Employee shareholdings (as well as stock options) is a well-known and attractive way of motivating and compensating employees, and of aligning their interests with those of other shareholders. This system has traditionally not been as widely used in Switzerland as in other countries, and a large reason for this has been some taxation traps. This may thankfully be changing.
The main benefit for start-ups is that issuing shares or options does not impact their cash flow, and this can therefore help justify lower salaries which helps conserve cash (keeping in mind the need to avoid paying “truck wages”). In larger companies it should encourage management to plan for the longer term and reduce churn.
There are many ways in which employees can participate in the company. It is necessary to distinguish here between participation in the success of the company, or in the company itself. Employees can participate in the profits of the company (art 322a CO), from a provision (art. 322b CO) or from a bonus (art. 322d CO). These types of remuneration can benefit the individual or a wider group on a uniformed basis, and can sometimes also take the form of “phantom shares”. In issuing shares, it can also be cumbersome if the company has the S.à.r.l. (GmbH) legal form as these are registered differently from S.A. (AG) legal forms which are much freer to do as they wish with their paid-in share capital.
Legal dispositions concerning employee shareholdings are on the one hand regulated by law and on the other hand by the statutes and other rules of the company. It is often recommended to complement these dispositions with shareholder agreements.
If the issuance of shares or stock options to the employee is considered a part of the salary, then there is a taxable benefit in kind, which includes the requirement to pay relevant social charges (art. 17 LIFD). On the other hand, if there is an incentive plan based on the future value of the shares, or similar “stock appreciation rights” and “co-investments” then no immediate taxable nature arises.
From a tax perspective it is important to distinguish between binding (although variable) compensation or a sort of compensation at the employer’s discretion. The tax liability takes place when the compensation of traded shares or options is awarded and is based on the difference between the exercise price of the benefit paid and the market value. For shares that are blocked the same basic principle applies but a 6% discount is applied on the market value for every year of the blockage, up to a maximum of 10 years (art. 17b al. 2 LIFD). With a maximum 10-year blockage the market value is reduced by 44.161% which gives a considerable tax advantage.
It is also important to consider that for blocked options which are not traded on any exchange the tax liability is only realized when they are exercised or transferred. In this case the difference between the market value of the share and the exercise price determines the tax due (art. 17b al. 3 LIFD). Similarly, vesting, and other arrangements also delay the tax liability to the date of any transfer.
There are many different sorts of option plans available, and include:
The shares can be vested. It is often preferable for the company to enact provisions to block shares sales to ensure that the employees continue to work for the long-term benefit of the company.
If shares are issued to employees it is also recommended that the company specifies that these do not commit the company to keep issuing them in the future or else a precedence may occur where the company, by Federal Legal precedence, is expected to keep issuing them. The company also needs to consider where the awarded shares will come from; a purchase of existing shares (subject to legal dispositions contained in art. 659 CO) or an increase in the share capital which would require shareholder consent and modifications in the statutes.