Switzerland - Changes to Taxation of Stock Options

GMT Client Alert Series - 2013/07




Jul 5, 2013

Switzerland – Changes to Taxation of Stock Options

Effective at the start of 2013, the taxation of stock options in Switzerland has undergone significant changes. Previously, each of the 26 cantons or administrative districts that comprise Switzerland was permitted to tax equity differently for income and social tax purposes. Furthermore, the options were subject to different reporting requirements. Due to the fact that sometimes employees resided in various cantons, employers were forced to obtain numerous tax rulings in order to be in compliance with the varied treatments of the cantons. Even though tax rates vary by canton, starting this year a new Federal tax law simplifies and clarifies the taxation and reporting requirements of different forms of equity.

Point of taxation, withholding obligations, and employer reporting requirements are all being streamlined across cantons at the federal level. This is especially important for international employees who receive equity compensation from a Swiss company and for those who reside or have resided in Switzerland during the vesting period of the stock options.

Taxable Events

Unrestricted employee shares and warranted awards from listed companies are still taxed at grant/award/vest (RSU, RS, SARs). Thus, there are no changes of this taxation to international employees. Moreover, equity compensation that was taxed at grant in Switzerland can be exercised tax-free under Swiss law.

In contrast, the most significant change relates to when options of shares (subject to a restriction) are now taxed at exercise. The moment when the taxable event occurs is going to affect individuals who will have working days in Switzerland and other countries during the vesting period. The new law provides directives for the taxation of employees who move into or out of Switzerland during the vesting time of the awarded options that are taxed at exercise.

Sourcing for Taxation

Switzerland has adopted the Model Convention for the Avoidance of Double Taxation on Income and Capital (OECD) in regard to the taxation of stocks for mobile employees.

In the case of options granted to employees living abroad and exercised once they relocate to Switzerland, they will be subject to Swiss tax proportionately taking into consideration the number of working days in Switzerland compared to the total number of workdays from grant to vest. Working days include vacation days, weekends, legal holidays and other absences during the period when there is a relationship between the employer and the employee. The working days in Switzerland will be reduced by workdays in third countries.

Whereas, when the options are granted while living in Switzerland, but exercised while residing abroad, the Swiss employer is required to remit taxes at source on the income that relates to the Swiss workdays. This requirement will apply even if the individual ceases to be an employee, which makes it hard for the employers because they need to keep track of the Swiss sourced income based on the allocation between Swiss workdays and the total workdays that may include foreign jurisdictions. A flat Federal tax rate of 11.5% applies to non-Swiss tax residents (outbounds).  

In addition to the reporting requirements, the employers are required to inform the grant of option to the cantonal tax authority of the employee’s canton of residence. Under the previous legislation, the employer only needed to report the income and the details of the participation plan when issuing the annual certificate and any modifications at the time of the taxable event to the cantonal authorities.

GMT recommends the following actions on the part of companies with international assignees in/to Switzerland in light of the above legislation:

1. Companies need to revise their payroll and salary certificate process to ensure their reporting is in compliance with the new legislation.

2. Employers with assignees in Switzerland receiving equity compensation need to review their stock option plans to ensure they are compatible with the taxation events noted above. Updating tax equalization policies to conform with these changes should an employee be subject to Swiss tax on equity is also recommended.

3. Companies need to implement and monitor a system that would allow them to keep track of the international employees’ Swiss sourced equity income and the portion of total equity income to be allocated and reported to the Swiss tax authorities, including the tax liability that must be withheld at source.