The taxation of employee participation in Switzerland

In today's world, companies strive to bind their employees more closely to the success of the company and promote their loyalty. A popular method to achieve this goal is granting employee participation. Employees receive shares or stock options as part of their compensation. The following blog article addresses exactly this case, as it can sometimes raise questions.

The incentives as well as the tax consequences will be discussed:

Employee Participation

Among employee participation, there are three ways in which employees can participate in a company:

Employee Shares: Here, employees receive a package of shares from the company and directly participate in the company's profit. There are two types of employee shares:

Free employee shares, which the employee can sell or pledge freely after receipt.

Restricted employee shares, which are subject to a lock-up period and may only be sold after this period has expired.

Employee Options: Employees receive the right to acquire shares of the company at a specified exercise price at a later date. A lock-up period can also be agreed upon during which the acquired shares may not be sold.

Entitlements: Through a so-called vesting period, employees have the prospect of acquiring shares after a certain time. The shares are either provided free of charge or offered at a preferential price. The vesting period is often tied to the duration of the employment relationship.

Synthetic Employee Participation

Additionally, there are so-called synthetic employee participations. Synthetic employee participations include phantom shares (English: Phantom Stock) and co-investments:

Phantom Shares: Employees receive a virtual share that reflects the performance of the real share. Although the employee does not own a real share, they economically participate in the performance of the share but have no rights to information or participation.

Co-Investments: Management can buy into the company and thus directly participate in the profits or losses of the company. However, it is only considered synthetic employee participation if management receives no comprehensive owner rights.

Taxation of Employee Participation

Taxation of Employee Shares

Free employee shares are taxed immediately upon transfer to the employee. The difference between the transfer value and the market value forms the basis for taxation. For publicly traded shares, the closing price on the day of purchase is considered fair value; for privately held shares, the market value is calculated by the employer.

Restricted employee shares are also taxed upon transfer. Lock-up periods are considered a value-reducing factor in tax calculation. A discount of about 6% per vesting year is deducted from the market value, thereby reducing the taxable income. A lock-up period of up to 10 years or about 44% is deductible.

When selling employee shares after the lock-up period, capital gains tax is exempt or a loss is not deductible.

Taxation of Employee Options

Free publicly listed employee options are taxable at the time of transfer. The tax amount corresponds to the difference between the market value of the share and the lower transfer price.

On the other hand, restricted or non-publicly traded employee options are only taxed upon their exercise or sale. The tax amount then corresponds to the difference between the exercise price and the market value of the share, or the sale proceeds minus any transfer price of the employee options.

Taxation of Entitlements

Entitlements are only taxed when the vesting period has expired. The difference between the market value and the shares then allocated, along with their transfer price, results in the taxable income.