Revision of Swiss company law and its effects on Swiss tax law
Lukas Scherer and Manuel Vogler of Prager Dreifuss consider the revision of Swiss company law and its impact on the tax landscape
In keeping with the saying 'good things take time', the Swiss Federal Assembly adopted the proposed revision of the Swiss company law on June 19 2020 – more than 12 years since its initial release. It is scheduled to enter into force on January 1 2022, at the earliest.
Scope of the revision
Among other things, the revision includes the following key topics:
Introduction of important flexible rules with regard to share capital;
Participation and control rights of shareholders;
Liability under company law; and
New provisions on business rescue.
This article deals with the planned innovations to the share capital and its effects on the Swiss tax landscape; especially the tax effects of the introduction of share capital in a foreign currency, the new instrument of the so-called 'capital band' and the introduction of the interim dividend.
Share capital in foreign currency
Under current law, the financial statements of a Swiss company can already be drawn up in the foreign currency most relevant to the company's business activities. Until now, however, this has not applied to the share capital.
According to the planned revision, the share capital may in future also be denominated in a foreign currency significant to the company from a business activity perspective. This means that capital-related aspects such as dividends, reserves and overindebtedness will also be assessed according to the relevant foreign currency.
It is envisaged that the permissible currencies will be Swiss francs, British pounds, euros, US dollars or Japanese yen. However, an 'all or nothing' principle applies, i.e. a mix of currencies is not possible. The cumulative requirements for the introduction of a share capital in a foreign currency can be summarised as follows:
Foreign currency must be essential for the business activities in which the company operates (functional currency);
Share capital in the foreign currency must correspond to an equivalent value of at least 100,000 Swiss francs at the time of incorporation or at the time the currency of the share capital changes;
Accounting and financial reporting must be done in the same currency; and
Foreign currency must be one of the following: Swiss francs, British pounds, euros, US dollars or Japanese yen.
The introduction of share capital in foreign currencies will be particularly interesting for companies whose accounts are already kept in a functional currency today and which operate in markets in which one of the recognised currencies is applicable.
Should existing companies wish to change the currency of their share capital at the beginning of a financial year, the general assembly must approve such motion with a qualified majority.
Subsequently, the board of directors is responsible for the implementation of the resolution of the general assembly. This entails the amendment of the articles of association once the board decides to change the currency and the board confirmation in a public deed that the above-mentioned requirements are fulfilled.
Corporate tax law consequences
Under current jurisprudence of the Swiss Federal Supreme Court, conversion differences between the applied functional currency and the Swiss franc merely indicate a potential risk and must therefore neither be shown positively nor negatively in the profit and loss statement. Rather, conversion differences must be shown as a neutral equity position without affecting profit or loss for tax purposes so far.
The proposed revision of the Swiss company law now clearly stipulates that the taxable net profit must be converted into Swiss francs at the applicable average exchange rate if the financial statement is denominated in a foreign currency. For income tax purposes, the average exchange rate applied to the tax period will be decisive.
“The introduction of the capital band aims to increase the flexibility of the capital regulations of companies.”
With regard to capital tax, a conversion of the taxable equity capital will also be required in accordance with the revised tax law regulations, whereby the exchange rate at the end of the tax period will be decisive.
In summary, taxable profit and capital tax will be determined in a foreign currency in future. As a result, the aforementioned conversion differences between the functional currency and the Swiss franc should no longer arise, because all relevant tax factors will be determined on the basis of the chosen functional currency.
This approach goes hand-in-hand with the principle of equal treatment of the commercial accounting balance sheet as relevant tax basis. Ideally, the functional currency would therefore merely be converted into Swiss francs at the exchange rate at the end of the tax period in the context of the tax assessment. It is still unclear whether the tax return can be filed by using the functional currency or year-end numbers converted into Swiss francs.
Introduction of the 'capital band'
The introduction of the capital band aims to increase the flexibility of the capital regulations of companies. For this purpose, the board of directors will be authorised in the articles of association to increase or reduce the share capital by a quota of up to 50%, depending on necessity.
The capital band will be valid for a maximum period of five years. After this period, the basis for a new capital band would have to be created by amending the articles of association.
Once the revision comes into force, if a company makes use of the capital band it must include a provision in the articles of association authorising the board of directors to make use of the capital band when authorised to do so by a resolution of the general assembly.
Such resolution requires a two-third majority of the voting rights represented and a majority of the nominal value of the shares represented.
The authorisation provision must specify at least the highest and lowest limit of the capital band, whereby the upper limit of the capital band may not exceed the share capital registered in the commercial register by more than 50% and the lower limit may not be less than 50% of the share capital. At no time may the capital band fall below CHF 100,000 (minimum capital requirement).
