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7 October 2022 New Corporate Law: Relevant changes from a tax perspective (no. 14)

The new corporate law, which comes into force on 1 January 2023, brings many changes. In our current blog series, we present these in detail.

The new corporate law also includes some changes relevant from a tax perspective and changes to individual tax laws. In this article we highlight the most important tax-related changes.

Capital band

During the capital band, which we have already discussed in blog no. 3 of the series, changes in the capital contribution reserves are considered in aggregate. In other words, changes in the capital contribution reserves are only determined at the end of the capital band, taking into account all contributions and repayments. This is intended to prevent abuses arising from the combination of capital increases and capital decreases by means of share repurchases on the second trading line. This approach is not only to be applied with regard to changes in capital contribution reserves, but also with regard to the Swiss issuance stamp tax, which is only owed to the extent that in aggregate the inflows exceed the repayments during the capital band. Furthermore, the Swiss issuance stamp tax does not have to be settled at the time of the capital increase or within 30 days of the end of the quarter in which the capital increase took place, but only at the end of the capital band. Considering changes in the capital contribution reserves in aggregate entails that capital contribution reserves, which are created during the capital band, can only be confirmed at the end of the capital band and distributed tax-free by the company. Therefore, caution is advised in the case of capital reductions during the capital band. These are only free of withholding tax consequences insofar as the capital reductions take the form of share capital reductions or as capital contribution reserves existed prior to the capital band.

Share capital in foreign currency

Accounting and financial reporting in functional currency is already permitted since the new Swiss financial reporting law came into force. Until now, however, the share capital had to be denominated in Swiss francs even if financial statements were prepared in foreign currency. As we discussed in blog no. 11 of the series, the new corporate law introduces the possibility of denominating the share capital in functional currency. This change represents a simplification in that all resolutions relating to the share capital, such as capital increases and decreases and appropriations of profits, can henceforth be adopted in the functional currency. With this amendment, although not directly related, the Federal Law on Direct Federal Tax (DBG) and the Federal Law on the Harmonization of Direct Taxes of the Cantons and Municipalities (StHG) are amended to the effect that, in the case of financial reporting in a foreign currency, the taxable net profit is converted into Swiss francs at the applicable average rate for the tax period and the taxable capital is converted at the closing rate at the end of the tax period. Consequently in such cases the tax factors are now de facto determined on the basis of the financial statements in foreign currency. In the tax return, the net profit and capital converted into Swiss francs must be declared accordingly. A converted financial statement in Swiss francs is, however, no longer required for the tax return; instead, the financial statement is submitted in foreign currency, which in some cantons was already possible. As a result, conversion gains or losses from the translation of the foreign currency financial statements, which result because income and expenses are converted at the respective daily exchange rates, while assets and liabilities are converted at the closing rates at the end of the tax period, can no longer arise. The tax treatment of such conversion differences was controversial for a long time. The Swiss Federal Supreme Court finally ruled in BGE 136 II 88 that conversion losses are not deductible and have to be recognized directly in the equity, as they do not result from business transactions but from fictitious conversion transactions and are therefore not business-related.

Capital contribution reserves in foreign currency

The dispatch on the new corporate law does not comment on whether, with the new possibility of denominating the share capital in foreign currency, it will now also be permissible to report the capital contribution reserves in foreign currency. According to previous administrative practice, capital contribution reserves must be reported in Swiss francs, whereupon they are confirmed in Swiss francs by the Swiss Federal Tax Administration. If a company prepares its financial statements in foreign currency, it can happen that, due to changes in exchange rates, the foreign currency financial statements show an amount of capital contribution reserves that actually no longer exists, as the following example illustrates:

Company X prepares its financial statements in U.S. dollars (USD). On 01.01.2021, it created capital contribution reserves of USD 10,000 as part of a capital increase. The USD exchange rate at that time was CHF 1.00. Company X therefore reported capital contribution reserves of CHF 10,000 to the Swiss Federal Tax Administration using Form 170, which confirmed the amount accordingly. In case of an USD exchange rate of CHF 1.20 at the time of distribution of the capital contribution reserves, Company X could only distribute capital contribution reserves of USD 8,333.33 tax-free, as the Swiss Federal Tax Administration has only confirmed capital contribution reserves of CHF 10,000. Capital contribution reserves of USD 1,666.67 would remain in the balance sheet, although they would effectively no longer exist.  

Interim dividends

The law currently in force does not provide for interim dividends but as we discussed in blog no. 9 of the series they will be introduced with the new corporate law. In the future, the general meeting of shareholders will therefore be able to approve a dividend distribution from the profits of the current financial year on the basis of interim financial statements. From a tax point of view, interim dividends are basically to be treated in the same way as ordinary dividends based on the annual financial statements by resolution of the ordinary general meeting of shareholders, both for income and profit tax purposes as well as for withholding tax purposes. Ordinary dividends will remain the common way of distributing dividends in the future, which is why, despite the introduction of interim dividends, the last annual financial statements should continue to be decisive for the determination of distributable reserves under commercial law for the purposes of the indirect partial liquidation or the old reserves practice, even if more recent interim financial statements are available.

Treasury shares

According to the corporate law regulation currently in force, a company may hold up to 10% of its own shares. In the case of shares with restricted transferability, up to 20% is permitted if the shares acquired in excess of 10% are resold within two years. Exceeding these thresholds leads to an immediate direct partial liquidation for tax purposes. For treasury shares that do not exceed these thresholds, the tax consequences of a direct partial liquidation only arise if they are not resold within six years. In principle, this rule continues to apply even if a company makes use of the capital band option. Corporate law experts argue that under the new law repurchases of treasury shares within the scope of the capital band will be permissible up to the lower limit of a maximum of 50% of the share capital if the limit of 10% is reached again within two years. A company could therefore hold treasury shares up to a maximum of 50% of its share capital. However, the question arises whether this would trigger the tax consequences of direct partial liquidation. Since the relevant provision in the Federal Withholding Tax Act refers to the corporate law provision., it is more likely to be assumed that such a flexibility regarding treasury shares also applies to tax law and that repurchases of treasury shares up to a maximum of 50% of the share capital within the scope of the capital band do not trigger the tax consequences of direct partial liquidation, provided that the shares acquired in excess of 10% are resold within two years.

This brief summary makes it clear that the tax-relevant changes introduced with the new corporate law raise various questions of application and interpretation. It is to be hoped that the Swiss Federal Tax Administration will provide legal certainty by adapting the relevant administrative guidelines in due time.

Other articles in the series:

​​​​​​If you have any questions, please do not hesitate to contact our team.

Contact persons: Damien Conus (Geneva), Lukas Züst, Thomas Steiner-Krizaj, Peter Kühn (Zurich) 

Authors: Patrik Fisch and Christoph Niederer