4) The granting of expectancy rights (i.e. a promise) to receive shares in the future does not trigger income tax.

Transcription

1 Unofficial translation from German original Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee Participations for Zürich Cantonal and Communal Tax and Direct Federal Tax purposes (21 October 2009) ZStB I No. 13/301 Contents A. Taxation of employee shares B. Taxation of employee options C. Taxation of phantom instruments D. Duties of cooperation A. Taxation of employee shares I. For income tax purposes 1. General 1) For the purposes of this information letter employee shares (also stock ) are shares of the employing company or of an affiliated company (hereafter referred to as employer ), which transfer shares to an employee based on his employment relationship, generally with preferential (or beneficial) treatment. Other certificates, which grant the employee a participation in the capital of the company, are to be treated analogously. 2) If employee shares are transferred with preferential treatment, the corresponding benefit-inkind represents income from employment ( 17 Para. 1 StG and Art. 17 Para. 1 DBG). 1 3) Instruments, under which the employer undertakes to grant the employee shares at a later date, if certain conditions are met, represent only an expectancy right (i.e. a promise) to receive shares in the future. Under this type of award, the employee does not possess an irrevocably acquired asset until the shares are transferred (e.g. Restricted Stock Units 2 ). 4) The granting of expectancy rights (i.e. a promise) to receive shares in the future does not trigger income tax. 1 Generally this type of award refers to shares purchased under an Employee Stock Purchase Plan which may be subject to a post-purchase blocking period. 2 Generally this type of award refers to unit award under which the employee receives only a promise to receive shares on the grant date with actual share allocation on the vesting date. Typically awards include restricted stock units, performance stock units, etc. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 1/11

2 2. Types of employee shares 1) Unrestricted employee shares are employee shares which the employee can dispose without restriction. 2) Restricted employee shares are employee shares with a restriction on disposal generally for a limited period of time (i.e. a blocking). A definite or indefinite conditional obligation to return the shares to the company (i.e. an Obligation of Return 3 ) may also be attached to restricted employee shares. The legal basis for the blocking period or the Obligation of Return is established within a contract between the employer and the employee. 3. Time of taxation and determination of the taxable income 1) Unrestricted employee shares are taxed on allocation. The difference between the fair market value of the employee shares and the purchase price (if any) represents taxable income. 2) Restricted employee shares are in principle also taxed on allocation. A reduced fair market value can be calculated to account for the blocking period imposed on these shares. The difference between the discounted fair market value, applying the discount table (Heading A. III) and the purchase price (if any) represents taxable income. If the Obligation of Return is indefinite, the fair market value can be discounted by the maximum amount provided under the discount table (i.e % of the current fair market value). 3) If an Obligation of Return is attached to restricted employee shares and if the employer contractually retains the voting and dividend rights of the allocated shares, the restricted employee shares are not taxed until they are returned to the employer or the Obligation of Return lapses. On return of the shares the difference between the return price and the purchase price at the time of return represents taxable income. When the Obligation of Return or the contractual retention of the voting and dividend rights lapse, the difference between the value of the shares discounted for the remaining blocking period and their original purchase price represents taxable income. 4) For listed employee shares the fair market value is equal to the stock exchange quotation on the allocation date. The applicable stock exchange quotation is the average price for the day. 5) If the subscription period for employee shares does not exceed 14 calendar days, the stock exchange quotation on the first day of the subscription period can be utilized as the fair market value provided this price is permitted within the plan document. 6) If the subscription period does not exceed 60 calendar days, the average stock exchange quotation during the subscription period is deemed to be the applicable fair market value. 7) For non-listed employee shares the fair market value is equal to the intrinsic value. The intrinsic value is to be calculated using a recognised valuation method. If a market value is available, this value can be used as the applicable fair market value. 3 An Obligation of Return likely arises under, for example, Employee Share Purchase Plans, where shares are allocated (i.e. legal and beneficial ownership is transferred) from the time of grant to employees, even if a blocking period is imposed. In such cases, under Swiss tax law, the return of the shares to the company prior to the blocking period lapse is considered a return or repurchase of the shares by the company. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 2/11

