Employee shares in Switzerland are taxed according to the rules set forth in Circular 37. This circular outlines the specific circumstances under which an employee can derive tax-free capital gains or taxable employment income. It is important for employees to carefully review the specific rules outlined in Circular 37 in order to understand how their employee shares will be taxed.
Phantom stocks and stock appreciation rights (SARs) are both forms of equity-based compensation that are commonly used by companies to reward employees. In Switzerland, these types of shares are subject to full income tax and social security contributions at realisation. This means that when an employee exercises their phantom stock or SARs, they will need to pay tax on the value of the shares at that time.
What is a depositary receipt?
A depositary receipt, best known in the form of an American Depositary Receipt (ADR), is a financial instrument that represents ownership in a foreign company’s stock. It allows investors to buy and sell shares in a company that might not be listed on their own exchange. Depositary receipts are issued by a bank or financial institution, and they typically represent a certain number of shares in the underlying company. For example, an investor might buy a depositary receipt that represents 100 shares of a company’s stock. These receipts are typically used to make it easier for investors to buy and sell shares in foreign companies, as they do not need to worry about the complexities of trading on a different exchange or dealing with different currencies. Investors who hold depositary receipts generally have the same rights as the underlying shareholders, including the right to receive dividends and vote at shareholder meetings.
How are depositary receipts and ADRs taxed in an ESOP?
According to the tax authorities of the Canton of Zurich, depositary receipts will be taxed like ordinary employee shares, if they give shareholders the same rights as the underlying shares (such as voting rights and dividend rights), even if underlying share is formally owned by the bank. It is recommended that companies confirm that the depositary receipts fulfil those requirements and confirm the tax treatment with the tax authorities, especially outside the Canton of Zurich.