In practice, the distinction between founder participations and employee participations is of great importance. We briefly summarise the main differences in the tax treatment of founder shares compared to employee shares.
Key differences
In the case of founder participations (e.g. founder shares or founder participation certificates), the provisions on employee participations do not apply. This means that in principle, there will be no income tax consequences upon acquisition, and the possibility of a tax-free capital gain is not restricted upon subsequent sale.
In contrast to employee shares, a tax-free capital gain can be realised in full for founder shares, and there is no income tax on the excess gain (i.e. in the difference between the sale price and the formula value at the time of sale), if the shares are sold within five years of acquisition.
Persons who acquire shares in the company at the time of incorporation act primarily as investors and not as employees. The legal basis for the acquisition of founder shareholdings is not the employment relationship. For this reason, founder participations do not qualify as employee participations even, if the founding member is employed by the same company.
Circular no. 37 of the Federal Tax Administration (FTA) dated 30 October 2020 on the taxation of employee participations now expressly stipulates in Section 3.4.4 that shares acquired at the time of the incorporation of a company do not qualify as employee participations. Following the introduction of Circular no. 37 on 1 January 2021, initial experience was gained with this tax practice.
According to the tax practice in the cantons, the question of whether a participation qualifies as a founder or employee participation is often assessed on a case-by-case basis based on the overall circumstances. In order to qualify as a founder’s shareholding, it is in principle assumed that the acquisition of shares takes place in close proximity of the company’s founding date. A time delay in the acquisition of founder shares can be recognised in practice, if the acquisition of the shares is already intended at the time of incorporation and this can also be sufficiently documented. Furthermore, the reason for the delay is also taken into account in particular. One reason for a delay in acquiring the shares may be an existing employment relationship that must first be cancelled or terminated.
Practical advice
Due to the to the different assessment of employee shares and founder shares, the possible qualification as a founder participation must be kept in mind when founding a company, increasing share capital or restructuring. An appropriate documentation should be drawn up. In case of doubt, a tax ruling should be obtained to clarify the qualification as a founder participation or as an employee participation.