On July 3rd, 2023, a welcome update has been published by the Geneva authorities in regard of the tax treatment of incentive plans. This publication provides additional information regarding the extent to which a participant may realize a tax-free capital gain.
According to general Swiss tax rules, the grant of shares may be a taxable event depending on the terms of the incentive plans. However, any subsequent sales by the participant are expected to be qualified as a tax-free capital event. The application of this general rule was unfortunately limited when it came to shares of unlisted companies. Specifically, the exemption from taxation on capital gains during subsequent sales of unlisted shares was restricted by a five-year holding period starting from the grant date. Within this five-year period, any sale of these shares that did not match the value derived from a specific formula was subject to taxation. The exemption from taxation on capital gains were also restricted should a taxable transaction (IPO, investment round, sale, etc) occur within this five-year holding period. Such transaction would hold tax implication for participants in incentive plan. It meant that if a shareholder or a participant were to sell their shares during this period, it would limit the tax-free capital gain that other participants may expected to realize.
Through their recent publication, Geneva tax authorities provide additional information in regard of their tax practice which has been softened. To begin with, the Geneva tax authorities has restricted the definition of taxable transactions that may hold tax implication for participants. Indeed, it has been outlined that now, only an IPO or a sale by the effective participant would limit the tax-free capital gain a participant may expect to realize.
Geneva tax authorities have also softened their practice in regard of a sale or an IPO that may occur during the five-year holding period of unlisted shares. Indeed, it has been determined (subject to confirmation from the Geneva tax authorities) that an ad hoc formula may reflect the market value of unlisted shares. Should this be confirmed, any subsequent sale should be qualified as a tax-free capital event even if it occurs during the five-year holding period. Same apply in case of an IPO which mean that this event should not affect the tax-free capital gain a participant may expect to realize. To obtain confirmation that the ad hoc formula reflects the market value of unlisted shares, an advanced tax ruling shall be sent to the Geneva tax authorities.
It is important to highlight that this new publication and its related tax consequences have immediately entered into force. It means that companies which already have implemented an incentive plan and companies which are contemplating to implement one are concerned. In this regard, we would recommend companies to review the terms of their incentive plan and potentially to prepare an advanced tax ruling. Companies that are expecting a taxable transaction to occur during this five-year holding period are specifically concerned as it may limit tax consequence for their participants.
Our team would be please to help you in this regard.