent company on behalf of its employees. This approach enables a gradual transfer of ownership, funded by the company’s future cash flows rather than worker savings.

Socio-Economic Reasons for Adopting the ZLZD

Slovenia faces a high concentration of ownership, with 44 percent of companies having only one owner, and the average stake of the largest owner reaching 75 percent. Since 76 percent of companies identify as family-owned, one would expect family succession; however, data from the SPIRIT Slovenia agency reveal that only 9 percent of descendants are willing to take over the family business. Consequently, entrepreneurs face a dilemma, whether to sell the company to a direct competitor or a fund, or find a path that empowers the collective that built the company.

The ZLZD responds to these needs by providing a regulated option for employee ownership that keeps companies locally owned and increases their resilience to economic fluctuations. Employee ownership leads to higher productivity, lower turnover, and improved ties with the local community, as profits and decision-making remain in the location where the company operates.

Legal Nature of the Employee Ownership Cooperative

An Employee Ownership Cooperative (EOC) is defined under the ZLZD as a special form of cooperative established exclusively for the purpose of acquiring, managing, and disposing of a capital investment in a parent company. Although the ZLZD relies on the general Cooperatives Act, it introduces specific restrictions and obligations that distinguish the EOC from traditional cooperatives. A key difference is its narrow scope of operation. An EOC cannot engage in any other economic activity except managing the investment in a single company or a group of related companies.

The law requires the EOC to be organized as a cooperative without liability, meaning that members (employees) are not liable for the cooperative’s obligations with their personal assets. To prevent the model from being abused as a selective management incentive program, the ZLZD sets strict conditions for establishing and maintaining EOC status:

1.       At least five founding members;

2.       Participation of at least 75 percent of all employees who meet membership criteria;

3.       A mandatory contribution (share) of no more than EUR 300;

4.       Payment of the mandatory share exclusively in cash;

5.       Only one mandatory share per member.

The low entry threshold ensures that ownership is not conditioned by a worker's wealth but by their employment. Mandatory shares are non-transferable, non-alienable, and cannot be encumbered, ensuring that ownership remains permanently tied to active workers.

The Slovenian ESOP Model

The model involves three parties: the seller, the parent company, and the EOC, which borrows funds (from a bank, the parent company, or the seller) to purchase shares in the parent company. These shares become the property of the cooperative, while the debt is repaid from the parent company’s future earnings, transferred to the cooperative in the form of contributions or dividends.

Employees’ economic rights are tracked within the cooperative via Personal Capital Accounts (PCA). Value is credited to these accounts proportionally to the cooperative’s repaid debt and the growth in the parent company’s value. When the company repays EUR 1 of the debt used to buy shares with its generated profit, EUR 1 of capital value is allocated to the members’ PCAs. This mechanism ensures that employees directly see how their productivity impacts debt reduction and, consequently, their personal wealth within the cooperative.

The law defines the mandatory bodies of the EOC, with the structure depending on the size of the cooperative. An EOC with fewer than 50 members is managed by a president or a board of directors and overseen by an auditor or a supervisory board. An EOC with 50 or more members is led by a board of directors and overseen by a supervisory board. The ZLZD allows external experts to be appointed to the cooperative’s board, bridging potential gaps in specific expertise among employees. The EOC exercises its rights as a shareholder in the parent company through its board of directors.

The ZLZD does not interfere with the arrangements set by the Worker Participation in Management Act (ZSDU) but rather complements them. While the ZSDU enables participation through works councils and labour proxies, the ZLZD grants workers the formal power of an owner.

Tax Incentives and Benefits

When selling a stake or shares in a commercial company to an Employee Ownership Cooperative, two key tax benefits are introduced for sellers (individuals):

·         The positive tax base for capital gains is reduced by 20 percent;

·         The sale does not require the determination of a comparable market price, meaning the owner can sell the company stake to the cooperative at book value (which is often lower than market value) without the tax authority imposing penalties for hidden gifts or incorrect valuation.

Tax benefits are also introduced for the parent company and the Employee Ownership Cooperative:

·         Contributions paid by the parent company to the cooperative for the purpose of the buyout (ESOP contributions) are treated as tax-deductible expenses;

·         No social security contributions are paid on these contributions (with certain limitations), reducing the gross-gross cost for the company;

·         The cooperative can deduct 100% of the income received from the parent company from its tax base, meaning the ESOP contribution is not taxable income for the cooperative.

he strongest tax incentive applies to the workers (cooperative members) in the form of a progressive reduction of tax on payouts from the cooperative. These are treated as dividends for income tax purposes, with a rate that decreases based on the length of membership:

·         Up to 5 years: Full taxation (25 %);

·         After 5 years: Tax base reduced by 20 %;

·         After 10 years: Tax base reduced by 15 %;

·         After 15 years: Full exemption (0 % income tax).

The appreciation of value on the Personal Capital Account during the accumulation phase is not considered income and is not subject to any taxes or contributions, allowing for the unobstructed growth of worker wealth within the cooperative system.

Termination of Membership in the EOC

The ZLZD strictly separates the status of an owner from the status of an employee during the period of employment. Upon leaving the company, a worker cannot keep their stake in the cooperative. Instead, a process for paying out their Personal Capital Account is triggered.

The payout value depends on the method of exit. In the case of retirement or termination of employment, the valorized value of the mandatory share and the full value of the PCA are paid out. In the case of voluntary exit during employment, only the non-valorized value of the mandatory share is paid, preventing speculative exits during periods of high valuation.

The law allows for payouts to be made gradually, ensuring that a wave of retirements or departures does not jeopardize the financial stability of the parent company.

Recommendations and Legal Assistance

Although the ZLZD brings exceptional opportunities, questions regarding liquidity and valuation arise in practice. Buyout obligations can become a burden if the company lacks sufficient retained earnings to pay out departing members. There is also a risk that management might eventually dominate the employees if the latter are not adequately educated about their rights and duties within the cooperative.

Križanec & Partners Law firm in Slovenia has extensive experience in the fields of corporate law and company restructuring. Our attorneys provide expert advice and legal representation in all procedures related to the ZLZD, including the drafting of founding acts, structuring buyout financing, and advising on tax optimization. For additional information and legal counseling regarding the new law, you may contact our expert in commercial law, attorney Dinar Rahmatullin.