Motivation and retention of key people in the company with employee share ownership. What must be taken into account?
Start-up companies in particular demand a great deal of flexibility, long working hours, a high degree of creativity and entrepreneurial spirit. This is partly - especially in the start-up phase - at odds with wages that are not in line with the market. For this reason, employee share ownership is increasingly becoming an issue.
Employee stock ownership plans can be used to motivate key individuals among a company's employees. Employee participation in start-up companies is an integral part of corporate culture in the United States, especially in Silicon Valley. This idea is also becoming increasingly popular in this country. Start-ups are anxious to participate in the long-term success of the company for key individuals through possible incentives in the form of success, equity participation or other models.
Elaboration of employee participation plan
As a first step, it is important to create the organisational, corporate and civil requirements before a detailed employee participation plan is drawn up and implemented. Various questions have to be clarified. For example:
- Which form of participation (success versus equity participation or combination) should be created?
- Which group of employees should be able to receive or acquire employee stock options?
- What type of participation should be specifically issued (shares, participation certificates or options with or without vesting periods?)
- What is the maximum number of shareholdings that employees should hold?
- Should the participations be sold free of charge or at a preferential price?
- Should the employees with the corresponding shareholdings also receive voting shares or not?
Tax and duty consequences for the employee
In addition to the above-mentioned questions on the structure of employee participation models, there are also corresponding tax and social security issues. So-called non-cash benefits in connection with employee share ownership are taxable and subject to AHV contributions.
In 2013, the company introduced its own statutory provisions on the taxation of employee shareholdings. The Ordinance on the Obligatory Certification of Employee Participations (MBV) requires employers to certify extensive information relating to employee participation in the wage statement accordingly.
Types of employee participation schemes and their taxation
There are many options for organizing employee stock ownership plans. The following two forms of participation occur most frequently in SME relationships:
Taxation takes place at the time of allocation. It should be noted that the employee is taxed even though he or she does not receive any direct inflow of liquidity (as in the case of wage payments, etc.).
Taxable as income is the market value of the share less any purchase price. Any blocking periods (sale of the share not possible during a corresponding period) are taken into account at a flat rate with a discount of 6% per blocking year.
Options grant the employee the right to acquire shares of the employer at specified conditions. In most cases, the options are linked to conditions (e.g. they can only be acquired in 5 years, employment relationship must continue etc.).As long as the options are blocked and not listed on the stock exchange, they are not taxed until they are exercised. The taxable income here is the market value of the share on exercise, less any exercise price.
Containment of the employee's tax-free capital gain / challenging certification and recording obligations of the employer
Due to the wide range of possible arrangements, the taxation of employee shareholdings is also a recurrent concern in practice. The intention of the tax authorities is clear: The tax-free capital gain with employee shareholdings which the employees receive/acquire from their employers should be contained as far as possible. In addition to the tax consequences for the employees, the employer's certification and recording obligations should not be underestimated.KENDRIS is happy to support you in the preparation of employee stock option plans and to answer any questions you may have. Be it their design, in valuation questions or in their assessment and reduction of tax or social security risks.
Further information on this topic can be found at:
- Circular No. 37 of the Swiss Federal Tax Administration (FTA) on the taxation of employee shareholdings
- Circular No. 37A of the Swiss Federal Tax Administration FTA on the Tax Treatment of Employee Participations by Employers
- Asset valuation of start-up companies (KENDRIS Blog-Post)
- Crowdfunding - the new way to finance a start-up?