The Swiss Federal Supreme Court rules on social security obligations in relation to employee shares.
In a leading decision of November 6, 2012 the Federal Supreme Court (9C_648/2011) ruled on the social security obligations on shares received as employment income in an international context.
In cases where an employee has been seconded abroad, it is often unclear for Swiss employers when the Swiss social security liability arises on employment income (shares) derived from an employee share plan and whether all of that income is subject to social security contributions. An employee of a Swiss employer was seconded to an affiliated company in Oman from January 1, 2005 until September 30, 2006. During his secondment in Oman the employee was not subject to Swiss social security legislation. In January 2007 the employee terminated his employment with the Swiss employer. Three months later he left Switzerland permanently and took up residence in the UK.
During his employment (in 2002, 2003 and 2005) the employee was awarded restricted shares that were subject to forfeiture. The employee acquired the unconditional right to the shares on the vesting date in 2008. At that point, the Swiss employer deducted Swiss social security contributions on the total profit realised by the employee on the vested shares.
The question at issue was whether it was correct that the Swiss employer had deducted the Swiss social security contributions on the total profit realised by the employee on the vested shares. The employee was of the view that no social security contributions were due, or, if any were due, they should be calculated on a pro rata basis only taking into account only the days worked in Switzerland during the vesting period.
The Swiss Federal Supreme Court ruling is summarised as follows:
Shares received by an employee through a share-based remuneration plan constitute employment income and hence, income subject to Swiss social security contributions. A distinction has to be made between when the social security liability arises and when the social security contribution is payable. The social security contributions are due when the income of the employee derived from the employee shares is realised. The social security liability, however, is determined by reference to the employment period for which the employee shares were awarded. This principle is referred to as the “determination principle” (Bestimmungsprinzip), meaning that the law that was in force during the employment period for which the employee shares were awarded shall apply.
Based on the above the Federal Supreme Court concluded that 2008 – the year of vesting – was the year the employee received employment income by way of shares. Hence, 2008 was the year in which social security contributions were payable.
In order to determine the social security liability the Court looked at the years in which the employee shares were granted, namely 2002, 2003 and 2005. With respect to the employee shares allocated in 2002 and 2003 the Court concluded that they were subject to Swiss social security because the employee was subject to the Swiss social security system in those years in which case, Swiss social security contributions were payable in 2008. However, with respect to the employee shares granted in 2005, the Court concluded that they were not subject to Swiss social security because in 2005 the employee was not subject to Swiss social security legislation.
Despite this case, there is still some uncertainty regarding the point in time when the social security obligation arises on share-based employment income and when the social security contributions are due. Swiss employers are advised to obtain in advance an assessment from the social security authorities for each individual case.
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.
Circular 230 disclosure
To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
If you would like to copy or otherwise reproduce this article then you may do so provided that: (1) any such copy or reproduction is for your own personal use or if it is made available to any third party it is done so on a free of charge basis; and (2) the article is reproduced in full together with the contact details, disclaimer and any logos as they appear on each article.