Furthermore, the articles of association must specify the date on which the authorisation to the board of directors expires. With regard to a reduction of share capital, the board of directors are only authorised to perform a reduction of share capital, provided the company has not opted-out from the requirement of a limited audit.
The board of directors decides within the scope of its authorisation on the increase or reduction of the share capital. Possible methods of increasing the share capital within the scope of the capital band are:
An ordinary capital increase; or
An increase from contingent capital, whereby the provisions on the ordinary share capital increase or the increase from contingent capital shall be applicable.
With regard to the reduction of the share capital within the scope of the capital band, the board of directors may use the instruments of:
Ordinary capital reduction;
Capital reduction in order to eliminate a capital loss; or
Reduction of the share capital with a simultaneous share capital increase.
Additionally, the repurchase of own shares by the company will be of significance with respect to the capital band; especially with regards to tax questions.
Should the general assembly additionally agree on an ordinary share capital increase during the term of the capital band, the authorisation of the board of directors will cease and the capital band will have to be struck from the articles of association.
Furthermore, the general assembly may establish and/or adopt a contingent share capital within or outside the capital band. If the creation of such contingent share capital takes place outside the capital band, it will still have an impact on the capital band, since the higher and lower limits of the capital band are changed linearly in the case of a share capital increase from contingent capital.
All in all, with the introduction of the capital band, the general assembly can significantly broaden the board of directors' scope and flexibility in the light of equity financing as required.
Income tax consequences for private shareholders
The question arises whether the instrument of the capital band may trigger tax consequences for the company and/or the shareholders. For Swiss resident shareholders holding the shares as business assets, income tax consequences depend on the applied accounting method (i.e. whether changes in shareholdings are, or must be, recognised by changing the book value).
Swiss resident shareholders holding the shares as private assets do not have this possibility. In the following, reference is therefore only made to these shareholders.
Contributions by shareholders can be recognised at company level as special equity positions (so called 'capital contribution reserves'). Capital contribution reserves are not displayed in the commercial register.
From a tax perspective, distributions of capital contribution reserves are exempt from Swiss withholding tax irrespective of whether such distribution occurs to Swiss resident or foreign shareholders.
Further, for Swiss resident individuals holding the shares as private assets, distributions of capital contribution reserves are treated as a repayment of capital and are, hence, tax-free. Only contributions by the direct shareholders can qualify as capital contribution reserves. To be treated as such, the company must book the contributions in a separate equity position (capital contribution reserves) in its financial statement and the form 170 must be filed with the Swiss Federal Tax Administration (FTA).
For the sake of clarity, the filing obligation with the FTA applies to every decrease and increase of capital contribution reserves.
From an income tax perspective, it is envisaged that capital contributions within the framework of a capital band shall only qualify as capital contribution reserves to the extent they exceed the repayment of any free reserves within the capital band.
“Issuance stamp duty will only be levied on the net increase of capital”
The assessment whether new or additional capital contribution reserves exist will therefore only be made upon termination of the capital band on a net basis: the contributions into capital contribution reserves must exceed the distributions of the capital contribution reserves during the period of existence of the capital band.
The legislator has made this adjustment in order to prevent listed companies from establishing capital contribution reserves for individuals resident in Switzerland who hold shares as private assets without any de facto restrictions (by setting up a separate trading line at the Swiss stock exchange SIX).
For individuals holding shares in non-listed companies as private assets, however, this change in the law has negative tax consequences in the event of a capital reduction. Since the FTA only confirms new capital contribution reserves upon termination of the capital band, there may be non-confirmed capital contribution reserves at the time of the capital reduction, which is why income tax consequences may not be averted for the shareholders concerned.
A possible solution to avoid this risk could be the purchase of treasury shares by the company.
Purchase of treasury shares
In the context of the purchase of own shares by a Swiss company (so called 'treasury shares'), certain potential tax pitfalls in relation to the so-called 'partial liquidation' need to be considered. The basic regulations are stipulated in Swiss corporate law: generally, the purchase of treasury shares up to 10% of the share capital is permitted; or up to a quota of 20%, if the shares are registered shares with restricted transferability. In such case, 10% out of the 20% must be resold within a period of two years.
The purchase of treasury shares is only allowed, if the purchasing company has free reserves corresponding to the purchase value of the treasury shares.
From a tax viewpoint, a partial liquidation is given, if a company acquires treasury shares in connection with a resolution to reduce its capital. In this case, Swiss withholding tax is triggered and shareholders face income tax consequences due to the distribution of liquidation proceeds, unless the capital reduction is realised by a reduction of the capital contribution reserves.
Additionally, a partial liquidation applies, if:
the quota of the acquired treasury shares exceeds the 10%/20% threshold;
registered shares with restricted transferability are acquired and the shares exceeding the 10% quota are not resold or cancelled within two years; or
the acquired treasury shares within the 10% quota are not resold or cancelled within six years.
