Sweet equity taxation

My employer is part of a private equity transaction, and as mid-level manager I am offered the possibility to buy some so-called ‘sweet equity’ at fair value (corroborated with a valuation report from an independent tax advisor).

The sweet equity offered consists of ‘real shares’. However, the shareholder’s agreement comes with a whole bunch of standard good/bad leaver clauses. Essentially these shares only yield more than purchase price at issue if I stay until exit (and less if I’d commit fraud etc.).

The information I find online regarding taxation is (obviously?) not conclusive. Some sources say that capital gains on employer shares purchased at fair value are tax-exempt. Others say that the difference between fair value at issue and exit, minus a discount for all the years I can’t sell, is subject to income tax as the ability to buy these shares is obviously tied to my employment. All say an advance ruling would be recommended.

Any practical experience/references?

talk to law / accounting firm with pe expertise. or try some finance forums on reddit.

Or colleagues, surely you’re not the only one with those questions :slight_smile:

International firm, few Swiss colleagues in the same boat.

Sure, expert advice is the best way to go (and likely will be gotten), but asking other financially minded internet strangers, can’t it?

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For those interested, had a chat with a tax advisor.

As I understood it, since this is an employee incentive plan with shares purchased at fair value based on a formula valuation (as opposed to a transaction or public share price), any capital gains in excess of a re-valuation using the same formula/method will be subject to income tax in the year of sale if and only if the holding period is less than five years. After that it would be tax free.