New legislation on the taxation of share-based employment income
On January 1, 2013 new federal laws were introduced to ensure a consistent approach in all cantons to the taxation of share-based employment income.
Federal Law on the taxation of share-based employment income (“FLTES”)
The FLTES introduces consistent rules on the timing of the taxation of share-based remuneration and clarifies an employer’s reporting and withholding obligations.
The timing of taxation depends on the type of share-based income
1. Shares (restricted or unrestricted)
For shares the previous practice continues to apply: Unrestricted and publicly listed shares as well as restricted shares (shares which cannot be sold or disposed of) are subject to taxation at grant on the difference between the fair market value at grant and the price paid by the employee. The fair market value of the latter, however, is reduced by 6% for every year that the share is restricted up to a maximum of 10 years. Any gain realised upon sale is considered as tax-free capital gain.
2. Share options
a) Options over unrestricted and publicly listed shares
Options over unrestricted and publicly listed shares also continue to be taxed at grant. The taxable value corresponds to the fair market value at grant minus the price paid by the employee. The gain realised on exercise of the option or selling the share represents a tax-free capital gain.
b) Options over non-tradable or restricted shares
Options over non-tradable or restricted shares are taxable at the time of exercise. The gain realized at the time of exercise is considered employment income and is therefore fully subject to income tax. This is a major change to the former practice in some cantons.
The FLTES does not apply to the “phantom” shares of options since these are awards that are calculated by reference to share value but cannot be delivered in shares and are paid out in cash.
Where a holder of restricted shares or options is not resident in Switzerland for all of the vesting period, Swiss income tax will apply to the portion of the income or gain that can be ascribed to the period of Swiss residence. For example if the individual was resident in Switzerland for 2 years out of a 4 year vesting period, 50% of the income or gain will be subject to Swiss income tax. This is in accordance with the provisions of double tax treaties to which Switzerland is a party and is designed to ensure that individuals do not have to pay tax twice on the same income.
Ordinance on employer’s reporting obligations in relation to share-based remuneration
An employer is required to file to the cantonal tax authorities an annual return of the grants made in the year as well as the gains realised by employees on the exercise or vesting of such awards. Reporting requirements include the date of acquisition, the number of shares acquired, the acquisition price, the length of the vesting period and the calculation of the income to the employee.
Employers are advised to consider whether they need to amend their employee share plans in the light of the new legislation.
In order to comply with their reporting obligations and liability to pay over withholding tax, Swiss employers should put in place procedures for keeping track of the exercise date by internationally mobile employees of share options.
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