SWITZERLAND Law and Practice Contributed by: Marion Bähler, Ramona Wyss, Florian Gunz Niedermann, Fabienne Limacher and Urs Hofer, Walder Wyss Ltd
The main advantage of a share and stock options plan is the leeway for tax-optimisation (see 5.3 Taxation of Instruments ). However, they create an increased administrative burden due to the need for rulings and discussion with the tax authorities, certification obligations vis-à-vis tax authorities and the financing and structuring of the corresponding option and share issuance, respectively. In addition, as the relevant ben - eficiaries become shareholders with full voting and information rights, it will have to be ensured that they are set in an appropriate governance framework, including a shareholders’ agreement that outlines their rights and obligations. Virtual share plans, on the other hand, are quick, cheap and easy to implement and maintain. However, in most instances they are not the most tax- optimised option. 5.3 Taxation of Instruments As a general rule, for Swiss tax residents, capital gains from the sale of privately held shares are tax free under Swiss law. However, this does not apply to capital gains from the sale of privately held employee shares of beneficiaries (ie, shares which are transferred to the employee in connec - tion with the employment relationship), unless it can be proven that such transfer occurred at fair market value (which is typically not the case with non-listed shares). In practice, employee shares are rewarded at a recognised formula, which is often pre-agreed with the authorities and which typically leads to a moderate valuation of the relevant shares at the time of their acquisition or exercise of options to determine the taxable salary component. In case of an exit, the same formula will be used to determine the part of the exit price which is deemed tax-free, thereby using the most recent financial parameters at exit for the purpose of the formula. Accordingly, a relevant beneficiary
can then benefit from a tax-free capital gain in an amount corresponding to the difference between the formula value at the date of acqui - sition and the formula value calculated based on the same valuation method at the time of the dis- posal. Any additional increase in value ( “excess profit” ; Übergewinn ); ie, the difference between the actual exit price and the formula value at the time of the disposal, constitutes taxable income. As per the current tax practice in the cantons, the “excess profit” will also be treated as a tax- free capital gain after a holding period of five years. Considering the above-mentioned princi - ples, key factors when structuring a share and/ or a stock option pool thus include the deter - mination of a formula that is equally suitable at the time of grant and at the time of exit, and finding an appropriate (reverse) vesting sched - ule, thereby taking into consideration the timing of a potential exit as well as the development of the financial parameters used for the purpose of the formula until then. On the other hand, monetary benefits from vir - tual share plans are fully taxable and subject to social contributions at the time of their payment – ie, generally a liquidity event. No tax-free capi - tal gains can hence be derived from virtual stock option plans. The applicable tax rate varies depending on the canton and municipality where such employee is based and generally does not have a major impact on the structuring of an incentive pool at the company level. 5.4 Implementation Typically, the investors will insist that, as part of the financing round, an incentive programme will be set up or a current programme be increased, to ensure that a reasonable and unallocated
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