Swiss Taxation of US Stock Options
Tax Court Basle-Land – Case no. 104/2003, 10 October 2003
During the years 1992, 1993, and 1994, X. resided and was employed in the United States. As part of his compensation during those years, he received stock options. In 1995 X. moved to and took up residence in Switzerland. In the year 2000 X. exercised the stock options and was taxed on the resulting income in accordance with Circular No. 5 of the Federal Tax Authority of 30 April 1997 (Circular).
Due to a recent change in assessment procedures (from a praenumerando to a postnumerando method), ordinary income accrued in the years 1999 and 2000 was not taxed. However, a special annual tax was levied on extraordinary income. The Cantonal Tax Authority deemed the income resulting from the exercise of the stock options to be extraordinary income and therefore levied a tax in 2000. Consequently, X. appealed this decision to Cantonal Tax Court.
X. argued, that the income derived from the exercise of the stock options constituted ordinary income and therefore was not to be taxed. Alternatively, even if the income was deemed extraordinary, it should be deemed exempt from Swiss taxation as it was part of his compensation scheme while being employed and residing in the United States. Furthermore, X. claimed that the income was only taxable in Switzerland to the extent that it related to the increase in stock value after becoming a Swiss resident.
The Cantonal Tax Court was asked to rule on to what extent, if at all, income from the exercise of stock options obtained while employed and residing in the United States could be taxed in Switzerland. Art. 15 (1) of the Swiss-US Tax Treaty concerning employment income was the relevant norm to be considered in this case.
The Court agreed with the Cantonal Tax Authority in qualifying the income as extraordinary. Therefore, levying a special annual tax in the year of the exercise of the stock options was in accordance with Circular by the Federal Tax Administration.
Confirming the decision of the Cantonal Tax Authority and agreeing with the taxpayer’s claim, the Court held that income may only be taxed to the degree that it occurred while X. was a resident of Switzerland.
Furthermore, and in line with the arguments of the tax authorities and the second alternative claim of the taxpayer, the Court then held that the income may only be taxed as far as it relates to an increase in the value of the stock that occurred while the taxpayer was a resident of Switzerland.
Therefore, the increase in value of the stock was to be allocated in accordance with Art. 15 (1) of the Swiss-US Tax Treaty which states that “remuneration derived by a resident of a State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State”.
In this case, the Court concluded that at the time of issuance the stock options were transferred as an incentive for future activities and not as (additional) compensation for past work or as part of a regular salary. Consequently, the remuneration was to be allocated pro rata temporis to the period between the issue and the exercise of the stock options.
In accordance with Art. 23 (1) (a) of the treaty the income allocated to the United States had to be exempt in Switzerland in order to avoid double taxation.
However, the exempt income was still used as a basis for determining the tax rate (exemption with progression).