Switzerland Update: Start-Up and Deferred Wages: Beware of Tax Traps!

Start-ups often do not have the financial resources to pay salaries that meet market standards. Minimum wages currently only exist on the basis of cantonal regulations or generally binding collective agreements. According to the Federal Supreme Court, there is an entitlement to a minimum appropriate remuneration in the case of a salary based on business results. The minimum subsistence level under the law of obligations is probably the minimum that can be legally agreed. In the start-up phase, however, entrepreneurs are often not remunerated or only paid to a very limited extent. While this may be contrary to labour law, it remains irrelevant in the light of the principle of “where there is no plaintiff, there is no judge”. However, it can lead to those affected not being adequately insured, e.g. in the event of a prolonged illness.

Entrepreneurs often seek to receive some or all of their lost income at a later date. In addition to the fact that deferred wages are also already a burden on the balance sheet, this can cause considerable tax problems: the taxation of outstanding but not yet paid income is not clearly regulated by law.

Most tax systems use the accrual accounting method. Under this method, income is recognised when it is either accrued or recoverable, regardless of when it is actually paid. In effect, this means that receivables are taxable as income in the year in which they can be paid. This also applies in Switzerland: as soon as the taxpayer is actually able to dispose of income and it increases his or her ability to pay, it is considered to have been received and is therefore taxable (established practice since at least 1947 – see BGE 73 I 135 E. 1); Deviations are possible in cases provided for by law (e.g. in the case of employee options – see Art. 17b E. 1 DGB). In this case, it is fictitious that a creditor can actually use a claim when it is due (BGE 144 II 427 E. 7.2). A claim is deemed to be due if it is enforceable and there is clear certainty about its existence and scope, whereby it is sufficient if the amount can be determined on the basis of objective criteria (BGer 2C_357/2014 / 2C_358/2014 of 23 May 2016 E. 8.1). An unjustified claim is not enforceable and therefore irrelevant for tax purposes, since the creditor cannot demand performance before the due date and the debtor is not obliged to perform (BGE 148 III 145 E. 4.2.1.1). In the normal course of business, wages from the due date thus lead to taxable income (BGer 2C_342/2016 of 23 December 2016 E. 3.3.4). Exceptionally, receivables may even be taxable as income before they fall due, e.g. if the determination of the due date is at the discretion of the taxpayer and can thus determine the date of taxation, or if the parties have postponed the due date for tax reasons (BGer 9C_682/2022, of 23 June 2023 E. 4.3).

Consequently, taxation takes place at the time when the taxpayer receives a receivable that is due and can actually use it (BGE 144 II 427 E. 7.2). The time of payment of the claim is irrelevant. A receivable that is due is not taxed at the time of acquisition only if the performance of the receivable must be considered uncertain. In this case, taxation is deferred until the claim has been satisfied (BGE 113 Ib 23 E. 2e). The fulfilment of a claim is considered uncertain if it appears to be “peu probable” from the outset (BGer 2C_1035/2020 of 12 November 2021 E. 5.1), in particular if the debtor is insolvent or unwilling to pay. In other judgments, the Federal Supreme Court says that the fulfilment of the claim must be regarded as “particularly” uncertain (see, for example, BGE 144 II 427 at 7.2.2). In the absence of further indications in these judgments and according to a recent ruling of the Swiss Federal Supreme Court, this is not to be regarded as an aggravation (BGer 9C_682/2022, 9C_683/2022 of 23 June 2023 E. 4.4).

The question arises as to whether a deduction for bad debts can be claimed from income tax if it becomes apparent that the salary will never be paid. In Swiss tax law, such a negative salary due to a loss of accounts receivable is generally not recognized, as the loss is considered a separate transaction. Losses on private assets are irrelevant for tax purposes.

Based on these principles, it is important that entrepreneurs make careful agreements with the start-up when deferred wage payment is sought. One possible approach is to make future payments conditional on objective milestones that cannot be controlled by the entrepreneur concerned, such as the completion of an equity financing round with a fixed CHF amount. The downside here is that if investors insist on a waiver of this deferred wage payment, it can be considered a waiver of income, and when the milestone is reached, taxation may still apply. However, in very limited cases, salaries may not be taxable even if the start-up does not have sufficient cash at the time the salary is due. Since entrepreneurs should avoid putting a start-up in such a delicate situation, this exception only applies in exceptional circumstances. The burden of proof also lies with the person concerned.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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