Subject: Tax
Autor: Roland Böhi , Lukas Scherer , Manuel Vogler
Reading time: 3 Min

Switzerland: Adjustment of the capitalisation rate for determining the earnings value as of 1 January 2021

As of 1 January 2021, the calculation of the capitalisation rate for determining the earnings value was adjusted in Switzerland. What influence will this adjustment have on the Swiss tax landscape?"

Roland Böhi
Lukas Scherer
Manuel Vogler

Adjustment of the capitalisation rate and specification for start-ups

Against the backdrop of the low interest rate levels and the widely expressed criticism of the so-called practitioner method as a valuation method for determining the fair value of participations of non-listed companies, the Swiss Tax Conference (SSK) adjusted its circular no. 28 of 28 August 2008 (SSK-KS 28) in November 2020. The update concerns the calculation of the capitalisation rate for determining the earnings value as well as a clarification on the practice regarding the valuation of start-ups. What influence do these adjustments have in practice which came into force on 1 January 2021?

Adjustment Calculation of the capitalisation rate


In the context of the Swiss wealth tax, the SSK-KS 28 aims to create a uniform valuation of participations of non-listed companies. Generally, the valuation is made according to the so-called practitioner method. In this context, the market value of a participation (U) is determined according to the average of the double-weighted income value (E) and the single-weighted net asset value (S) (U=[2xE+S]/3). The earnings value corresponds to the average net profit of the relevant business years, which is capitalised with the relevant interest rate. Previously, this capitalisation interest rate consisted of the interest rate of risk-free investments as well as a fixed risk premium and amounted normally to 7%.

Based on a report by the University of Zurich, the SSK has now determined that the risk-free interest rate shall be based on the interest rate at which shareholders are willing to invest or take out loans. Under the new rules, the annually determined risk premium is derived from the risk premium of listed companies, considering the specific risks of unlisted companies and illiquidity. All in all, this leads to an increase in the capitalisation rate from previous 7% to approx. 8.8 - 9.3%.

Participation in private assets (non-employee participation)

Due to the higher capitalisation rate since 1 January 2021, the earnings values will inevitably be lower, which leads to a lower market value of the participations in non-listed companies. This is a favourable development, especially since a lower market value results for Swiss wealth tax purposes and the market value is now adjusted to the existing interest rate environment.

Employee participations held as private assets

Monetary benefits from employee participations are generally subject to income tax. The monetary benefit stems from the positive difference between the market value and the actual issue price. In the case of non-listed employee participations, the relevant market value is determined on the basis of a formula (formula value): this formula value is often determined using the practitioner method in accordance with SSK-KS 28. As of 1 January2021, the adjusted capitalisation rate according to SSK-KS 28 will apply to the practitioner method.

In the case of a disposal of employee participations, any excess profit is subject to income tax. The excess profit refers to the difference between the value of the employee participation at the time of sale based on the same formula compared to  the time of acquisition and the actual sale price. The excess gain may arise as a result of a change in the valuation methodology or due to a change of the formula value. If the sale takes place after a 5-year holding period, the excess profit is generally no longer subject to income tax.

Applicable capitalisation rate to existing employee plans?

The increase of the capitalisation rate results in a lower formula value. What would seem to be positive for wealth tax purposes (unlisted employee participations are subject to wealth tax at the formula value) is a double-edged sword when taking into account the income tax perspective: if in the past the practitioner method was used as the relevant formula in existing employee plans, the formula value will now be lower compared to the formula value at the time of allocation. This inevitably leads to an increase in the taxable excess profit and is disadvantageous for the taxpayer. For employee participations issued before 1 January 2021, the question therefore arises which capitalisation rate shall apply to their future sales within the 5-year holding period.

The application of the new capitalisation rate of 8.8 -9.3% at the time of sale would be consistent with the jurisprudence of the Swiss Federal Supreme Court, which states that the principle of legality requires the immediate application of a new practice to all pending cases. However, the principle of legality needs to be balanced against other constitutional principles, such as the protection of trust, which states that the greater the time span between the realisation of a fact and its assessment by the tax authority, the more objectionable the immediate application of a change in practice to all assessments that are not yet legally binding would be.

However, the SSK-KS 28 does not provide for any transitional regulation regarding the adjustment of the capitalisation rate. Furthermore, the formula value for unlisted employee participations only (but at least) renders an approximative fair value. Based on the expert opinion of the University of Zurich, the SSK came to the conclusion that the adjusted capitalisation rate of 8.8 - 9.3% is nearer to reality. Overall, these facts speak in favour of a general application of the new practice to all pending cases.

Details for start-ups

In the case of financing rounds of start-ups, the valuation often differs from valuations according to the practitioner method due to the expected performance of the start-up. As a result, the SSK-KS 28 in the past already provided that one could – in justified cases – deviate from the principle of asset valuation according to the third-party price paid. In the latest version of the SSK-KS 28, it is now explicitly stated that investor prices are not considered during the start-up phase of a company, as there are high valuation uncertainties with regard to start-ups. According to SSK-KS 28, investor prices are therefore only applicable if they are paid after completion of the start-up phase. These clarifications lead to more attractive tax conditions for start-ups as well as to greater legal certainty.


On the one hand, the change in the calculation of the capitalisation rate to determine the capitalised earnings value for the sake of non-listed participations held as private assets is advantageous, as the wealth tax burden will be lower. On the other hand, there are currently some ambiguities in determining the income tax consequences of employee participations held as private assets when they are sold. In particular, it is still unclear which capitalisation rate will be applicable within the 5-year holding period of the employee participations. According to our understanding, the new practice (and thus the lower capitalisation rate) will generally be applied equally to all pending cases and for all associated types of tax. In case of any uncertainties, we recommend that you contact the competent tax authority for clarifications.