News - Switzerland

Switzerland - September 2013

The Swiss Federal Supreme Court rules on social security obligations

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.

Background

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.

Court Ruling

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.

Commentary

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.

Sources

Decision of the Federal Supreme Court of November 6, 2012; 9C_648/2011.

For further information or to discuss any of the issues raised, please contact Stefanie Monge (monge@pbklaw.ch) Nadja Flühler (fluehler@pbklaw.ch) on +41 44 220 12 12.

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