Income tax and social security aspects of corporate restructuring
Workshop on "Income Tax and Social Security Aspects of Corporate Restructuring" by Tabea Nyfeler and Severine Vogel on the occasion of the ISIS seminar "Corporate Restructuring" on August 29, 2023.
Case 1: Succession solution for partnerships
1. facts of the case
Franz Müller, born May 1, 1963, is domiciled in Bassersdorf / ZH, where he has been operating the Müller Garage in the form of a sole proprietorship since 1985. The property used by the garage business is part of the business and has been capitalized and depreciated in the books of the Müller Garage sole proprietorship.
Franz Müller is 60 years old and wants to set up a succession solution for the business. He therefore plans to transfer the sole proprietorship to a new public limited company to be founded, Müller Garage AG. Franz Müller thus ends his self-employed activity and becomes an employee of Müller Garage AG.
The property previously held as business assets is not to be transferred to the new company, but is to be held privately in the future and leased to the company. Among other things, this is intended to ensure that Franz Müller will continue to generate income from Müller Garage AG in the future, even if he is not active.
- What must be taken into account so that the conversion of the sole proprietorship into an AG can take place in a tax-neutral manner?
- What are the tax consequences of the private withdrawal of the property?
- What should be taken into account when taking the property private from the point of view of social insurance law?
- What planning options arise in the year of conversion or after conversion to an AG from a social security perspective?
Case 2: Employee shareholdings - from inception to disposal
1. foundation of Clever AG on 04.11.2020
Matthias, Bastian and Roger know each other from their studies. In the years since, they have developed an innovative technology that could revolutionize the food market, as it can be scalably applied to the entire food industry.
After the supermarket shelves remained partially empty during the lockdown in March 2020, the three decided to found a company to bring their technology to market - Clever AG. The company will be founded on November 4, 2020, with headquarters in the canton of Zurich. Matthias, Bastian and Roger, who all live in the canton of Zurich, each have a one-third stake in the company. They hold the participation as private assets. The share capital amounts to CHF 100,000 (nominal value 1CHF per share = issue amount at foundation). As of 31.12.2020, the net asset value amounts to CHF 1.05 per share. A dividend will not be distributed.
Matthias and Bastian are managing directors and receive an appropriate salary, while Roger continues to be employed by his previous employer. All three work exclusively in Switzerland.
- Are the shares held by the managing directors Matthias and Bastian employee shares? How are Roger's shares to be qualified?
- What are the consequences of establishing a joint stock company in terms of income tax, property tax and social security contributions?
2. capital increase 01/18/2021
Just a few months after the company was founded, the three founders were able to win two major customers. The sales forecasts for the next few years are in the double-digit millions. As of January 2021, two employees have been hired and three more will join in March.
Some fellow students of the founders are interested in an investment in Clever AG. The fellow student Stefan Fleissig (S) is willing to buy 10'500 shares at a price of CHF 31'500 (CHF 3 per share = CHF 1 par value and CHF 2 premium). The founders do not make use of their subscription right according to Art 652b OR.
S acquires 10,500 shares at CHF 3 each and now holds 9.50% of Clever AG. The participation ratios thus change, which means a dilution of the founders' shares (participation now at 30.17%). The nominal capital after the capital increase amounts to CHF 110'500.
- What are the income tax, property tax and social security consequences for the founders from the capital increase?
- How are the shares of S treated?
3. issuance of employee stock options 5/1/2021
Matthias, Bastian and Roger plan to bind their employees more closely to their company. For this reason, an employee participation plan is to be used to give employees a stake in the company. According to the plan, employees are to be given the following opportunities:
- Purchase of up to 600 shares per year at a price of CHF 1 per share (net asset value = CHF 1.05) without blocking period.
- Subscription of 1,500 restricted stock units (RSU) (= entitlement to employee shares with the prospect of acquiring a certain number of shares at a later date), with a three-year staggered vesting period (vesting of one third per year). One RSU entitles the holder to acquire one share. The acquisition is free of charge.
The founders plan to sell the shares directly to their employees. For the issuance of the RSUs, a conditional capital increase according to Art. 653 OR is carried out.
The employees Fred (F) and Klaus (K) residing in the Canton of Zurich participate in the employee stock ownership plan. They are therefore allocated RSUs. Both decide to buy 600 shares each. F and K are subject to Swiss social security contributions.
Thus, on May 1, 2021, 600 shares each will be sold to the two employees (the founders will sell 200 shares each), and 1,500 RSUs each will be allocated.
On 12/31/2021, F and K thus own: 600 shares and 1,500 RSU. Vesting is planned as follows: 01.05.2022: 500 RSU, 01.05.2023: 500 RSU, 01.05.2024: 500 RSU.
- What tax and social security consequences result for the founders from the sale of shares to employees F and K?
- What are the tax and social security consequences of the acquisition of the shares/allocation of the RSUs at F and K?
4. withdrawal of Roger from Clever AG as of 30.11.2021
Roger has decided to concentrate on his job at a wholesaler and to sell the stake in Clever AG. Leo Ehrlich is very interested in the technology of Clever AG and makes Roger an offer. As of 30.11.2021 Roger sells his shares to Leo for CHF 10 per share. Leo also holds his shares as private assets. The formula value is CHF 1.30 per share.
