lucrative activity – preferential price shares

The taxpayer was employed by a company and was also a shareholder. He was able to acquire shares in the company from another shareholder at a preferential price. The taxpayer argued that the preferential price for the block of shares represented a capital reallocation between shareholders and not income.

The difference in value between the full value of the share and the price paid by the employee (the taxpayer) was classified as employment income by the tax authorities and ultimately confirmed by the Federal Supreme Court judges.

While everyone understands that acquiring shares of their employer from that same employer at a preferential price is considered salary, in this ruling, the federal judges recall that the classification of dependent gainful employment income (of which salary is the primary but not sole element) can also apply to a benefit offered by someone close to the employer (one of the shareholders in this case).

This is how, when shareholders decide to rebalance (for example, annually) the distribution of share capital according to each individual's performance (an operation called «rebalancing»), tax administrations can reclassify this rebalancing as income from dependent employment (see Circular Letter from the Federal Tax Administration No. 37 of 30.10.2020, on the taxation of employee shareholdings, para. 3.4.3).

This is a Solothurn case. The ruling is in German.

Federal Tribunal, decision 9C_604/2022, of 1 May 2024