Blocking-period discount (Swiss Federal Tax Administration Circular No. 37)

Circular No. 37 of the Swiss Federal Tax Administration on the taxation of employee participations sets a blocking-period discount applicable to employee shares subject to a remaining blocking period (Sperrfrist). The formula used is 100% divided by 1.06 to the power n, where n is the number of remaining blocking years.

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This formula produces precise discount rates that rise with the remaining duration: 5.660% for a single year of blocking, up to 44.161% for ten remaining years. The discount reduces the taxable value of employee shares granted, for example under Vesting or an ESOP (employee stock ownership plan), at the time of grant.

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Illustration: an employee share valued at CHF 100 per unit, with a five-year remaining blocking period, receives a discount of around 25.27%, bringing its taxable value down to roughly CHF 74.73 instead of CHF 100. On an incentive plan granted to several dozen employees, the cumulative gap between the gross nominal value and the taxable value actually applied can run into several hundred thousand francs of tax base.

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For a Swiss startup structuring an employee share plan subject to a contractual blocking period, correctly applying this discount formula, rather than using the gross nominal value, is essential to determine the actual tax burden borne by beneficiary employees, a calculation detailed in our article on the cost of an employee participation valuation in Switzerland and that the financial structuring of an incentive plan must build in from the design stage.