Startup Board Member Compensation - Part 3

Taxation implications and social security considerations

An important step of launching a startup is establishing a viable incentive plan. It is meant to motivate all those working towards the startup’s development, and it should include both the employees and the board member compensation. Designing one isn’t easy, and there are some hidden pitfalls that one must keep in mind to avoid unpleasant surprises when it comes to taxation laws and social security expenses.

Once they accept their mandates, board members have a duty of diligence towards the company, which means that, beyond aiming for its ultimate profitability, they must ensure that the Swiss law is applied correctly and thoroughly. It is therefore useful to consider different compensation types, whether paid to employees or board members themselves, and the hurdles they may present.

Taxation implications

Taxation-wise, while things are rather straightforward for cash compensation such as salaries and bonuses, they become trickier for other types of remuneration such as stocks, shares, participation certificates, options, expectation rights (e.g., restricted stock units), and improperly named participations, which may include but aren’t limited to phantom stocks (bonuses the value of which depends on the fair market value of the underlying shares) and payments in nature (e.g., a product the company makes, like a watch from a watchmaking firm). While a salary certificate must be established regardless, its contents will vary to accurately reflect the monetary value of the compensation. That value may be difficult to establish in advance for several compensation types, and calculations will depend on whether the company is listed or not.

Given the intricacies of establishing the actual monetary value of a compensation at the time of taxation, it is therefore best to formally discuss the anticipated taxation with the relevant authorities. In some Swiss cantons, a formal ruling is requested by the tax authorities while in others? the board members may simply estimate and anticipate the tax expenses as accurately as possible.

Furthermore, the timing of the taxation will vary greatly, too. Shares, for example, are taxed upon acquisition regardless of whether the company is or isn’t listed; non-listed company options will only be taxed when they are exercised or sold, expectations rights once they are converted to an actual share, and improperly named participations upon payment or firm right.

Social security charges

Another aspect to consider is that of social security payments due, and conditions may vary depending on the status of the board member. While from the perspective of the Swiss code of obligations the board is a body of the company and board members aren’t considered employees, from the social security point of view, they technically are. Their compensation is therefore considered a salary subject to social security deductions when it is paid to them directly, for instance when the board member also holds a different role in the company, when they are self-employed (and recognized as such by the Swiss AVS/AHV) or when they are a board member by profession. However, it may so happen that a board member is employed by another company, in which case their compensation will be subject to VAT and not to social security deductions.

The most important thing to remember is that the legal responsibility of the board members towards the Swiss AVS/AHV is personal. Whatever social security payments are due – for employees or for board members themselves – board members are individually liable if these deductions aren’t paid.

Other considerations

Compensation-wise, things can get even more complex if a person who lives in Switzerland sits on the board of a foreign company, or if a person who lives abroad sits on the board of a Swiss company. To avoid any issues with taxation in the former case, one needs to check what double taxation treaties exist between Switzerland and the country where the company is based. If the OECD model was used to negotiate the treaty, for instance, then the taxation will likely be performed in the country of the company. In addition, social security treaties must also be taken into account and can add considerable complexity to determining which amounts are due and to what authorities.

Overall, the best advice that one may give when it comes to anticipating taxation and social security expenses is to double and triple check the rules of the game, and because there are so many playing fields, the easiest way to prevent any issues is to speak to professionals who specialize in the field.

Virginie Verdon, Managing Director, Startup Board Academy