29-02-2024
Draft law aiming at introducing, under certain conditions, a reduced wealth tax on shares of unlisted companies held by Geneva entrepreneurs
Geneva draft law to reduce wealth tax on business assets
On 26 January 2024, the Geneva Grand Council adopted a draft law aiming at reducing the wealth tax burden on shares held by Geneva entrepreneurs by applying a 80%/40% discount. This would bring Geneva into line with other French-speaking cantons that have already adopted similar measures.
On 26 January 2024, the Geneva’s Grand Council enacted a draft law with the objective of alleviating the wealth tax burden on shares of non-listed companies held by Geneva entrepreneurs who work for their respective companies (referred to as a business asset or "outil de travail"). The legislation outlines a wealth tax discount structure based on value tranches as follows:
- An 80% discount on the value tranche of the business asset between CHF 0 and CHF 10 million.
- A 40% discount on the value tranche of the business asset above CHF 10 million.
This initiative brings Geneva into line with other French-speaking cantons (except Bern) that have already introduced similar benefits.
Tax injustice stemming from the valuation of unlisted shares
The motivation behind this measure is to address tax inequities resulting from the valuation of unlisted shares. In Geneva, business assets bear a substantial tax burden, with companies initially being taxed on their profits and capital. Subsequently, entrepreneurs are taxed on the dividends they receive and the business assets they hold, both as income tax and wealth tax, since the company is considered part of their taxable assets. To determine the shares’ value for wealth tax purposes, the Geneva Tax Administration applies Circular 28 published by the Swiss Tax Conference (“CSI 28”). According to CSI 28, the value of unlisted shares in commercial companies is derived from the average of the double-weighted capitalized earnings value and the single-weighted substance value. This formula often results in scenarios where entrepreneurs are taxed on amounts significantly exceeding the book value of the companies' net assets. This approach not only overlooks the fact that the company is frequently the primary source of income for the entrepreneur but also neglects the entrepreneurial objective of business development rather than selling. Regrettably, such a practice not only hampers the growth of entrepreneurial activities in the canton but also places entrepreneurs in precarious financial situations.
Debates have led the authorities to seek a remedy for this cantonal anomaly
Ongoing discussions among the authorities have prompted them to seek a remedy for this cantonal anomaly. The canton's objective is not only to reduce the tax burden on business assets but also to mitigate instances of potential double taxation for entrepreneurs. In response to these concerns, Geneva’s Grand Council has adopted the above-mentioned bill. The primary purpose of this legislation is to reduce the wealth tax burden on unlisted shares held by entrepreneurs in their companies by 80% or 40%, depending on the value tranche of the business asset. To qualify for this reduction, entrepreneurs must meet the following cumulative conditions:
- Residing in the canton of Geneva.
- Owning at least 10% of the share capital (i.e., unlisted securities) of their company.
- Exercising their principal gainful dependent activity within the company.
Illustrative example
Below is an illustrative example of this measure and its impact on the wealth tax burden.
Mr. X owns Company Y and is subject to an unlimited tax liability in the Canton of Geneva. He meets the criteria to qualify for a reduced wealth tax burden on his business assets. To ascertain his overall wealth, the valuation of his Company Y is necessary. The value of his business is determined using the guidelines set forth in CSI 28. This valuation results in a business value of CHF 3,020,575. Mr. X has additional assets and benefits from tax deductions. His gross wealth stands at CHF 4,993,115, with a taxable net wealth of CHF 3,793,115. In view of this tax base, Mr. X is presently subject to a cantonal wealth tax burden of CHF 25,924.
Should the draft law be enacted, Mr. X would benefit from a substantial reduction in his cantonal wealth tax burden. Specifically, a reduction of CHF 12,546 would be realized, resulting in a cantonal wealth tax burden of CHF 13,378. This contrasts with the original CHF 25,924 without the proposed reduction. It's important to note that this illustrative example does not factor in the reduction in the municipal wealth tax burden, which is also anticipated to apply.
Comparison table (for simplification purpose this example only considers cantonal tax)
| Cantonal wealth tax burden before the tax reduction | CHF 25,924 |
| Proportion of the business assets in comparison with the gross wealth | 60,49% |
| Cantonal wealth tax burden attributable to the business assets before tax reduction | CHF 15,683 |
| 80% reduction applicable to the business assets cantonal wealth tax | CHF 12,546 |
| Cantonal wealth tax burden after tax reduction | CHF 13,378 |
Next steps
The draft law has been adopted by Geneva’s Grand Council. After its publication in the Official Gazette of the Republic and Canton of Geneva, a referendum against it was lodged on 12 February 2024 with the deadline for collecting signatures of 13 March 2024. We will keep you up-to-date on these developments.