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Have You Got Employees in Switzerland? Equity-Based Compensation Tax Revised for January 2013
- Clarify and simplify various aspects of the current practice on equity-based compensation.
- Define the taxable event of employee shares and employee options.
- Define rules on the taxation of employee participation plans in cases where the employee has changed his tax residence during the vesting period.
- Address the employer's obligations towards the tax authorities.
In addition, the Swiss Federal Council issued an ordinance which will be applicable to all Swiss cantons, and enters into force on 1 January 2013. This ordinance contains significant changes to the taxation and reporting duties of equity-based compensation in Switzerland. Further implementation guidelines on a federal level are expected in the form of a circular letter in the beginning of 2013. Taxand Switzerland investigates these new laws and their potential impact on multinationals with employees operating in Switzerland.
New Federal Law on Taxation of Employee Participation
As mentioned above, the new law clarifies the taxable event of employee shares and employee options as follows:
The taxation of employee shares remains unchanged, ie, shares are taxed at grant. Furthermore, the timing of taxation of RSUs also remains unchanged, ie, RSUs are taxed at vesting and at the transfer of the ownership in the shares. The value of the shares at that time is subject to tax.
The most significant changes concern the time of taxation of options. Under the new law, options are generally subject to taxation at exercise. Only unrestricted warrants which are quoted and traded on a stock exchange market may be taxed at grant. Instruments entitling the employee to receive cash (and not equity) are taxable at the time of vesting and at the time of the payment.
The new law provides rules for the tax treatment in cases where the employee moves to Switzerland or leaves Switzerland during the vesting period. Switzerland fully adopts the allocation rules as suggested by the OECD.
An employee who has been awarded employee options in another country and exercises these options in Switzerland after relocation, will be taxed in Switzerland at exercise on the income that relates to Swiss work days, in proportion to the total work days during the vesting period. Conversely, if the employee receives options in Switzerland and he is resident abroad at the time of exercise, the Swiss employer is obliged to remit taxes at source on the income that relates to Swiss work days during the vesting period. The Swiss company is obliged to remit the tax and collect the respective tax amount from the employee irrespective of whether the employee is working for a new entity in the meantime and no longer attached to the Swiss payroll.
In general, the events that trigger tax consequences also trigger social security consequences. However, so far no guidelines have been issued on whether or not the social security authorities will adopt the "pro-rata" approach for imported and exported employee participation rights.
New Ordinance Applicable to Swiss Cantons
This new law also introduces filing obligations for employers offering employee participation rights. Under current practice, the employer reports the income plus the details on the participation plan in the annual salary certificate and any amendment, at the time that the tax triggering event takes place. Under the new law, however, employers are also required to report the grant of entitlements such as options, RSUs, etc. Only in cases of phantom employee participations is no filing required at grant, but only at vesting.
In international cases (import or export of instruments), where the options and similar instruments are subject to Swiss income tax based on the time spent in Switzerland during the vesting period, the reporting of the employer must include the calculation of the pro-rata allocation between Switzerland and the foreign jurisdictions.
The new law on taxation of employee participation rights affects all employers who offer equity-based compensation in Switzerland. Employers should review their current equity compensation plans and related rulings in light of the new law and ordinance to guarantee full compliance from 1 January 2013.
Employers also need to check that they are able to track income and work days of internationally mobile employees who import and export equity-based compensation instruments such as stock options, RSUs, SARs, etc., and that they are able to collect the respective Swiss tax amounts from employees who are no longer staying in Switzerland when the tax needs to be remitted. These changes will require new tracking and reporting processes for internationally mobile employees.
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