Taxation of Employee Participation – Part 1: Introduction and Overview

Increasingly, compensation is no longer just a monetary payment. Especially in startups or for executive staff, employee participations often form part of the compensation. This can be very lucrative for all involved. However, since the exact tax value is not as easy to determine as with a regular salary payment, this makes the tax calculation more difficult. Therefore, Findea explains in this series of articles how the taxation of employee participations works and what needs to be considered. This first article provides an introduction to the topic and ensures an overview.

Employee participations: what is it?

‍As the name suggests, employee participations are only possible for employees. This can be a current, future, or past employment relationship. When participation rights are granted to an employee in connection with such an employment relationship, these are either classified as genuine or non-genuine employee participations. Genuine employee participation is spoken of when the participation right entitles the employee to a share in the employer's equity capital, either directly or indirectly. Direct means that the employee receives this right immediately, e.g., through employee shares or other participation papers. Indirect refers to having only a claim on participation papers, as might be granted, for example, through options or expectancies.

Non-genuine employee participations do not give the employee a claim on the equity capital. They are incentive systems that are related to the stock price or equity capital. If the goals are achieved, a cash payment is made. Often, no further rights are established by these instruments. Since no voting or dividend rights are established, these non-genuine participations are considered expectancies for tax purposes until they are realized.

‍Taxation of employee participations

‍The legal basis for the taxation of employee participations can be found in Art. 17a – 17d of the Federal Act on Direct Federal Tax (DBG) and in the Employee Participation Ordinance (MBV). A central characteristic of employee participations is that they are usually granted for free or at discounted conditions. This difference from the regular market price then represents an income from employment (Art. 17 DBG). When and exactly how this difference and thus the tax value is calculated will be explained in the coming articles.

Detailed information can be found in Circular 37 of the Federal Tax Administration.

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