Update of the Geneva practice on the taxation of management incentive plans - Tax and Legal blog

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On July 3, 2023, the Geneva tax authorities (GTA) published on their website an amendment to the way in which they tax management incentive plans.

The new amendment increases the scope for beneficiaries of management incentive plans to receive benefits in a more tax efficient way.

The principle until now has been that when a manager receives shares from his or her employer, tax is applied to the grant, while when the shares are sold any gain is considered to be a tax-free capital gain. But this, now former practice of the GTA in relation to shares of non-quoted companies, limited the amount of the tax-free capital gain in the first five years to the formula value: if the shares were granted based on a formula value, the same formula value had to be used at exit and only the gain resulting from the formula was tax-free, while any additional gain was considered as employment income and taxed accordingly. However, if the gain was realized five years following the grant, the entire gain was tax-free.

Now the GTA has indicated that it may agree to consider certain valuation methods reflecting the fair market value of the shares at grant. Depending on the economic circumstances of the company and other variables (i.e., its stage of development), the Swiss practitioners' method, which is the valuation method used by the tax authorities (including with adjustments) and methods based on multiples of revenue, EBIT or EBITDA may be considered as representing the fair market value of the company at the moment of the grant. In order to obtain confirmation that the valuation method can be considered as representing the fair market value of the company, an advance ruling must be obtained from the GTA.

As an example, this means that if the valuation method is considered as representing the fair market value of the shares in year Y, the gain realized in a subsequent sale will be considered as a tax-free capital gain in Y+3 (even during the five-year period as mentioned above).

Moreover, should shares be acquired according to a valuation method, the GTA will consider as taxable events for the manager during the said five-year period only a limited number of events: IPOs and effective exit where shares are sold by the manager. This reverses the previous practice of the GTA, which was to consider investment rounds involving at least 10% of the share capital as a taxable event for the manager, even if no shares were sold by the manager. This practice had the disadvantage of: (i) forcing managers to pay a potentially large amount of tax on profits that they had not received, without necessarily having the funds to meet the demand, and (ii) exposing them to the risk of capital loss if the shares had lost all or part of their value.

This information is in our view in line with the legal basis and in particular the Federal, cantonal and communal income tax laws. The development is a positive one and will be very much welcomed by managers taking the risk of investment in companies.

The new practice has immediately entered into force and should apply to new management incentive plans as well as to existing ones. We would therefore recommend the following:

  • For companies who already have a management incentive plan in place: review it and potentially renegotiate with the tax authorities.
  • For companies who want to implement a management incentive plan: seek an advanced ruling from the tax authorities.

Our professionals will be happy to assist you in these matters.

Key contacts

Ferdiando Mercuri_110

Ferdinando Mercuri - Partner, Corporate Tax

Ferdinando has over 22 years of professional experience in providing tax advice to Swiss and international individuals and businesses. Ferdinando advises individuals on wealth and estate planning, and entrepreneurs operating independently or via companies and legal entities on restructuring, mergers, acquisitions, and Swiss and international tax planning. In recent years, he has had a particular focus on consulting in relation to shareholding plans for private equity and major acquisitions and sales of companies and, more generally, on providing comprehensive tax advice to Swiss and international companies. He teaches tax law in French-speaking Switzerland, is responsible for the international tax module at Swiss Expert and is an expert in tax examinations. He regularly hosts conferences on topical tax issues (notably at the Ordre Romand des Experts fiscaux (Order of certified tax experts of Western Switzerland) and the Tax Law Day in Geneva).



Renaat Van den Eeckhaut - Partner, Global Employer Services Lead Switzerland

Renaat leads the Global Employer Services (GES) Practice for Deloitte Switzerland. He specialises in international assignment and cross-border employment matters and advises on tax, social security and international mobility policies. Renaat has 24 years of experience with Deloitte Belgium and Switzerland and has worked with many companies across a broad range of industries. Renaat holds a Master in Law and Accounting Law and has authored many publications on international taxation.



David Wigersma - Partner, Global Employer Services

David has 20 years of experience in the area of international corporate and individual taxation planning. He specialises in addressing the complex compliance needs of a cross-border workforce with varied elements of compensation.



Silvio Jobin - Manager, Tax & Legal

Silvio is a Swiss qualified attorney at law with over 8 years of professional experience in providing tax advice to Swiss and international corporate and private clients who has a strong focus on incentive plans. He designed and successfully negotiated with the tax authorities numerous incentive plans for our clients.



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