The National Council has changed the 2004 draft on taxation of employee participation instruments, with the main change being the cancellation of the discounts for employee stock options.  The Council of States now debates on the new draft.

Under the current practice, depending on the detailed terms and conditions of employee stock options, the options are subject to income tax at grant, at vesting or at exercise (most common in practice).  Employee stock is taxed at grant. Restricted shares are also taxed at grant, however, a discount of approximately 6% per blocking year is granted.  However, there is no common practice among the cantonal tax authorities with regard to the taxation of employee participation instruments.  Therefore, the enactment of a new legal basis with regard to the taxation of employee participation instruments has become unavoidable.

Current position

In November 2004 the Federal Council published a draft of amendments to the Federal Direct Tax Act and the Federal Tax Harmonization Act on employee stock and employee stock options as well as a corresponding report.  The new regulations shall apply both at the federal level and by reference in the Federal Tax Harmonization Act also at the cantonal level.

Proposed position

Pursuant to the 2004 draft presented by the Federal Council freely disposable and restricted employee stock shall be subject to income tax at grant.  Blocking periods of restricted employee stock shall be taken into account with a 6% tax discount for each year of the blocking period, up to a maximum of ten years.  Freely disposable and exercisable employee stock options listed on a stock exchange shall also be subject to tax at grant.  Restricted employee stock options or employee stock options not listed on a stock exchange shall be subject to tax at exercise.  The Federal Council and the Council of States wanted to grant for each blocking year a 10% tax discount, up to a maximum of 50%.  The National Council favoured a 6% tax discount for restricted employee stock options. Mainly as a consequence of the dispute on the rate of the tax discount, the debates on the 2004 draft were suspended.

New position

In the wake of the global financial crisis and particularly the UBS crisis the debates on the taxation of employee participation instruments have been resumed.  On September 17, 2010 the National Council changed the 2004 draft, with the main change being the cancellation of the tax discount for restricted employee stock options.  Restricted employee stock options shall be taxed at exercise – as set forth in the 2004 draft – but no tax discount shall be granted for blocking periods.

The National Council has passed the changed draft to the Council of States for debate.

The time of entry into force of the new law on taxation of em¬ployee stock and employee stock options has not yet been determined.  We will monitor the progress of the draft and keep you informed.

For further information or to discuss any of the issues raised, please contact Walter H. Boss (boss@pbklaw.ch) or Stefanie Monge (monge@pbklaw.ch) on +41 44 220 1212.