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René Aeschlimann

Martin Leu

Social security law issues in transactions

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Workshop on "Social security law issues in transactions" by René Aeschlimann and Martin Leu on the occasion of the ISIS seminar "Current tax issues in M&A transactions" on March 21, 2024.

03/2024
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The complete PDF of the seminar folder can be downloaded for CHF
The corresponding case solutions can be purchased for CHF
120.00
(introductory price)
can be purchased in the shop.
The workshops are also available individually in the "Documents" section.
The case solutions and other documents can be obtained free of charge in the shop.

Part 1 - Treatment of typical "ancillary agreements" in the purchase agreement

Case 1: Bonus payments as part of a share deal

1. facts of the case

Peter Gründer is CEO of SwissCo and majority shareholder of HoldCo, both based in Zurich. Peter and the German co-shareholder X-AG are planning to sell all of HoldCo's shares.

Two C-level employees of SwissCo, i.e. the CFO and CMO, are to be paid a bonus if the sale is successfully completed.

Accordingly, a bonus agreement is drawn up with the following wording:

"In the event of an exit, the company shall pay a one-off bonus of CHF 100,000 in accordance with this agreement. [...]

The bonus is a gross amount: taxes and social security contributions (employee's share only) are to be paid by the employee. Taxes and duties are withheld and paid from the bonus to the extent required or permitted.

The bonus is due one month after the exit."

Question

Social security assessment of the bonus payment?

2. facts variant 1

Would the assessment change from a social security law perspective if Peter Gründer is the CEO of the German OpCo and also resides abroad?

Questions

  1. Do employees entitled to a bonus become employees without an employer liable to pay contributions (ANobAG) for the bonus payment if they receive their salary from a third party "employer" based abroad?
  2. How should the settlement be made?
  3. Which compensation office would be responsible (domicile vs. registered office of SwissCo)?
  4. Could the settlement for the bonus payment be settled via another Swiss subsidiary of X-AG?
  5. Alternatives?

3. facts variant 2

The wording in the corresponding bonus agreement is amended as follows:

"In the event of an exit, the company shall pay a one-off bonus in accordance with this agreement. [...]

The bonus is a gross amount: Taxes and social security contributions (employer and employee share) are included in the bonus, determined in accordance with this contractincluded. Taxes and duties are withheld and paid to the extent required or permitted.

The bonus is due one month after the exit."

Question:

Social security assessment of the agreement?

4. facts variant 3

The two C-level employees of SwissCo, i.e. the CFO and the CMO, will continue to be entitled to a bonus if the sale is successfully completed.

But the bonus agreement is drawn up with the following "new" wording:

"In the event of an exit, the company shall pay a bonus of CHF 100,000 in accordance with this agreement. [...]

The bonus is a gross amount: taxes and social security contributions (employee's share only) are to be paid by the employee. Taxes and duties are withheld and paid from the bonus to the extent required or permitted.

The bonus is paid in stages and is linked to an employment relationship that is not terminated at the time of payment."

Question

Social security assessment?

Case 2: Compensation for compliance with a non-competition clause

1. facts of the case

Initial facts see "Case 1: Bonus payments as part of a share deal"

The sale of the shares in HoldCo by Peter Gründerand X-AG is successfully completed.

Peter Gründer, like the CFO and CMO, can re-invest in the acquiring company as part of a (re-)investment.

In the shareholders' agreement that Peter concludes with the buyers, a two-year non-competition clause is agreed in the event of his departure as CEO. The same applies to the two C-level employees, i.e. the CFO and CMO.

Question

Social security assessment of the non-competition clause?

Case 3: Reclassification of tax-free capital gains as wages

1. facts of the case

Initial facts see "Case 1: Bonus payments as part of a share deal"

The sale is successfully completed. Peter Gründer "declares" his tax-free capital gain in his private tax return.

Peter Gründer will continue to work as CEO of SwissCo after the sale.

As part of the assessment, the responsible tax commissioner confronts Peter Gründer with the following issues:

  • The salary received by Peter Gründer was not in line with market rates and, accordingly, part of the capital gain achieved was to be reclassified as taxable salary.
  • His work activities and his function as a member of the Board of Directors at HoldCo were not compensated separately. This lack of compensation was compensated by a higher capital gain. Accordingly, the capital gain should be reclassified as taxable salary.

