Taxation of employee stock option plans and employee share plans
In December 2010 the Swiss Parliament adopted a Federal Act on the Taxation of Employee Stock Option Plans and Employee Share Plans, which will enter into force on January 1 2013. The new act clarifies and simplifies various aspects of the current practice on equity-based compensation. In particular, the new act defines the taxable event and stipulates rules on the taxation of employee stock option plans and employee share plans in cases where the employee has changed his or her tax residence during the term of such plan. The new act also has consequences for the employer's obligations towards the tax authorities, which will be specified by a new ordinance. This ordinance is expected to enter into force together with the new act.
This update provides a brief summary of the content of the new act and points out the expected consequences of this new law.
Taxation of employee stock option plans and employee share plans
The new act distinguishes between qualifying and non-qualifying employee stock option plans and employee share plans.
Qualifying employee stock option plans and employee share plans are defined in the act as employee shares (ie, shares, participatory certificates, cooperative shares and similar participations) and employee stock options. These management incentives allow for a discount on restricted shares and for a treatment of part of the income as tax-free capital gain.
Non-qualifying employee stock option plans and employee share plans are defined as participations that provide only a promise that the employee will receive a specific cash amount in future (ie, there is no right on equity, but the cash payment reflects the equity price) – for instance, bonus payments or phantom shares.
Taxation of employee shares
Under the new act, the taxation of employee shares corresponds to the current practice. Free and restricted employee shares are taxed upon acquisition, and the income that will be taxed is the market value of the shares less the lower purchase price. This treatment ensures that any capital increase after allocation of the employee shares is treated as an income tax-free investment, rather than as a taxable salary component. Restricted employee shares benefit from a discount of 6% per annum of market value (the maximum restriction period and thus the maximum period of discount is 10 years).
Taxation of employee stock options
According to current practice, employee stock options are taxed either at grant, at vesting or at exercise.
Under the new act, employee options are either taxed at exercise or at grant, depending on the type of option.
If the exercise of employee stock options is restricted or they are not listed on a stock exchange, options are taxed at exercise. In such case taxable income is defined as the difference between the market value of the shares and the exercise price.
If employee stock options can be sold or exercised without restrictions and are listed on a stock exchange, they are taxed at grant. In this case, the employee will be taxed on the difference between the market value of the option at the time of grant and the exercise price.
Taxation of non-qualifying incentives
Benefits from non-qualifying employee stock option plans and non-qualifying employee share plans, such as restricted stock units, are taxed when received by the employee.
At present, the taxation of so-called 'imported' or 'exported' employee stock option plans and employee share plans varies from canton to canton. The new act provides rules for the treatment of cases in which the employee, during the employee stock option plan programme, moves to Switzerland or leaves Switzerland. An employee who has been awarded employee options in another country and exercises these options in Switzerland after relocation (ie, after he or she has become a Swiss tax resident) will be taxed in Switzerland in proportion of the time spent in Switzerland to the entire period between purchase and vesting of the option (so-called 'pro rata taxation'). Alternatively, if the employee receives options in Switzerland and is resident abroad at the point of exercise, the Swiss employer is obliged under the new act to withhold Swiss income taxes. This withholding tax is also due if the employee receives shares from another group company.
The regulations regarding the taxation of imported or exported employee stock options are not applicable for the import or export of other participation instruments (eg, restricted stock units).
Swiss social security aspects
The social security treatment of employee stock option plans and employee share plans and income thereof in Switzerland follows, in principle, the tax treatment of such income. The employer must withhold and transfer social security contributions to the competent authority.
However, in case of exported or imported options, the bilateral agreements on social security apply. Normally, employees are subject to only one social insurance system at a time. In particular, there is no international pro rata allocation of income.
The new act also introduces new obligations for employers which offer employee participation schemes. Under current practice, employers must collect withholding tax and declare the issuance and the taxable income of employee stock option plans and employee share plans in the Swiss salary certificate, which is the starting point for income taxation. In addition, the new act provides for a direct reporting obligation of the employer towards the tax authorities: the employer must submit to them all relevant information and details for the assessment of employees on a yearly basis, which might conflict with certain data protection obligations.
The new act includes no transitional provisions. Thus, after its entry into force, its provisions will be applicable to all new employee stock option plans and employee share plans.
The new act harmonises the tax treatment of employee participation schemes and provides greater legal certainty in certain respects.
Furthermore, the new obligations for employers require a centralised administration of information related to employee stock option plans and employee share plans within group companies. In particular, the employer must monitor the tax residence and tax status of the employees, which might conflict with certain data protection obligations.
For further information on this topic please contact Harun Can or Michael Nordin at Schellenberg Wittmer by telephone (+41 44 215 52 52) or email ([email protected] or [email protected]).