Tax Treatment of Stock Bequests in Business Succession

Key Points at a Glance
In its ruling of June 17, 2026 (9C_463/2025 and 9C_464/2025), the Federal Supreme Court addresses the tax treatment of a business succession carried out through a bequest. The central issue is whether the transfer, without consideration, of all shares in a company to the long-serving managing director should be classified as income from employment or as an inheritance resulting from the bequest.

The Federal Supreme Court upheld the decision of the Administrative Court of the Canton of Aargau and held that the transfer was motivated primarily not by the employment relationship but by the long-term plan for business succession. Although there was a close connection between the beneficiary’s work and the bequest, this circumstance alone was not sufficient to classify the bequest as taxable earned income. Rather, the decisive factor was that the decedent intended to ensure the continued existence of the business by transferring it to a suitable successor.

Facts and Legal Background
The Federal Supreme Court’s ruling of June 17, 2026 (9C_463/2025 and 9C_464/2025) concerns the cantonal and municipal taxes of the Canton of Aargau for the 2016 tax period. The case centered on the tax treatment of the transfer of shares to a long-serving managing director.

The beneficiary had been working for a stock corporation since 1991 and, over the years, held various management positions, including that of managing director and member of the board of directors. The sole shareholder at the time held all of the company’s shares and intended to arrange for the long-term succession of the business in favor of the managing director, as there were no direct descendants or other suitable successors.

In December 2001, the parties entered into a purchase agreement for a portion of the shares and a notarized inheritance agreement. It was agreed therein that all shares still owned by the sole shareholder at the time of her death would be bequeathed to the managing director. It was also stipulated that any remaining debt arising from the share purchase would be waived at the time of her death.

In 2009, the sole shareholder intended to transfer the remaining shares to the managing director as a gift during her lifetime. As part of a ruling request, she applied to have this transfer treated for tax purposes as a component of salary or as an employee stock ownership plan. However, the planned transaction could not be carried out because the required approval from the competent social welfare authority was not granted due to the sole shareholder’s legal incapacity.

Following the death of the sole shareholder in 2016, the managing director received the remaining 795 registered shares pursuant to the inheritance agreement. While the Canton of Zurich levied inheritance tax on this transfer of assets, the Aargau tax authorities additionally classified the transfer as income from employment.

The Issue: Bequest or Earned Income?
At the heart of the case was the question of whether the shares bequeathed to the managing director should be classified as taxable income from employment or as an asset transfer resulting from the bequest.

These are the Federal Supreme Court’s considerations in
The Federal Supreme Court first notes that the concept of taxable income is harmonized and is governed by Art. 7 of the Federal Tax Act (StHG) as well as the corresponding cantonal provisions. Accordingly, all recurring and one-time income is generally subject to income tax, unless a statutory tax exemption is provided for.

Among other things, assets acquired as a result of an inheritance or a bequest are not subject to income tax. A bequest provides the beneficiary with a financial benefit without designating them as an heir. The key point here is that the gift is generally made without consideration.

The Federal Supreme Court then refers to its previous case law ( Jurisprudence ) regarding benefits related to an employment relationship. According to this case law, a mere close connection to professional activities is not sufficient to classify a benefit as taxable income. Rather, it is necessary that the benefit appear, from an economic perspective, to be consideration for the work performed. Even voluntary benefits from third parties or even from the employer may, under certain conditions, constitute gifts or other gratuitous benefits, provided that the nature of the benefit as compensation takes a back seat.‍

Various points support the lower court’s decision
In the present case, there was undoubtedly a close connection between the managing director’s professional activities and the transfer of the business—without his many years of service, he would hardly have been considered as a successor to the business. However, in the opinion of the Federal Supreme Court, this connection is not sufficient to classify the payment as taxable income.

Rather, the decisive factor is the predominant economic reason for the transfer. The Administrative Court of the Canton of Aargau had found that, through the agreements dating from 2001, the decedent primarily sought to ensure long-term business succession. This assessment constitutes a finding of fact to which the Federal Supreme Court is, in principle, bound.

Several factors support this view. The contract documents from 2001 already show that the absence of direct and other suitable heirs was a decisive factor in the chosen succession plan. The focus was therefore on ensuring the company’s continued existence, rather than on compensating the managing director for his work.

Added to this is the exceptionally long period of time between the conclusion of the agreements and the actual completion of the transfer. In 2001, the managing director did not know when he would receive the remaining shares. In fact, approximately fifteen years passed before the decedent’s death. In the opinion of the Federal Supreme Court, such an indefinite time frame is hardly suitable as an incentive or compensation under labor law.

Another factor that argues against the bequest being considered a payment is that it was not made contingent on the managing director still being employed by the company at the time of the testator’s death.

Conclusion of the Federal Supreme Court
‍TheAargau Cantonal Tax Office, however, cited the tax ruling obtained in 2009. The Federal Supreme Court, however, did not consider this ruling to be of decisive importance. The ruling related to a different transaction that was ultimately never carried out. It concluded that no retroactive inferences could be drawn from this regarding the content or purpose of the agreements concluded eight years earlier.

Similarly, according to the Federal Supreme Court, the argument that the succession plan could have been structured differently is not convincing. In the Federal Supreme Court’s view, the fact that various options were available says nothing about why the specific method of asset transfer chosen at the time was implemented.

In summary, the Federal Supreme Court upholds the lower court’s ruling. The primary reason for the transfer of shares was long-term corporate succession, not compensation for work performed. Consequently, the transfer qualifies for the statutory tax exemption for bequests and does not constitute taxable income.

What the Ruling Means for Tax Practice
In its ruling, the Federal Supreme Court confirms that a transfer of shares to a long-serving executive, made without consideration, may not be classified as taxable earned income solely on the basis of the existing employment relationship. Rather, the decisive factor is the economic purpose of the transfer. If the primary purpose is to secure the long-term succession of the company—rather than as compensation for work performed—the transfer may be classified as a bequest resulting from a will rather than as income.

From a practical standpoint, the ruling underscores the importance of early and carefully documented succession planning. The terms of the agreement, the motives of the parties involved, and the actual circumstances of the transfer are decisive in determining the tax treatment of a stock transfer.

It remains striking, however, that despite the absence of taxable earned income, the transfer of assets was subject to substantial inheritance taxes. Many cantons provide tax breaks for certain types of business succession. The Canton of Zurich also provides for a corresponding reduction in § 25a(b) of the Zurich Tax Act (StG ZH). The judgment does not explain why this provision most likely did not apply in the present case, which raises questions in this regard.