3 8) In exceptional cases, despite the availability of a market value, the intrinsic value can be utilized as the applicable fair market value upon approval by to the tax authorities. This treatment, however, is conditional on the employer having an unrestricted right to re-purchase the employee shares at such intrinsic value (using a calculation method that is identical to the original share valuation method). 4. Early lapse of the blocking period 1) If the blocking period lapses early the employee will be deemed to realise a benefit-in-kind which will be taxable as employment income ( 17 Para. 1 StG and Art. 17 Para 1, DBG). The reason for the early lapse is not relevant. 2) The taxable income is equal to the difference between the non-discounted fair market value of the share at the time the blocking period lapses and the value discounted over the remaining blocking period. Blocking period years that have already commenced are to be considered pro rata temporis (i.e. based on the amount of time that has lapsed). 5. Sale of employee shares held in private assets 1) A gain on the sale of employee shares held in private assets constitutes in principle a tax free capital gain ( 16 Para. 3 StG and Art. 16 Para 3 DBG). 2) In certain exceptional cases (as outlined below) only the realised increase in the intrinsic value of employee shares held in private assets (i.e. the difference between the intrinsic value of the employee shares on allocation and the intrinsic value at sale calculated using the same valuation method as at allocation) will constitute a tax free capital gain. However, any difference between the sales proceeds and the calculated value of the employee shares at the time of sale (using the same valuation method as at allocation) will constitute taxable income where: the calculation of the taxable income from the allocation of the unlisted shares was based on an accepted valuation method (as no fair market value was available) and the employee shares are sold less than five years from the allocation date. the calculation of the taxable income from the allocation of the unlisted shares was based on an accepted valuation method and the employee shares are repurchased by the employer. the calculation of the taxable income from the allocation of the unlisted shares was based, upon ruling request, on an accepted valuation method, this despite the availability of a market value (Heading A. I. 3. Para 8). 6. Deduction of acquisition costs on return of restricted employee shares If the employee is required to return the restricted employee shares that were taxed on allocation, based on a contractual obligation entered into at allocation, the employee can claim an acquisition cost deduction equal to the loss incurred (if any) during the tax period in which the repurchase occurred. The employee would suffer a loss if the fair market value of the returned employee shares discounted over the remaining blocking period is greater than the return price. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 3/11

4 7. Taxation of employee shares internationally 7.1 Import of employee shares 1) Imported employee shares are those that an employee has been allocated in another country and brings with him upon transferring to Switzerland. 2) If the employee shares are taxable on allocation, as described within this information letter, no income tax will be triggered at the time the shares are imported into Switzerland (subject to the tax consequences per Heading A. I. 4). 7.2 Export of employee shares 1) Exported employee shares are those that an employee has been granted in Switzerland and takes with him upon departing Switzerland for another country. 2) If the employee shares are taxable on allocation, as described within this information letter, their export is irrelevant for tax purposes. 7.3 Import of expectancy rights to receive shares in the future 1) Imported expectancy rights to receive shares in the future are rights that an employee has acquired in another country and subsequently brings into and realises for tax purposes in Switzerland at the time of share allocation. 2) If employee shares are allocated in Switzerland based on imported expectancy rights the entire benefit-in-kind constitutes taxable income at the time of share allocation. 3) If the employee proves that this income has been taxed in another country for the same tax period, a portion of the income may be exempt from taxation in Switzerland to the extent that the right of taxation under the applicable double tax treaty lies with the other country. The partial exemption is calculated as follows: Taxable income x Number of days in DTT countries during the vesting period Number of days of the entire vesting period* * The vesting period represents the period of time between the grant of the expectancy right and the vesting (date the agreed conditions are fulfilled). As a rule, the employee shares are allocated on this date. 7.4 Export of expectancy rights to receive shares in the future 1) Exported expectancy rights to receive shares in the future are rights that an employee has been granted in Switzerland and subsequently realises income for tax purposes in another country (i.e. is allocated employee shares outside of Switzerland). 2) If employee shares are allocated in another country based on exported expectancy rights, at the time of allocation of the shares, in principle the benefit-in-kind partially constitutes taxable income in Switzerland. The taxable income is calculated as follows: Total benefit-in-kind x Number of days in Switzerland during the vesting period Number of days of the entire vesting period Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 4/11

