The journey of a startup, particularly in the life sciences sector, is a thrilling yet complex venture, characterized by the need for substantial capital in the initial stages. Angel investors play a pivotal role in this ecosystem, providing the necessary financial support through equity investments and loans, underpinned by solid contracts. The Swiss tax landscape presents unique considerations for these investors, especially regarding capital gains from the sale of shares.

In this article, we address the top five questions commonly posed to us regarding tax matters for startups and angel investors. Our aim is to offer clear insights and guidance, helping you navigate the financial terrain with confidence.

1. What are the tax obligations for angel investors in Switzerland regarding capital gains?

In contrast to numerous other countries where capital gains are subject to taxation at diverse rates—for instance, France at 30%, Italy at 26%, Austria and Germany both at 28%, and the USA with a wide range from 0 to 40.8%—Switzerland stands out by providing an exemption for these gains under specific circumstances. This exemption is contingent upon meeting certain criteria set by Swiss tax regulations, making Switzerland a potentially more attractive destination for investors seeking tax-efficient strategies for their capital gains.

2. Under what conditions are capital gains from sale of shares tax-exempt in Switzerland?

In Switzerland, individual capital gains are not subjected to tax, given that specific criteria are satisfied:

✓ Shares must be held as personal assets within the investor’s private portfolio at the point of sale.

✓ Individuals should manage their shares as personal, passive investments to ensure that tax authorities do not classify the activities as professional trading, which would subject capital gains to taxation.

✓ Income from self-employed ventures, notably professional trading, should be clearly differentiated from passive investment earnings to avoid additional taxation and social security charges (around 10%).

✓ When drafting mixed contracts that involve sale of shares and additional terms, such as non-compete clauses, the proceeds from the sale of shares should be specifically designated to receive tax exemption.

✓ Companies with substantial undistributed profits should be carefully monitored to ensure that these reserves do not inadvertently affect tax liabilities.

✓ When selling a significant stake (5% or more) in a company to an entity under one’s control, it should be recognized that this may be viewed as asset reallocation, potentially incurring tax liabilities, rather than a genuine sale.

3. How can activities be structured so that tax authorities do not classify them as professional trading?

By following these tax-recognized safe haven criteria, one can avoid being classified as engaging in professional securities trading:

✓ Ensuring a minimum holding period of six months or more for securities.

✓ Reducing the number and frequency of ecurities transactions annually.

✓ Utilizing private funds for the financing of securities investments rather then credit financing (leverage)

✓ Using derivative financial instruments solely for hedging purposes.

It’s important to note that not meeting one or several of these criteria doesn’t automatically result in the taxation of capital gains. The overall situation must be assessed to determine if activities constitute professional securities trading, with Swiss tax authorities typically exercising caution in this area.

 4. What strategies should angel investors employ to mitigate tax risks?

To minimize tax risks and ensure the tax-exempt status of capital gains, angel investors should clearly demarcate their private and business assets and engage in professional contract practices. This includes seeking pre-emptive tax rulings where necessary and ensuring that contracts, such as shareholder agreements and sales contracts, are meticulously drafted to prevent any blurring of lines between tax-exempt and taxable income. Its recommended to obtain a prior tax ruling by your tax authorities.

5. Why is diversification important for angel investors from a tax perspective?

While the Swiss tax regime allows for tax-exempt capital gains, it does not offer relief for capital losses. Angel investors, therefore, must balance the allure of tax-free gains against the inherent risk of investment losses, which are not deductible. Diversification serves as a risk mitigation strategy, ensuring that the potential for non-taxable gains does not lead to disproportionate exposure to risky investments.

To ensure investments comply with Swiss regulations, professional advice is crucial. Our team is ready to provide the expert guidance angel investors need to optimize their strategies within Swiss tax laws.

Contact us for tailored support to make your investment journey successful and compliant.