Participation schemes: tax treatment of the employees

Participation schemes are often used by multinational or local companies to attract new talents, to retain employees and to motivate them. Employee’s participation schemes generate complex questions, in particular from tax and social security standpoints.

Further to our last newsletter focusing on the Employer’ tax treatment in the context of participation schemes, we provide below with a reminder of the Employee tax treatment and the related reporting obligations. 

Overview of the Swiss tax treatment from the Employee’ standpoint

Benefits in kind/cash deriving from participation scheme are qualified as employment income as per the Swiss direct federal tax law. As such, this benefit should be subject to tax and to social security.

The Swiss tax law distinguishes the tax treatment between (i) the shares and other participation schemes that the Employer or related party offers to the Employee; and (ii) options offering the possibility to acquire such shares.

 * Fair market value:

-    For quoted shares, the official closing price at the day of their acquisition is in principle considered to be the fair market value.

-    For unlisted employee shares, the applicable value is considered in principle to be the value as determined for the given employer in accordance with a suitable, recognized formula. Once chosen, it is mandatory that this calculation method be used for the corresponding equity-based compensation plan. 

Cooperation and reporting obligations

Employer’s reporting obligations

As of January 1^st, 2013, the Employer is subject to a reporting obligation. This obligation also applies if the participation plan is administered by a foreign group entity.

• Each year, the Employer must list the beneficiaries of participations scheme. It must send the list at the beginning of each tax period to the concerned cantonal tax authorities.
• Also, the Employer must issue individual report for each tax period in which it has granted Employees with equity-based compensation and for each tax period in which the Employees have realized said equity-based compensation instruments in an income tax-relevant manner. The Employer must provide the Employee with the report as an enclosure to the salary certificate and attach the report to the tax-at-source statement should the considered Employee be taxed-at-source.

The Employees, as taxpayers, are responsible for a complete and correct declaration of the received participation scheme in their tax return. They must also submit the employer’s annexes to the competent cantonal tax authorities.

All shares should be declared in the securities and credit balances list in the tax return. This obligation to declare also applies in particular when the taxation of income is not (yet) imminent.

Tax ruling between the employer and the Swiss tax authorities

Due to the complexity of the subject, we strongly recommend to submit a tax ruling request to the cantonal tax authorities when equity-based instrument is set up. It serves not only the purpose of a uniform assessment of the employees, but also the proper tax treatment of the participation plan by the employer in inter-cantonal and international relationships with tax authorities.