Switzerland Tackles Excessive Compensation

by Ulrika Lomas, Tax-News.com, Brussels

30 April 2010

Switzerland’s Federal Council has announced tax measures against excessive salaries in banks and insurance companies, which it believes to be objectionable, particularly in the case of loss-making companies. The Federal Council has also made it known that the measures do not affect the freedom of contract and that competitive compensation packages in the financial sector will remain possible.

According to the Federal Administration: “Inappropriate compensation systems with false incentives were jointly responsible for excessive risk taking, which led to the financial market crisis. Switzerland therefore took corrective action very quickly. With its Circular on Remuneration Schemes, which entered into force on January 1, 2010, (the financial regulator) FINMA subjected the compensation policies of financial institutions to supervisory regulations. On the company law level, the Federal Council presented a counter-proposal to the popular initiative 'against rip-off salaries.' In doing so, the government expressed that there is a general need to prevent inappropriate compensation systems in the future and promote salary structures that have a positive impact on the long-term prospects of companies.”

“In principle, the question of appropriateness of salaries is topical and relevant for all sectors. However, the financial market crisis has shown that a smoothly functioning financial system fulfils key functions for an economy's growth and the development of its prosperity. Because of these functions and the associated high vulnerability of the systems, more effective financial market regulation is required. In addition, the crisis calls for clear answers to certain misguided developments seen in recent years, particularly in the financial sector. Against this backdrop, the compensation measures and compensation excesses of the financial sector warrant special consideration.”

Consequently, the Federal Council has recommended the following three measures:

• The salary systems of financial institutions seeking government assistance should be regulated for the entire duration of the support requested. Within the scope of the package of measures to strengthen Switzerland's financial system, the Federal Council made it clear in the autumn of 2008 that government assistance for financial institutions has to have implications for the compensation practices of the institutions concerned. The Federal Council now wants this principle to be explicitly anchored in financial market legislation.
• In the future, the variable salary components in banks and insurance companies that depend on company profits should no longer be treated as personnel expenses for tax purposes, but as profit distribution. Therefore, this bonus component will be taxable as corporate profit. The variable compensation attributed individually to single employees will continue to be deductible from profit as personnel expenses. In this regard, the tax deductibility of these individual components will be capped at the amount of the fixed salary. This rule will apply only to the total compensation that exceeds CHF2m (EUR1.4m). Consequently, part of the bonus sum will be taxable as profit for companies even if they post losses. In this way, salary payments can be brought more into line with companies' taxes. The taxation of bonuses will remain unchanged for the recipients. Bonus recipients will continue to have to pay income tax as well as social security contributions on the entire amount of their variable compensation.
• Regarding the taxation of employee stock options, the system should be changed from taxation when the options are granted to taxation when the options are exercised. For the recipients of stock options, this would ensure the same treatment as for other compensation forms. The tax concessions provided for to date (tax-free amount or rebate) will be eliminated. At the same time, this measure would create greater legal certainty relative to the current system, and would prevent distortions caused by the various possible structures for stock option programmes.

The Federal Council has instructed the Federal Department of Finance (FDF), in cooperation with the other departments involved, to present a consultation draft for the first two measures to the Federal Council by the autumn of 2010. Regarding the third measure, the FDF has been instructed to submit the Federal Council's proposals to the relevant parliamentary committees in May 2010.

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