What would you like to look for?
Site search
12 October 2023 Start-up and deferred compensation: Watch out for the tax trap!

Start-ups often do not have the financial means to pay salaries that meet market standards. Minimum wage entitlements currently exist only on the basis of cantonal regulations or generally binding collective agreements. According to the Federal Supreme Court, in the case of salaries that are dependent on business results, there is a right to a minimal appropriate remuneration. The minimum subsistence level under the debt enforcement law can probably be considered as such lowest limit. However, in the start-up phase, entrepreneurs are often not remunerated or only poorly. While this may violate labor law, it remains irrelevant given the principle of "where there's no plaintiff, there's no judge." However, it can mean that the people concerned are not adequately insured, e.g. in the event of prolonged illness.

Entrepreneurs often aim to claim some or all of the lost income later. Besides the fact that deferred wages also already burden the balance sheet, this can cause considerable tax problems: The taxation of income that is outstanding but not yet paid out is not clearly regulated by law.

Most tax systems use the accrual method of accounting. Under this method, income is recognized when it either accrues or when there is a recoverable right to it, regardless of when it is actually paid. This means, in effect, that receivables are taxable as income in the year in which they can be paid. This also applies in Switzerland: as soon as the taxable person can actually dispose of income and this increases his ability to pay, the income is deemed to have been received and is therefore taxable (constant practice at least since 1947 - see BGE 73 I 135 E. 1); deviations are possible in cases provided for by law (e.g. employee options - see Art. 17b E. 1 DGB). It is assumed that a creditor can actually enforce 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 May 23, 2016 E. 8.1). An unjustified claim is not enforceable and thus irrelevant for tax purposes, as the creditor cannot demand performance before it is due and the debtor is not obliged to perform (BGE 148 III 145 E. In the normal course of business, wages thus lead to taxable income from the due date (BGer 2C_342/2016 of December 23, 2016 E. 3.3.4). Exceptionally, receivables may even be taxable as income before they become due, e.g. if the determination of the due date is at the discretion of the taxpayer and it can thereby determine the time 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 taxable person obtains a claim 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 due claim is only not taxed at the time of acquisition if the fulfillment of the claim must be considered uncertain. In this case, taxation is deferred until the claim is fulfilled (BGE 113 Ib 23 E. 2e). The fulfillment of a claim is considered uncertain if it appears unlikely from the outset ("peu probable") (BGer 2C_1035/2020 of November 12, 2021 E. 5.1), in particular if the debtor is insolvent or unwilling to pay. In other rulings, the Federal Supreme Court says that the fulfillment of the claim must be considered "particularly" uncertain (see, for example, BGE 144 II 427 E. 7.2.2). In the absence of further indications in these rulings and according to a recent ruling of the Swiss Federal Court, this is not to be considered as aggravation different standard (BGer 9C_682/2022, 9C_683/2022 of June 23, 2023 E. 4.4).

The question arises as to whether a deduction for bad debts can be claimed for income tax purposes if it becomes apparent that the salary will never be paid. Under Swiss tax law, such a minus salary due to a bad debt loss 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 arrangements with the start-up when seeking deferred salary payments. One possible approach is to make future payments dependent 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 disadvantage here is that if investors insist on a waiver of this deferred salary payment, this may be seen as a waiver of income, and taxation may still apply if the milestone is reached. However, in exceptional cases, salaries may not be taxable because the start-up did 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 lies in addition with the employee concerned.