Contractors' Questions: Will taking shares in my new UK-Swiss employer be taxing?
Contractor’s Question: I am a UK tax resident individual in receipt of an exciting offer. I’ve been offered employment through the UK subsidiary of a Swiss technology company, and the employment will involve spending time in France and Switzerland. I’m further thrilled to have also been offered shares in the Swiss parent as part of my employment contract, so I would like to understand the tax implications associated with the receipt of the shares.
Expert’s Answer: The receipt of your shares arises in connection with your (future) employment and, to the extent that you are receiving shares for less than their market value, there will be a charge to UK income tax.
As the Swiss company is not a quoted vehicle, the issue is reported through your self-assessment tax return. While there is no mechanism for agreeing the value to be reported in advance with HMRC, there is a fairly established methodology for determining value in these circumstances. The most important principle in relation to a small percentage shareholding is that a heavy discount is applied to the fractional value of the shares.
For example, if you hold a 5% share and the company is worth £100, the valuation is not £5 but something more akin to £1.25, applying a rule of thumb 75% discount. Assuming the Swiss company has restrictions on the transferability of its shares (like most private companies), there is also a difference between the actual market value of the shares at the time of issue and their unrestricted market value. It is generally advisable, where the values are not too steep, to make an election to be taxed on the basis of the higher unrestricted market value as this avoids complications further down the line. Note; there is a tight 14-day deadline to make this election.
On a future sale, and assuming you are still UK tax resident, any gain will simply be charged to UK Capital Gains Tax where you made the election mentioned above and any reliefs, such as Entrepreneurs’ Relief, will apply in the normal way. If you don’t make the election, it is possible that some of the gain could be charged to income tax.
Perhaps counter-intuitively given that the shares are in a Swiss company, it is unlikely that you will be taxed in either France or Switzerland. Under Article 15 of our Double Tax Agreement with both countries, the UK has sole taxing rights in relation to your employment as long as three conditions are met: (i) you don’t spend more than 183 days in either France or Switzerland in any given year (the basis period for measurement varies between the Treaties) (ii) your remuneration is paid by your UK employer and (iii) it is not re-charged to a taxable presence the UK company has established in either State. Likewise, neither country would seek to charge you on a future disposal of the shares. Best of luck.
The expert was David Simpson, international tax partner at chartered accountancy firm BKL.