Equity-based compensation – employee stock ownership just got more attractive!

in Tax, 17.05.2019

What happened?

With the parliamentary initiative submitted in June 2017, Council of States member Ruedi Noser called for a significant reduction of the tax burden on employee participation in start-ups and family businesses. Following approval by the Economic Affairs and Taxation Committee of the Council of States (“WAK Ständerat”) last year, the respective committee of the National Council (“WAK Nationalrat”) has also given the go-ahead.

What’s the purpose?

Under the current tax framework and practice of the cantonal tax authorities, the valuation of employee stocks for tax purpose is often an issue for unlisted companies – mainly start-ups and family businesses. This makes employee stocks of unlisted companies unattractive from a tax perspective compared to employee stocks of listed companies.

The initiative includes significant tax benefits especially in terms of the tax valuation of employee stocks for wealth tax purposes, capital gains treatment on the sale of employee stocks and taxation of employee stock options. According to the original initiative text (submitted on 15 June 2017), federal tax law should be amended. The key provisions are:

  • The sale of employee stocks in an unlisted company results in a tax-free capital gain after a holding period of five years.
  • The tax value of employee stocks in an unlisted company is considered to be based on the equity of the company (at least the share capital) for seven years upon one-time application of the company.
  • The taxable income on employee stock options of unlisted companies must be calculated as outlined above (in the previous provision) and should be reduced by 50%.

In a nutshell, it makes it much more attractive from a tax perspective for unlisted companies to grant employee stocks or stock options.

What it means for you

At the moment it is unclear when and in what exact form the respective changes will come into force. In order to be prepared for the change, start-ups and family businesses with equity-based compensation plans should clarify the following questions:

  • How can existing plans be amended to make sure employees benefit most from the planned changes?
  • What is the impact on employee stocks and stock options granted before changes come into force?
  • Do existing tax rulings have to be amended or even cancelled?

To allow adequate time for plan amendments or restructuring, we recommend starting now to define a timeline and step plan.

 

 

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