5 3) If the costs incurred on this employee participation are charged back to the Swiss employer, the amount charged back is the minimum amount subject to income tax in Switzerland. 4) The taxes incurred should be delivered by the Swiss employer as source tax. The source tax rate is to be determined on the basis of the total benefit-in-kind provided to the employee. The canton of the employer s head office is to be considered the competent authority for calculating and remitting the associated taxes. Only in the following two cases can the Swiss permanent establishment canton be considered the competent canton (instead of the canton where head office resides): A) the employer s head office is not in Switzerland; B) the employment relationship existed expressly with a Swiss permanent establishment other than the Swiss head office and the employee s salaries during Swiss employment period were paid by this Swiss permanent establishment. II. For net wealth tax purposes 1. Employee shares 1) Employee shares are subject to net wealth tax at fair market value. Restricted employee shares are eligible for a reduction to the fair market value to take into account the remaining blocking period (using the discount table (Heading A. III.)) Incomplete blocking period years are considered pro rata temporis (i.e. based on the amount of time that has lapsed), if reported accordingly in the list of securities and bank balances. 2) Employee shares with an Obligation of Return are taxable at their return price when they are returned or when the Obligation of Return lapses. 3) If the issuing company contractually retains the voting and dividend rights of the allocated shares, the shares are not subject to net wealth tax until the Obligation of Return lapses (Heading A. I. 3 Para. 3). 2. Expectancy rights to receive shares in the future Expectancy rights to receive shares in the future are not subject to net wealth tax because they do not represent definitely acquired assets / property. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 5/11

6 III. Discount table Blocking period Discount Discounted fair market value 1 year 5,660% 94,340 % 2 years 11,000 % 89,000 % 3 years 16,038 % 83,962 % 4 years 20,791 % 79,209 % 5 years 25,274 % 74,726 % 6 years 29,504 % 70,496 % 7 years 33,494 % 66,506 % 8 years 37,259 % 62,741 % 9 years 40,810 % 59,190 % 10 or more years 44,161 % 55,839 % Blocking period years that have already commenced can be considered pro rata temporis (i.e. based on the amount of time that has lapsed). The reduced fair market value is calculated using the formula (100/1.06 n ), where n is equal to the number of blocking years still outstanding at the valuation date. B. Taxation of employee options I. For income tax purposes 1. General 1) An employee option is the right, granted to an employee based on the existing employment relationship, to acquire a share in the employing company or in an affiliated company (hereafter referred to as employer ) within a defined period (exercise period) at a defined price (exercise price). 2) When employee options are transferred with preferential treatment, the corresponding benefitin-kind represents employment income ( 17 Para. 1 StG and Art. 17 Para. 1 DBG). 3) The value of an option consists of its intrinsic value and its time value. The intrinsic value is equal to the difference between the fair market value of the security underlying the option and the exercise price. The time value is equal to the difference between the total value of the option and its intrinsic value. 4) When the option is exercised, only the intrinsic value can be realised. The full value of an option (intrinsic value plus time value) can be realised only on a sale of the option. 2. Types of employee options 1) Unconditional employee options are freely disposable from the grant date or exercisable without restriction. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 6/11

