On 4 May 2018, the federal tax authorities have published a new circular regarding the tax treatment of participation instruments for employers (circular No 37A). The circular enters into force with immediate effect.
What is it about?
Whereas the circular No 37 mainly provides guidance on the definition and individual income tax treatment of participation instruments in national and international cases, the new circular No 37A focuses on the corporate tax impact for employers resulting from participation instruments, i.e. tax deductibility of corresponding expense.
Learn more about the circular No 37A
What does this mean for employers?
The cost in connection with employee participation programs are generally tax deductible for corporate tax purposes as long as this is adequately reflected in the books. The new circular provides various examples in this respect. However, the devil lies in the detail.
We recommend you to assess the potential impact of the new guidance on your plans and processes to avoid / mitigate any tax exposure. If you have any questions regarding the circular contact Remo Schmid.
In this third and final part of this year’s ExCo Insights, we discuss new methods of pay design and communication with shareholders (and we clarify some misunderstandings regarding established “best” practices). Moreover, we recommend that board members and executives take a broad view of governance matters. We offer the following “Rethinks”:
1. Compensation design is fraught with “best practice” approaches that are actually often not appropriate. Companies should recognise the drawbacks of popular high-powered incentive systems with caps, should reflect on possible unintended side effects of the apparently intuitive use of “relative performance evaluation” (RPE, such as benchmarking to indices), should be wary of the risk-taking incentives of currently fashionable performance shares, and should consider using debt to complement standard equity-based incentives. Simplification – for example, granting straight-up shares rather than complex instruments such as performance shares – also has important advantages.
2. Ongoing communication with shareholders throughout the year, not just ahead of the Annual General Meeting (AGM), is essential to build trust and understanding regarding a company’s specific situation. This is particularly important given that a company also has to deal with powerful proxy advisors who sometimes use checklists and policies that management may regard as inadequate in the context of the concrete challenges a company needs to solve with incentive systems and governance choices.
3. We introduce the 5 Rs of value generation through effective governance: Recruit (select and retain the right board members, executives and employees), Reward (design and live incentives), Report (engage in value reporting and communication), Realise (execute value generation), and Rethink (reflect critically on practice of all four of the other Rs). An effective board has a holistic view of all of these matters. The weakest link of these five elements will determine the overall performance of the company.
We look forward to engaging in dialogue with you.
Dr. Robert Kuipers
Partner People & Organisation PwC
+41 58 792 45 30
Partner People & Organisation, PwC
+41 58 792 46 08