This move is expected to unify the approach of different cantonal tax administrations. This being said, some tax administrations do not agree with certain provisions of the circular letter, notably with the provision related to the deductibility of expenses for shares.
This update gives a short overview of different situations and the guidelines contained in the circular letter.
Own shares purchased by the employing entity
At purchase, the shares are booked as own shares in the statutory accounts at the acquisition price. When the shares are granted to employees the following applies:
- The difference between the acquisition cost of the shares and the fair market value (FMV) at share delivery to the employee is considered a deductible expense or reportable income; and
- If the shares are delivered to the employee at a reduced price, the difference between the FMV and the price paid by the employee is considered a deductible expense.
Share creation by the employer through capital increase
If new shares are created by means of a capital increase, such shares can be generated by booking the new shares against a liability for employee benefits. As a result, the difference between the FMV and the price paid per share by the employee will be accounted for as an expense, deductible in most cantons.
Despite the rules published in the circular letter, some tax administrations do not deem the expense as being deductible if the employee is not allowed to choose between the delivery of shares or a lump-sum cash payment.
Employee participation in the parent company
If the employee is not directly participating in the employing entity's capital but rather in the equity of the parent company, the following applies:
- The difference between the price (at arm's length) paid for the shares by the employing entity to the parent company and the purchase price paid by the employee is a deductible expense at the level of the employing entity in the majority of cantons.
Accruals for share awards
If shares are subject to vesting periods (i.e. awards are granted that entitle the employee to receive shares if certain conditions are met at the end of the vesting period), the expenses incurred from such shares are typically accrued. The circular letter confirms the deductibility of such accruals.
It is recommended that companies check whether their existing accounting and recharge mechanism is in line with the rules as set out in the new circular letter. Depending on the specific equity incentive scheme, there might be additional room to optimise the way costs are allocated and deducted. We strongly recommend applying for a ruling with the competent cantonal tax authority, as some authorities do not agree with all of the provisions of the newly issued circular letter.
Renaat van den Eeckhaut (email@example.com) and David Wigersma (firstname.lastname@example.org)
Tel: +41 58 279 6986 and +41 58 279 9260