7 2) Conditional employee options are neither transferable nor exercisable for a defined period (blocking period) from the date of grant. 3) One or more deferring conditions are attached to employee options with vesting clauses for a defined period (vesting period). Such options are not deemed to be irrevocably acquired until the vesting date, i.e. when the conditions are fulfilled. 4) Employee options with truncation clauses are generally, for their entire duration or upon expiration of the vesting period, exposed to the risk that the original exercise period of the option will be shortened if one or more conditions are not fulfilled during this period. For example, the exercise period is regularly shortened if the employment relationship is terminated after expiry of the vesting period. 5) As a rule employee options are deemed to be capable of valuation. If, however, a valuation calculation results in a valuation that is clearly not defensible, the employee option can be classified as not capable of valuation. This case may occur, if financial parameters necessary for the valuation are not available or the option agreement contains numerous individual conditions which cannot be given a mathematical value. 3. Times of taxation and determination of the taxable income 1) Employee options are taxed at the time the shares are irrevocably legally acquired, provided they can be objectively valued at the time. 2) For unconditional and conditional employee options that are subject to tax at grant, the taxable amount will equal the difference between the fair value of the option at grant and the purchase price. The fair value is calculated, as a rule, mathematically using the Black Scholes method. Any restriction on the exercise period is taken into account by discounting the share price in line with the discount table (Heading A. III.). 3) Stock options are taxable at vesting when: A) the employee options have a vesting clause but do not contain a truncation clause or B) employee options are transferrable / tradable and contain vesting and truncation clauses. The taxable income is the difference between the fair market value of the option on vesting and the purchase price. 4) All employee options, which are not taxed at grant or vesting, are taxed at exercise or on sale. 4. Early lapse of the blocking period If the blocking period on employee options that were taxed at grant or vesting lapses early the employee will realise a benefit-in-kind at the time of the lapse which will be considered employment income ( 17 Para. 1 StG and Art. 17 Para 1, DBG). The benefit-in-kind is equal to the difference between the fair market value of the employee option on the date the blocking period lapses early and the reduced fair market value which is discounted for the remaining blocking period. 5. Subsequent changes If employee options which were taxed at grant or vesting are subsequently adjusted (e.g. by extension of their term or by reduction of the exercise price), the employee will then realise a Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 7/11

8 benefit-in-kind which will be considered employment income ( 17 Para. 1 StG and Art. 17 Para 1, DBG). The benefit-in-kind is equal to the difference between the fair value of the original employee option and the fair value of the employee option subsequently adjusted, in each case valued at the time of the subsequent change. 6. Taxation of employee options internationally 6.1. Import of employee options 1) Imported employee options are those that a taxpayer has been granted in another country and realises for tax purposes in Switzerland (Heading B. I. 3). 2) Imported employee options which are taxable at grant, as described within this information letter, will not be subject to additional taxes in Switzerland. 3) Imported employee options which are taxable at vesting or exercise, as described within this information letter, are in generally taxable in Switzerland. 4) If the employee proves that during the vesting period he was resident in a country with which Switzerland has executed a double tax treaty, a portion of the taxable income is exempt from tax in Switzerland. The partial exemption is calculated as follows: Taxable income x Number of days in DTT countries during the vesting period 6.2.Export of employee options Number of days of the entire vesting period 1) Exported employee options are those that a taxpayer has been granted in Switzerland and are realised for tax purposes in another country (Heading B. I. 3). 2) The export of employee options taxed at grant is irrelevant for tax purposes. 3) The export of employee options taxable at vesting or exercise will create a tax liability in Switzerland at the time of taxation. The taxable income in Switzerland is calculated as follows: Taxable income x Number of days in Switzerland during the vesting period Number of days of the entire vesting period 4) If the costs incurred on this employee participation are charged back to the Swiss employer, the amount charged back is the minimum amount subject to income tax in Switzerland. 5) The taxes incurred are, as a rule, to be delivered by the Swiss employer as source tax. The source tax rate is to be determined on the basis of the total benefit-in-kind. The canton of the employer s head office is to be considered the competent authority for calculating and remitting the associated taxes.. Only in the following two cases can the Swiss permanent establishment canton be considered the competent canton (instead of the canton where head office resides): A) the employer s head office is not in Switzerland; B) the employment relationship existed expressly with a Swiss permanent establishment other than the Swiss head office and the employee s salaries during Swiss employment period by this Swiss permanent establishment. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 8/11

