The Zurich tax authorities recently published new guidelines regarding the valuation of shares of start-up companies for Zurich private net wealth tax purposes. In the past in some cases owners of start-up companies were facing high annual net wealth taxes resulting from their shares in case the company had financing rounds, which were considered relevant for the determination of the share value (in line with circular letter no 28 of the Schweizerische Steuerkonferenz). In the first years after foundation the share value determined based on financing rounds may not be representative and too high as the companies are still in the process of building up business and have no or very limited revenues. The new Zurich guidelines now take into account these specific circumstances allowing for a beneficial valuation in these first years. As per the guidelines, only the net asset value of the shares is relevant for the first 3 years and any higher market values derived from third party investments or financing rounds can be ignored. In the fourth and fifth year the valuation resulting from financing rounds are to be taken into account gradually (1/3 in the fourth year and 2/3 in the fifth year). As of the 6th year after foundation, the share value is to be based on the results of financing rounds. Additional concessions are offered to the Biotech as well as medtech companies as these companies may use the net asset value for the first 5 business years with a subsequent transition period of 2 years.
Though the above applies as general rule, the new guidelines state exceptions and limitations. For example, if a start-up company determines its own fair value, this amount represents a minimum value for the Zurich annual net wealth tax purposes. That said, if such a formula value is agreed with the Zurich tax authorities e.g. for the use in an employee share plan, this agreed value is considered under the new rules the minimum value for wealth tax purposes. As consequence, it is no longer possible for founders of the company or third party investors to declare their shares for net wealth tax purposes at a lower value.
This beneficial valuation approach for net wealth tax purposes only applies to newly founded start-up companies whereby the group of effected companies is not yet defined in the guidelines. The rules are applicable with immediate effect for companies located in the canton of Zurich. Additionally, a Parliamentary initiative has been launched in March to specifically address these issues for specified start-up companies. We will monitor the effect of the new guidelines closely and expect that key stakeholders will participate in an intensive debate.
Please find additional Information here.