In all these cases, Swiss withholding tax may be triggered and Swiss individuals holding shares as private assets could face income tax consequences.
The revision of the Swiss company law leaves room for discussion whether own shares can be purchased or resold within the capital band, or if a formal capital reduction or increase must be performed in each case. So far, Swiss legal doctrine tends to support the possibility of the purchase of treasury shares within the capital band.
From a tax perspective, the topic of the partial liquidation also applies to the purchase of treasury shares within the framework of the capital band. The capital band allows the increase or reduction of capital to a quota of up to 50%.
According to the revision of the Swiss company law, the lower limit of the capital band may be up to 50% below the registered share capital. However, it is currently unclear whether a capital decrease within the capital band of up to 50% below the registered share capital by way of purchase of treasury shares would lead to a direct partial liquidation because the 10% quota thresholds (or a quota of 20% in case of registered shares with restricted transferability) are de facto exceeded.
Some in Swiss legal doctrine have gone on record to suggest that treasury shares acquired within the capital band should not trigger immediate partial liquidation consequences if the portion exceeding the 10% threshold is resold or cancelled within two years.
The FTA has not yet made a final statement on this topic. If, however, the FTA does not confirm this doctrine, this would mean that the purchase of treasury shares within the capital band entail the Swiss withholding tax risk of a direct partial liquidation (and potential income tax consequences for private shareholders). This would run counter to the intended flexibility concept of the capital band.
Issuance stamp duty (Emissionsabgabe)
The planned amendments to the Federal Act on Stamp Duty provide that the issuance stamp duty on newly issued securities or capital increases within the scope of a capital band will only be due at the termination of the capital band and not at the moment of each capital increase.
Issuance stamp duty will only be levied on the net increase of capital. Consequently, no issuance tax stamp duty will become due if the capital increases do not exceed the repayments of capital within the same capital band. This solution was not envisaged in the first dispatch of the revision of the Swiss company law and was only included in response to concerns that the flexibility of the capital band should not be restricted by strict issuance stamp duty measures.
This relief is very much welcomed from a tax point of view as companies would have had little incentive to use a capital band if each capital increase would have incurred issuance stamp duties of 1%.
Under current Swiss law, the distribution of interim dividends is not allowed. However, companies and entrepreneurs clearly expressed the need to allow for interim dividends, in particular for the sake of liquidity redistributions purposes and for companies whose (foreign) shareholders are used to receiving interim dividends.
The revision of the Swiss company law now expressly permits the payment of interim dividends. In case of an interim dividend distribution, the company has to prepare interim financial statements. It is, however, not necessary to include specific provisions on interim dividends in the articles of association.
The interim financial statements provide the board of directors with the necessary information including current and reliable figures on the course of business. The general assembly approves the interim financial statements, if necessary, and resolves the distribution of interim dividends.
For the sake of clarity, the revision of the Swiss company law does not prevent the annual general assembly to resolve on dividend distributions based on already approved financial statements (extraordinary dividends). Such distributions are not genuine interim dividends, but rather staggered distributions of balance sheet profit stemming from previous financial years.
All in all, the revision of the Swiss company law mainly facilitates interim dividends to be distributed intra-group by subsidiaries subject to audit obligations, which do not have sufficient free capital reserves or retained earnings from previous financial years.
From a tax point of view interim dividends are treated like ordinary dividends and are subject to withholding tax.
The entry into force of the revision of the Swiss company law will inevitably lead to tax changes.
Some ambiguities and irregularities, especially with regard to the capital band, currently still exist. These various open tax questions will hopefully be solved in a practical manner before the revision of the Swiss company law enters into force. It is yet to be decided how the practice will react to these challenges – the jury is still out.
Counsel, Prager Dreifuss T: +41 44 254 55 55
Lukas Scherer is a member of Prager Dreifuss' tax team and startup desk.
Lukas supports Swiss and international corporate and private clients on all aspects of tax law, focusing on public and private mergers & acquisitions (M&A), corporate finance, succession planning and blockchain/distributed ledger technology. He also advises clients in contentious and non-contentious tax proceedings and on VAT.
Lukas holds a masters' degree in law from the University of Basel. Before joining Prager Dreifuss, he worked for several large commercial law firms and a Big Four auditing company in Zurich.
Associate, Prager Dreifuss T: +41 44 254 55 55
Manuel Vogler is a member of Prager Dreifuss' private clients and tax team.
Manuel advises Swiss and foreign corporate and private clients on all aspects of Swiss and international taxation, focusing on corporate and real estate tax. He also specialises in corporate law, inheritance law and succession planning for businesses.
Manuel holds a masters' degree in law from the University of Lucerne. Before joining Prager Dreifuss, he worked for a Big Four auditing company, specialising in commercial law in Zurich and at the Cantonal and High Court of the Canton of Nidwalden.