- What are the consequences with Roger?
- Are there consequences among the remaining founders?
- What are the consequences for employees F and K?
5. acquisition of all shares by SMART AG
The new shareholder Leo establishes contact with SMART AG, which shows great interest in buying Clever AG. After tough negotiations, SMART AG and the shareholders of Clever AG agree on a merger. Clever AG is subsequently absorbed by SMART AG (real merger according to FusG). The closing takes place on 01.06.2023.
Two Clever AG shares with a nominal value of CHF 1 entitle to subscribe to one SMART AG share with a nominal value of CHF 1. For this purpose, SMART AG carries out a capital increase. Alternatively, SMART AG offers a cash compensation (CHF 15 per share = market value per Clever AG share). The tax-free repayable KER (capital contribution reserves) of Clever AG amount to CHF 5 per share. The fair value of a SMART AG share is CHF 30. The restructuring is tax neutral.
The founders exchange their shares for shares in SMART AG. It is agreed that the founders will not act for SMART AG after the closing.
Leo and S opt for the cash settlement.
F and K also receive shares in SMART AG for their Clever AG employee shares. F opts for part of his shares for the cash settlement. Both will start working for SMART AG. Of the RSUs allocated in 2021, 500 shares have not yet been vested at the time of the takeover by SMART AG. According to the employee stock option plan, an "accelerated" vesting takes place if the majority of the shares in the company are sold or transferred. The shares from the vesting of the RSU are also eligible for exchange.
F has been regularly employed in Germany since 01.11.2022, where he is working on setting up a new location. However, he is not an executive employee and not a cross-border commuter within the meaning of the double taxation agreement between Germany and Switzerland (DTA D). As of 01.11.2022 he has moved to Germany and has given up his residence in Switzerland. The employment contract with Clever AG in Switzerland continues to exist. In 2022, F did not have a Swiss working day after his move. In 2023, he worked 5 days per month in Switzerland before 01.06.2023. For the next twelve months, he is scheduled to work in Switzerland to the same extent. F is a Swiss citizen.
What tax and, if applicable, social security consequences arise in the case of
- FoundersMatthias and Bastian?
- InvestorsLeo and S?
(The problems concerning securities dealers, indirect partial liquidation and transposition are not addressed).
6th variant: Sale of the majority of shares with "holdback" clause
Uwe Schnell heard about the interesting business model of Clever AG through Leo. As a result, he acquires the shares of Leo, Bastian and Matthias as of 01.04.2023, thus holding more than 80% of the shares in Clever AG. The purchase price is a negotiated third party price.
The share purchase agreement provides for a fixed purchase price of CHF 13 per share. In addition, payment of an additional sum is to be made if the key employees Bastian and Matthias do not resign within three years. This "holdback" amount will be paid in two staggered tranches. The first installment is scheduled to be paid after 18 months, the second after the three years have expired. If the employment relationship is terminated early, due to incapacity for work or by mutual agreement, a reduced amount will be paid immediately.
On August 11, 2023, Bastian's employment is terminated by mutual agreement as of August 31, 2023. He will receive the proportionately reduced amount of CHF 150,000.
What are the tax and, if applicable, social security consequences for Bastian as a result of the payment of the "holdback" amount?
7th variant: IPO on 02.08.2023
On 02.08.2023 the company succeeds in going public. In this context, K sells on 02.08. the 600 shares he had bought on 01.05.2021 at a price of CHF 15. The formula value on 02.08. is CHF 2.
What are the consequences for Employee K's employee shares?
Case 3: Foreign partnership enterprises
1. facts of the case
Silvia Fröhlich is a German citizen and married to Luke Smith, an American citizen. Both spouses are resident in Germany. Silvia Fröhlich works for an international group of companies. As a result of a restructuring, a Swiss company has become part of the group. Silvia Fröhlich is to work for the Swiss company in Zurich in the future. She therefore plans to move her place of residence to Switzerland. Her husband, Luke Smith, is also moving to Switzerland.
Silvia Fröhlich holds shares as a limited partner in a German GmbH & Co. KG, which operates a business in Germany. Luke Smith has made a private equity investment in the USA via a limited partnership.
Due to the international circumstances, Silvia Fröhlich and Luke Smith consult a tax expert to clarify how the shares in the German GmbH & Co. KG as well as the private equity investment have to be declared in the Swiss tax return and what has to be considered from a social security point of view.
- How are the German GmbH & CoKG shares and income therefrom treated for tax purposes?
- Variant: What would be the tax assessment if the GmbH & Co. KG would be an asset-managing company?
- How are the American LP shares treated from a tax perspective?
- What needs to be considered with regard to commercial GmbH& Co. KG shares from a social security perspective?
- Variant: Does anything change with regard to the social security obligation if the company is an asset-managing GmbH & Co. KG would be involved?
- What should be considered from a social security perspective with respect to the LP investment?
- Are there opportunities for optimization?