Many companies sell their businesses to long-standing employees, thereby ensuring the sustainable continuation of the company. As part of succession planning, not only tax issues such as indirect partial liquidation or transposition must be considered, but also the tax risks and consequences of employee participation must be actively taken into account. In practice, the topic of employee participation still receives too little attention.
In principle, capital gains from the sale of private assets, and therefore privately held shares, are tax-free. As a result, it is widely assumed that employees who acquire shares in their employer (for example as part of a succession plan) can sell these shares later and realize a tax-free capital gain. However, this assumption has been limited by several court rulings, and cantonal tax authorities have developed a stricter practice in recent years, also due to legislative developments. The starting point is the rule that financial benefits arising from employee shareholdings are taxable as income from employment. As a result, proceeds from the sale of employee shareholdings may be reclassified as employment income.
The first step is therefore to verify whether the participation qualifies as an employee shareholding. When someone acquires shares in a company, it must be assessed whether the person acquires them as (i) a founder, (ii) an investor, or (iii) an employee.
Founder
Shares are generally considered founder shares if they are subscribed at the time of the company’s incorporation and held as private assets. In such cases, they are not considered employee shares, and the founder can realize a tax-free capital gain upon sale of the shares, provided that a third-party salary and an appropriate valuation exist.
Investor
If a person acquires shares as an investor (for example, an employee buying shares of their employer on the stock exchange as a private individual), a tax-free capital gain may also be achieved.
Employee
However, if a person acquires shares in their employer (from a third party or shareholder) and the acquisition is linked to the employment relationship, the shares qualify as employee participation and may lead to unexpected tax consequences. A useful indicator is the following question:
“Would the buyer have been able to purchase the shares if they had not been an employee of the company?”
In many cases, entrepreneurs sell shares to employees because these individuals work in the company and are expected to continue running it. The entrepreneurs would typically not sell the shares to these individuals if they were not employed by the company.
Succession Planning vs. Employee Shares
If it is determined that the shares qualify as employee shares, it must then be examined how a potential gain from their sale will be taxed. The valuation at the date of purchase is decisive in this context. In the SME sector, there is often no market price for the shares, which makes the valuation method used at the first purchase or sale particularly important.
This valuation method must be recognized by the tax authorities and must be maintained for any subsequent resale. In such cases, a formula value is typically used to determine the value of employee shareholdings.
If a person realizes an amount above the formula value, the difference is classified as employment income. This amount is subject to income tax and social security contributions, which can also lead to unexpected consequences for the employer. The same applies if the acquisition price is set too low: the difference between the purchase price and the actual value is treated as employment income for the individual concerned. This practice is based on the assumption that employees acquired the shares at preferential conditions due to their employment, or that the higher resale value is linked to the employment relationship and therefore represents additional employment-related income.
Under certain circumstances, a holding period of five years may allow the proceeds from the sale to remain tax-free, functioning as a kind of “safe haven rule.” However, additional criteria must be met.
For non-listed and privately held companies, succession planning must therefore be structured carefully. When employees are intended to become successors as entrepreneurs, the relevant tax risks must be taken into account.
In some cantons, a distinction is made between succession planning and employee participation when determining the valuation of the company, which is important for designing appropriate valuation methods. In succession arrangements, certain conditions must be met to ensure a reasonable and justified valuation, thereby creating a more stable foundation for the transfer of the business.
It is advisable to coordinate the company valuation and the resulting formula value in advance with the tax authorities and the social security office and to have it confirmed in a binding manner. This helps ensure that the company succession does not lead to unexpected tax or social security consequences, and that potential cost implications for the employer can be planned and avoided.