9 II. For net wealth tax 1) Employee options that are taxed at grant are subject to net wealth tax from grant. The taxable value is generally equal to the fair market value, but cannot be less than the award s intrinsic value (i.e., the difference between the price of the underlying security and the exercise price), at the end of the tax period. 2) Employee options that are taxed at vesting are subject to net wealth tax from vesting. They are valued at fair market value, not below the intrinsic value at the end of the tax period. 3) Employee options that are taxed at exercise or sale are not subject to net wealth tax during the period they are held. C. Taxation of phantom employee participations I. For income tax 1. General Phantom employee participations are equity or share price based incentive instruments, which in effect, do not enable the employee to participate in the employer s equity, but as a rule foresee only a cash payment. 2. Time of taxation and amount of the taxable income 1) Benefits-in-kind from the grant of phantom employee participations are not taxable until the cash payment is made to the employee. 2) The entire benefit-in-kind is treated as employment income that is subject to income tax. 3. Taxation of phantom employee participations internationally The import and export rules for phantom employee participations are analogous to the import and export rules associated with expectancy rights to receive shares in the future (Heading A.I.7.3 and 7.4). II. For net wealth tax Phantom employee participations are not subject to net wealth tax because they do not represent assets that have been definitely acquired. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 9/11

10 D. Duties of cooperation I. Employer 1) The grant of all types of employee participations must be reported on each employee s salary certificate. The details of the grant are to be disclosed on an attachment to the salary certificate, which must contain the employee s personal data. 2) The taxable income that flowed to the employee from employee participations in the relevant calendar year is to be listed under item 5 of the salary certificate ( participation rights per attachment ). If no taxable income results from the grant of employee participations, the grant of such employee participations is to be noted under item 15 ( Comments ). 3) If the employee has to return employee participation rights based on the share ownership plan, the employer must issue a corresponding confirmation for the employee. It is not permissible to consider the acquisition costs (Heading A. I. 6) directly in the salary certificate. 4) Upon import of employee participation rights, even if there is a possibility that a portion of the taxable income can be excluded from income, the employer must disclose the full taxable amount. The employer may, however, in an attachment confirm which countries the employee was resident during the vesting period or whether and to what extent it has delivered source taxes on the income to another country. 5) If a ruling (Heading D. III. 1.) on the taxation of the employee participation rights is available, the cantonal administration that issued the ruling and the date of the ruling are to be quoted on the salary certificate. II. Taxpayer 1) The taxpayer is responsible for the complete and correct declaration of the employee participations in his/her annual tax return for the year of taxation. 2) Employee shares and irrevocably acquired employee options that are capable of valuation are to be reported in the list of securities and bank accounts. 3) Restricted employee shares with an Obligation of Return (which are not taxed until the lapse of the Obligation of Return (Heading A. III. 3. Para. 3)), employee options that have not yet been irrevocably acquired or are not capable of valuation, and phantom employee participations, are to be provided pro memoria (i.e. without a value) in the list of securities and bank accounts on the annual tax return. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 10/11

11 III. Ruling between the employer and the tax authority 1. General and competence 1) The employer domiciled in Canton of Zürich can submit its employee participation plans to the tax authority for review (ruling) in order to determine the applicable time of taxation as well as its individual share and option valuations. 2) Rulings issued by other cantons are recognised to the extent that they substantively comply with this information letter. 3) The competence lies with the following administration: Cantonal Tax Administration Zürich, Service Department Securities, Bändliweg 21, 8090 Zürich. 2. Conditions for a ruling 1) All relevant plan and contract documents are to be submitted to the competent administration. Based on these documents and upon citing the exact passage in the text, the employer must undertake a tax appraisal and submit a corresponding application. 2) The ruling relates solely to the facts described in the application. The tax authority does not in principle make a more extensive review of the employee participation plans. 3) If the ruling is requested by a representative, the representative must produce a corresponding power of attorney from the employer. 3. Implementation of the ruling After a ruling has been issued on the tax consequences, the ruling(s) is to be included along with the grant documentation (i.e. grant agreement and/or terms and conditions) provided to employees. The tax authority assumes that the employee is aware of the tax consequences associated with the acceptance of the option. IV. Contact point The contact point for questions concerning the implementation of this information letter is as follows: Cantonal Tax Administration Zürich, Service Department Securities, Bändliweg 21, 8090 Zürich. V. Effective date This information letter is effective immediately. Zurich Cantonal Tax Administration Information Letter governing the Taxation of Employee participations 11/11