In the context of business successions, it is common for shares to be transferred to successors. Such individuals have often already been employed by the company in a senior capacity over several years. Where shares are transferred below fair market value, there is a particular risk that the tax authorities will classify and tax such shares as employee participation. Current cantonal practice in this regard is inconsistent. While certain cantons consider the transfer of 100% of the shares to be part of a succession arrangement rather than an employee participation, other tax authorities adopt a more restrictive approach and classify any transfer of shares to employees (irrespective of the level of participation or the underlying rationale) as employee participation.
Until recently, the Canton of Aargau classified shares as being employee participations as soon as these were transferred to an employee, even in the context of a succession arrangement. In a recent decision, however, the Administrative Court of Aargau rejected this blanket approach and held that there must necessarily be a connection between the employee’s work performance and the transfer of shares for the latter to qualify as employee participation. Furthermore, the compensation for the employees’ work within the company must constitute the primary reason for the share transfer. Accordingly, the transfer of shares must be suitable to create a performance-related incentive for the employee. What is decisive in this respect is a comprehensive assessment of all the circumstances of the individual case. In the matter at hand, the Administrative Court of Aargau ruled in favor of a succession arrangement, notwithstanding the fact that the recipient of the shares had served for years as managing director and member of the board of directors of the company concerned.
From the perspective of business succession, the judgement is very welcome. It sends an important signal against an overly generalized approach to employee participation. Moreover, it is to be hoped that the judgment will have a signaling effect and prompt other restrictive cantons to adjust their practice accordingly.