15 November 2016

Tax relief for start-up founders in Zurich

In future, new start-ups, i.e., their shares as part of the assets of the start-up founders  will be taxed only at net asset value "until representative business results are available". There is fierce international competition to stand out as a start-up hub. Swiss cities compete with Berlin, Singapore, London and, more recently, Barcelona, and regularly achieve high rankings as attractive locations. After successfully lobbying by the start-up scene, the canton of Zurich has now eliminated a serious tax hurdle.

An interdisciplinary working group headed by financial director Ernst Stocker analysed the tax situation together with representatives from the start-up scene. The latter had, for some time, criticized the assessment practices of the tax authorities in connection with the fixing of the tax values. The tax value of shares in start-ups was often determined by the intrinsic value, which was used as a basis for financing rounds. As a result, many founders become tax millionaires overnight, although they have not actually spent a franc and therefore also have no possibility to sell their shares. Young entrepreneurs have been invoiced for capital taxes at levels so high that they could hardly pay with their, usually low, wages.

The financial director of the canton of Zurich recognized this deficit and therefore adapted the tax practices for start-ups to be more in tune with the regulations of some other cantons. The canton now classifies start-ups on their net asset value until representative business results are available (see the directive of the Financial Directorate on the Valuation of Securities and Balances for Property Tax – currently available only in German Weisung der Finanzdirektion über die Bewertung von Wertpapieren und Guthaben für die Vermögenssteuer). The tax office, however, has a wide discretion to assess whether or not, or when, representative business results are available. According to the tax office, it is crucial whether a positive cash flow exists, the company has established itself in the market and whether it can show a regular turnover with a marketable product.

It is interesting to note the definition of a start-up in the above-mentioned directive, in other words, for which companies a valuation based on the net asset value can be carried out. According to it, qualifying as start-ups are corporations "with an innovative, usually technology-driven business model, which are in development and scalable". Under this definition, mainly companies from the IT, Life Science and Med Tech sectors, but also those from the financial sector ( "FINTECH"), are likely to benefit from the new regulation.

The new regulation satisfies the start-up scene, because it is finally oriented to the actual economic success and gives the start-ups the necessary time to establish themselves.

All in all, the participants considered the change in practice to be very successful. The fact that this was presented before the end of the year influenced the location choice of some companies already based in Zurich, as well as newly founded ones, in favour of the Limmat city.

The value of location promotion for start-ups is also recognized at federal level. In its latest report on financial market policy, the Federal Council reaffirms its intention to promote innovative companies. This will entail reliefs in taxation for start-ups and the licensing practices for FINTECH companies and, in particular, facilitation in matters of migration law. Therefore, in the near future, we can look forward to the introduction of start-up-friendly laws in Switzerland.

Authors: Christoph Niederer

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