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.
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)Peter Gründer is the CEO of SwissCo and the majority shareholder of HoldCo, both headquartered in Zurich. Peter and the German co-shareholder X-AG are planning to sell all shares of HoldCo.
Two C-level executives at SwissCo—namely, the CFO and CMO—are to receive a bonus upon the successful completion of the sale.
Accordingly, a bonus agreement is drafted with the following wording:
“In the event of an exit, the company shall pay a one-time 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 borne by the employee. Taxes and contributions will be withheld from the bonus to the extent necessary or permissible and remitted.
The bonus is due one month after the exit.”
Social security assessment of the bonus payment?
Would the assessment change from a social security perspective if Peter Gründer serves as CEO of the German OpCo and is also a resident abroad?
The wording in the relevant bonus agreement is amended as follows:
“In the event of an exit, the company shall pay a one-time bonus in accordance with this agreement. […]
The bonus is a gross-gross amount*:* taxes and social security contributions (employer and employee shares) are included in the bonus, as determined in accordance with this agreement. Taxes and contributions will be withheld and remitted to the extent necessary or permissible.
The bonus is due one month after the exit.”
Social security assessment of the agreement?
The two C-level employees of SwissCo, i.e., the CFO and the CMO, are to remain entitled to a bonus upon the successful completion of the sale.
However, the bonus agreement is drafted 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 borne by the employee. Taxes and contributions will be withheld from the bonus to the extent necessary or permissible and remitted.
The bonus is paid out in installments and is contingent upon the employment relationship remaining in effect at the time of payment.”
Social security law assessment?
For the initial facts, see “Case 1: Bonus payments in the context of a share deal”
The sale of the shares in HoldCo by Peter Gründer and X-AG is successfully completed.
Peter Gründer, as well as the CFO and CMO, can reinvest in the buyer company as part of a (re-)investment.
In the shareholders’ agreement that Peter enters into with the buyers, a two-year non-compete clause is agreed upon in the event of his departure as CEO. The same applies to the two C-level executives, i.e., the CFO and CMO.
Social security law assessment of the non-compete clause?
For the initial facts, see “Case 1: Bonus Payments in the Context of a Share Deal”
The sale is successfully completed. Peter Gründer “reports” his tax-exempt capital gain on his personal tax return.
Peter Gründer continues to work as CEO of SwissCo after the sale.
During the tax assessment, the responsible tax commissioner raises the following issues with Peter Gründer:
For the initial facts, see “Case 1: Bonus Payments in the Context of a Share Deal”
In addition to Peter Gründer and X-AG, the following minority shareholders are involved:
For the initial facts, see “Case 1: Bonus Payments in Connection with a Share Deal”
HoldCo is sold to a third-party investor as planned, with the purchase agreement closing on January 30, 2024.
In the canton where SwissCo is headquartered, Zurich, there is a tax ruling for the employee stock ownership plan. The Zurich Tax Office has confirmed a formula-based valuation (formula: EBITDA x multiple).
The two C-level executives also sold their shares as part of the transaction. At the time of the sale, both managers held 5% of HoldCo’s shares each and acquired them based on the formula:
Both the CFO and the CMO acquired their shares in 2020 at the same time and at the same purchase price (i.e., not at the formula value) as the third-party investor, X-AG, entered the company.
The sale in 2024 takes place at a market value that clearly exceeds the formula value.
In the canton where SwissCo is headquartered, Zurich, there is a tax ruling confirming the formula value approach.
In a ruling regarding the CMO’s investment in 2020, the tax authority of the Canton of St. Gallen confirmed that while employee shares exist, it accepts a market value transaction.
For the initial facts, see “Case 1: Bonus Payments in Connection with a Share Deal”
HoldCo is sold to a third-party investor (Y-AG) as planned. Peter Gründer and the management of SwissCo are given the opportunity to acquire a stake in Y-AG.
The buyback is conducted at “the same prices” as Y-AG.
