Taxation of Employee Participation – Part 4: Taxation of Employee Options and Entitlements

Employee participations are very popular in the business world. They usually represent a component of salary and are taxable as such. Depending on the specific design of the employee participation, however, the tax assessment can be complicated. Therefore, Findea explains in this series of articles what you need to know about employee participations. This last article covers employee options and entitlements.

Freely traded employee options that are listed on the stock exchange

‍If the employee options are listed on an exchange and are freely tradable, they are taxed directly at the time of issuance, or in this tax period. Similar to employee shares, employee options are usually issued for free or at least under special conditions, thus at a discount. Like with employee shares (see Part 2), the difference between the market value of the option at the time of issue and the price actually paid by the employee represents the income. This constitutes earned income from non-self-employment and is fully taxable under Article 17 Paragraph 1 DBG.

‍Other employee options

‍All employee options, which do not fall under the above paragraph, are taxed at the time of sale or conversion. This is stipulated in Article 17b Paragraph 3 DBG. The taxable income corresponds to the revenue earned from the sale or the profit generated by the exercise, minus any costs incurred. These may include costs incurred if the bonds were issued at preferential terms.

‍Entitlements to employee shares

‍Entitlements to employee shares become taxable only at the moment they are converted into employee shares. When this happens, they are treated just like regular employee shares (see Part 2).

‍Tax-free capital gain

‍Once the employee participations have been taxed as income from non-self-employment, they become part of the private assets of the employee. If the employee then sells the participatory rights at a later date, this generally represents a capital gain of the private assets. This is tax-free according to Article 16 Paragraph 3 DBG.

For detailed information, see Circular 37 from the Federal Tax Administration.

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