New Federal Law on the taxation of employee shareholdings
The Federal Council has determined that a new Federal Law on the taxation of employee shareholdings (“FLTES”) will enter into force on 1 January, 2013.
The FLTES determines the timing of the taxation of employee shareholdings as well as the reporting and withholding obligations for imported and exported employee shareholdings in the case of internationally mobile employees. The major changes to the current federal and cantonal rules on the taxation of employee shareholdings are (i) the taxation of certain types of stock options at exercise, with no discount granted for blocking periods and (ii) the tax treatment of the exercise of options in cross-border situations.
The FLTES makes a distinction between genuine employee shareholdings and phantom employee shareholdings. Genuine employee shareholdings are employee stocks and employee options, whereas phantom employee shareholdings are equity/share-price-related incentivising instruments which do not allow the employee to participate in the employer’s equity capital but instead offer the prospect of a cash benefit.
For the purpose of federal as well as cantonal/communal personal income taxes, unrestricted and tradable employee stock is taxed at grant. Restricted employee stock is also taxed at grant, however, a discount of 6% per year of restriction is available, up to a maximum of ten years.
With respect to employee stock options the FLTES distinguishes between restricted and unrestricted employee stock options as well as tradable and non-tradable employee stock options.
Unrestricted tradable stock options
Unrestricted and tradable employee stock options are taxed at grant. The taxable value of unrestricted and tradable employee stock options equals the fair market value of the option at grant. The gain derived from selling or exercising the employee stock option represents a tax free capital gain (with the exception of commercial security dealers).
Restricted and non-tradable stock options
Restricted and non-tradable employee stock options are taxed at exercise. Hence, the gain realised at exercise represents income from employment and is subject to federal and cantonal/communal personal income taxes.
In cross-border situations restricted and non-tradable employee stock options that partially vest while the employee is a tax resident of Switzerland are partially taxed in Switzerland. The portion of the benefit that is subject to tax in Switzerland is calculated on a time-apportioned basis. The basis for the apportionment is the time in which the employee was a Swiss tax resident during the vesting period as a proportion of the total vesting period.
If the holder of restricted and non-tradable employee stock options is no longer a Swiss tax resident at the time of exercise, the Swiss resident company must withhold the taxes calculated on the above mentioned time-apportioned basis. Federal personal income tax is levied at a flat rate of 11.5%. In addition to the federal personal income tax the Swiss resident company must withhold the cantonal/communal personal income taxes. The cantons have not yet determined what tax rates they will apply.
Phantom employee shareholdings are taxed at exercise.
Employers are advised to review their employee shareholding plans and respective tax rulings in order to ensure compliance with the reporting and withholding obligations under the new FLTES. Swiss employers are well advised to pay special attention to internationally mobile employees who hold employee stock options subject to a vesting period while they are Swiss tax residents.