Questions

  1. Tax and social security assessment?
  2. What does the social security authority do in the event of an income tax set-off?

Part 2 - Employee participation in a share deal

Case 1: Qualification as employee participation

1. facts of the case

Initial facts see "Case 1: Bonus payments as part of a share deal"

In addition to Peter Gründer and X-AG, the following minority shareholders are involved:

  1. Members of the Board of Directors who have no other employment relationship with the Group
  2. C-level employees who received their shares through the conversion of a convertible loan
  3. Mandated external experts who are paid in shares as part of their consulting activities
  4. Contractors registered as self-employed who work exclusively for SwissCo as sales representatives (but who could, in principle, mandate other clients)
  5. Persons pursuant to para. 4 who were hired as formal employees at a later date (but received their shares in the context of self-employment)
  6. The wife of Peter Gründer, who received shares as a gift on February 14, 2024
  7. Two students from the Faculty of Law who receive shares as compensation for their temporary work at sales fairs during the semester break (without a formal employment contract)
  8. Peter Gründer's son, who works in the company, as compensation for inheritance benefits from his sister

‍Questions

  1. Are they employee shares from a social security law perspective?
  2. Is it possible for the compensation office to make a different assessment?

Case 2: Effect on sale

1. facts of the case

Initial facts see "Case 1: Bonus payments as part of a share deal"

As planned, HoldCo will be sold to a third-party investor with completion of the purchase agreement on January 30, 2024.

There is a tax ruling for the employee participation plan in the canton in which SwissCo is domiciled in Zurich. The Zurich tax office has confirmed a formula approach (formula: EBITDA x multiple).

The two C-level employees also sold their shares as part of the sale. At the time of the sale, both managers each held 5% of the shares in HoldCo and acquired them on the basis of the formula:

  • The CFO, who lives in Zurich, has held his shares since 2018.
  • The CMO, who lives in St. Gallen, acquired his shares in 2023.
  • Both managers have the same number of shares (5% each) and have each acquired them based on the ESOP at an EBITDA x multiple formula value.
    • Formula value at the time of sale: CHF 30 million.
    • Proceeds from the sale of C-level employees CHF 50 million each

Questions

  1. How are C-level employees taxed when the shares are sold?
  2. How is the situation handled in practice under social security law?
  3. Responsibilities and process:
    1. When must social security contributions be settled at the latest?
    2. Which compensation fund is responsible?

2. facts variant

Both the CFO and the CMO acquired their shares in 2020 and at the same time and at the same purchase price (i.e. not at formula value) as the third-party investor, X-AG, joined the company.

  • The CFO with residence in Zurich
  • The CMO with residence in St. Gallen

The sale in 2024 will take place at a market value that clearly exceeds the formula value.

SwissCo's canton of domicile in Zurich has issued a tax ruling confirming the formula valuation approach.

The tax authorities of the Canton of St. Gallen confirmed in a ruling for the CMO's entry in 2020 that there were employee shares, but accepted a fair value transaction.

Questions

  1. Can SwissCo take into account the tax ruling of the Canton of St. Gallen for the CMO, i.e. no declaration of excess profit?
  2. Does it make a difference to the assessment of question 1 if no ruling was obtained in the canton of Zurich?
  3. If there is no ruling for Zurich, can the assessment for the CFO also be based on the ruling of the Canton of St. Gallen (a market value was also confirmed there for DBG)?

Case 3: Reverse participation

1. facts of the case

Initial facts see "Case 1: Bonus payments as part of a share deal"

HoldCo will be sold to a third-party investor (Y-AG) as planned. Peter Gründer and the management of SwissCo will be given the opportunity to re-invest in Y-AG.

The re-investment is made at "the same prices" as Y-AG.

Questions

  1. How is the situation handled in practice under social security law?
  2. Would anything change if the management were to re-invest in Y-AG via a foreign pooling vehicle (e.g. a Jersey LP)?
CHF
120.00

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