Switzerland: Zürich Lowers Wealth Taxation For Start-Up Entrepreneurs

Last Updated: 18 January 2017
Article by Thomas Rihm

The Canton of Zurich had for quite some time the practise to levy wealth taxes with start-up entrepreneurs based on the monies raised in one or more recent financing rounds. Not surprisingly, the start-up community in the Greater Zurich Area, mainly the founders and their co-investors (business angels) complained about this somewhat confiscatory wealth tax regime as it did not consider more common tax assessment techniques usually applied to businesses elswhere, in particular well accepted business evaluation methods averaging the sum of the net assets and twice the sum of the net income (which is called the "practitioner method" usually applied to more or less matured SMEs).

The venture capital scene not only complained: it also left the Canton of Zürich in great numbers towards cantons with a more favorable wealth taxation system or avoided right away to register their start-up business in the Canton of Zurich. Their complaints even culminated in the perhaps questionable allegation that Mark Zuckerberg would not have made it with Facebook had it registered in the Canton of Zürich first.

Despite complaints from the community of well established SMEs and their owners about not getting the same favorable wealth tax treatment, the Canton of Zürich now further loosens up its tax business evaluation rules first promulgated in August 2008 and further refined in May 2016 in order to regain its reputation as an attractive place for the startup industry and its venture capital financiers. In its regulations no. 28 of August 2008, the cantonal tax authorities first ruled that non-quoted stocks be evaluated in any given tax year on the prices paid in most recent sales transactions whereby financing rounds via share capital increases were to be treated similarly.

This rule was somewhat alleviated in May 2016 whereby the said prices considered to be fair market value would not count in the first three to five business years and in the following two busines years they would count only between one and two thirds. The new tax regime enacted in May 2016 found considerable opposition from the start-up and venture capital scene mainly within the Greater Zürich Area. The community rightfully argued that the shares issued in share capital raising rounds could not be sold on the same day, so they had to be taxed differently.

The start-up and venture community successfully lobbied with the cantonal government of Zürich recalling on November 1, 2016, its spring 2016 practise by introducing for start-ups a substance-based business tax valuation model what means taking into account only current and non-current assets from the balance sheet (thereby adding hidden reserves on these assets), but deducting any deferred income tax burden.

According to the cantonal government of Zürich, the new substance-based business tax valuation model will be applied as long as the start-up is in its "build-up phase" and does not have "representative business figures" and further provided that "particular circumstances" do not suggest otherwise. It is clear that terms such as "build-up phase"or "representative business figures"offer considerable interpretational leeway, so it remains to be seen whether the next Mark Zuckerberg will indeed make it in the Greater Zürich Area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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