Since June 2018, Swiss cantons have been using the new guidelines issued by the Federal Tax Administration (FTA) for the deduction of equity incentive expenses. The FTA issued a circular letter sanctioning the reforms in a bid to unify the approach of Swiss cantons regarding taxation. While the guidelines have been applied by the majority of the cantons, there still remains some tax administrations that disprove of the new circular requirements. They are of a different opinion concerning the deductibility of expenses for shares in particular.
The FTA guidelines endorse the general principle that only actual costs incurred and registered into statutory accounts can be deducted. They also clarify the treatment of equity incentive costs. The guidelines address the circumstances under which employee participation in the company’s equity should be carried out.
Shares purchased by the employing company
When the shares are purchased, they are registered as own shares in the statutory accounts, with their correspondent acquisition price. If the shares are granted to employees of the company, the following rules apply:
- The difference between the share acquisition costs and the full market value at share delivery to the employee or employees is considered a reportable income or a deductible expense.
- If the shares are delivered to the employee at a reduced price, the difference between the full market value and the price paid by the respective employee is considered a deductible expense.
Shares created by employees through capital increase
In the situations that new company shares are created by increasing the capital of the company, they can be generated by registering the new shares against a liability for employees’ benefits. As a consequence, the difference between the full market value and the price laid per share by the employees will be accounted for as an expense and is deductible in most Swiss cantons.
Some Swiss cantonal tax administrations do not consider this expense as deductible, despite the guidelines included in the circular letter from the FTA, if the employees are not allowed to make a choice between the delivery of shares or a lump-sum payment in cash.
Employees’ participation in a parent company
If the employees are not directly participating in the capital of the employing company, but in the equity of the parent company, the difference between the price paid for the shares by the employing company (at arm’s length) to the parent company and the purchase price of the shares paid by the employees is considered a deductible expense at the level of the employing Swiss company in the majority of the Swiss cantons.
Share awards accruals
In certain cases, shares may be subject to vesting periods, for example awards that entitle the employee to receive shares are granted at the end of the vesting period and under certain conditions. Usually, the expenses occurred for such shares are accrued. The deductibility of this type of accruals is confirmed by the circular letter issued by the FTA.
Considering the changes made by these new guidelines, Swiss companies should check if their current accounting mechanisms are in line with the rules set out in the circular letter issued by the Federal Tax Administration. Depending on the equity incentive scheme, it is possible to optimize the manner in which costs are allocated and deducted. Given that some cantonal tax authorities don’t agree with the regulations included in the circular letter, it is important to check with the competent tax authority and to apply for a ruling in the case of equity incentive costs.