Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

There are no typical employee participation programmes. Rather, it depends, for example, on the company structure, the funding possibilities for the company and the influence of the employees who are allowed to participate. In terms of the form in which equity compensation is awarded, the most prevalent appear to be shares or stock options. The most common length of vesting period is three years. Excessively long vesting periods (eg, longer than 10 years) are not permissible. Simply, the employer is free to select the employees participating in an equity compensation programme. However, owing to the principle of equal treatment of employees enshrined in Swiss employment law, participation rights shall be granted to all employees of the same group of employees (eg, executives, senior management and employees working in production, etc.) Therefore, the employer can include individual employee groups (eg, management) in a participation programme, but cannot select only individual employees within the group to be eligible to participate in an equity compensation programme.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Provided the grant of equity-based compensation has been properly delegated, this task can also be performed by an officer or employee of the company. There are no limitations or requirements that apply to the delegation of this task.

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

Shares and other participation rights in a group company of the employer, as well as listed options and options to acquire such rights that are not blocked, are taxed when the employee legally acquires such rights or options. A discount applies if the sale of such shares or other participation is blocked. Any other equity compensation instrument (eg, blocked or unlisted options, derivatives or phantom stock) is only taxed when the employee realises the income.

Pro-rata taxation in Switzerland applies if the employee’s tax residence in Switzerland starts or ends during the vesting period.

Depending on the (expected) price development of the employee’s shares or options, the tax structuring of such equity compensation can be advantageous or disadvantageous (eg, if blocked options are given to the employee, which gain in value during the vesting period, the taxation may be higher than the taxation of non-blocked options). Note that the above answer is only a summary overview and the legal situation for each individual case may vary from case to case.

Registration

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

In order to provide employees with necessary shares, the company may obtain such shares either by increasing its share capital (usually from authorised share capital designated for such purpose) or by using treasury shares. Increasing the company’s share capital requires the submission of various forms of documentation to the relevant cantonal company registry.

In situations in which a foreign or Swiss company issues new shares and such issuance is considered a ‘public offer’, an offering prospectus may be necessary. Such a public offering is triggered if the shares are offered to an indefinite number of potential investors. Whether such situation exists in the context of equity-based compensation must be analysed on a case-by-case basis.

If new shares are issued that are to be listed on the SIX Swiss Exchange, applicable listing rules will have to be respected and a listing prospectus may be necessary. An exemption, however, from the requirement to draw up a listing prospectus exists, inter alia, for shares offered to employees, board members or executive management, provided such shares are of the same class as those already listed, and that a document containing information on the number and type of shares, and the reasons for and details of the offer, is made available.

Withholding tax

Are there tax withholding requirements for equity-based awards?

To the extent that the employee: does not have Swiss citizenship or a permanent residence permit in Switzerland; is not tax-resident in Switzerland; or moves his or her tax residency outside of Switzerland during a vesting period, the employer must remit withholding tax from the employee’s salary. In particular, should the employee leave Switzerland during such a vesting period, the Swiss employer will be able to reclaim withholding tax from the employee.

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

Such agreements do not seem to be common. In any event, value added tax issues as well as the price charged, hidden profit distributions or tax evasion issues should be considered.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

Especially in larger companies and start-ups, employee stock (shares or options) purchase plans are prevalent. The purchase of such shares or options at a discount may trigger tax and social benefits payment obligations. Furthermore, such shares or options given to an employee at a discount may either qualify as part of the salary or as a gratification. While salary is considered compensation for performance of work and can include a variable component (eg, reaching a specific target in order to receive the variable part of the salary), a gratification is in addition to salary and it is at the employer’s sole discretion whether and in what amount such gratification is granted.

In situations where such compensation qualifies as salary, many protective provisions must be respected, including limitations on the withholding of salary by the employer and restrictions regarding the waiver of employee rights during the employment. When assessing whether such restrictions are applicable, the Swiss Federal Tribunal differentiates between situations in which the purchaser of such shares or options acts primarily as an employee and situations in which the purchaser is considered to be acting primarily as an investor. Generally, if the employee is considered an investor, protective employment provisions may not apply.