Convertible loans are a cornerstone of early-stage financing as they provide Swiss start-ups with quick access to new capital while postponing the often difficult and lengthy company valuation to a later date. When entering into a convertible loan agreement, founders and investors must understand the applicable tax rules to avoid costly surprises.

Withholding Tax and the 10/20 Non-Bank Rule

The primary tax concern for Swiss start-ups issuing convertible loans is the potential 35% withholding tax (Verrechnungssteuer). While generally not levied on simple loans, withholding tax can be triggered if the Swiss Federal Tax Administration ("FTA") reclassifies the financing instrument as a bond (Anleihensobligation).

According to the so-called 10/20 Non-Bank Rule, a convertible loan is treated as a bond and is thus subject to a 35% withholding tax if either of the following conditions is met:

1. 10 Non-Bank Rule: The company borrows at least CHF 500'000 from more than 10 non-bank lenders under identical conditions. The FTA interprets "identical conditions" narrowly, meaning that slight differences in interest rates, maturity dates or conversion terms can be sufficient to avoid meeting this condition.
2. 20 Non-Bank Rule: The company has outstanding debt of at least CHF 500'000 from more than 20 non-bank lenders in total (irrespective of the outstanding loan amount and the applicable conditions).

A breach of the 10/20 Non-Bank Rule means that both the interest and conversion discount will be subject to a 35% withholding tax. For a cash-strapped start-up, this is a significant burden. Therefore, a key objective is to structure convertible loan agreements within these limits. In addition to the tax consequences, a breach of the 20 Non-Bank Rule constitutes a violation of Swiss Banking Laws and can result in penalties under criminal law.

The "Classic" Convertible Loan

While the 10/20 Non-Bank Rule itself cannot be avoided, there is a crucial exemption that can protect the conversion discount from taxation (even if the company has more than 10 non-bank lenders under the same convertible loan). If a convertible loan meets the criteria for being a "classic" convertible loan, the conversion discount is exempt from both Swiss withholding tax and income tax. The interest remains taxable.

To qualify as a classic convertible loan, several conditions must be met. As start-up investments are typically considered risk capital requiring higher returns for investors, the most critical condition is the limit on the conversion discount. Following a publication by the FTA in 2025, a convertible loan can qualify as a "classic" convertible loan if the conversion discount does not exceed 33.33%. However, the FTA expressly clarifies that this is not a statistical average conversion price, but rather a reference to 66.66% of the fair market value of the respective participation right at the time the conversion right is granted (e.g. signing of the convertible loan agreement) or, if the fair market value is unknown at such date, at the time of conversion (e.g. cash price paid by investors in the respective financing round). If the conversion discount exceeds 33.33%, the loan is considered "non-classic". Consequently, the entire conversion discount (and not just the amount exceeding 33.33%) becomes subject to income tax and, if the 10/20 rule is violated, to withholding tax. In addition, the shares granted to the investor by way of conversion of the loan need to be newly issued shares, not treasury shares. While the use of treasury shares would have an adverse impact, the use of new shares held as a reserve (Vorratsaktien) is possible.

Illustrative Examples

Considerations and Recommendations

• Monitor the 10/20 Non-Bank Rule: Anticipate the potential appetite of existing shareholders when offering participation in a convertible loan. Diligently track the number of non-bank lenders and the terms of their agreements. Seek compliance with the 10/20 Non-Bank Rule to ensure that the conversion discount is not subject to withholding tax (even if the conversion discount is above 33.33%).
• Structure as "classic" convertible loan: When negotiating with lenders, aim to keep the conversion discount below the 33.33% threshold to secure the tax-free treatment of the conversion discount. Also consider this threshold when agreeing on valuation caps with lenders.
• Use only newly issued shares for the conversion of loans (not treasury shares).
• Remember that any cash interest or interest paid-in-kind is taxable (even for a classic convertible loans). Exemptions specifically apply to the conversion discount.
• The interest agreed with existing shareholders must pass an arm's length test (Drittvergleich), otherwise the interest expense may be reclassified as a monetary benefit (geldwerte Leistung) to the shareholder triggering withholding tax. Unless new investors require higher interest rates under the same convertible loan (or the arm's length test can be established by other means), do not exceed the safe harbour interest rates published by the FTA for related-party loans. In addition, seek an agreement under which interest accrues on the loan amount and then converts together with the loan amount into shares upon conversion.
• Issuance Stamp Tax: Once the company has achieved the general exemption threshold of CHF 1 million, a 1% issuance stamp tax (Emissionsabgabe) is due on any issuance of new shares (e.g. cash investment and loan amounts including interest converted in the course of a financing round).
• Tax treatment of alternative instruments like Simple Agreements for Future Equity (SAFEs) depends on the contractually agreed features and such instruments may not in any case be treated as convertible loan by the FTA.

Navigating these rules requires foresight and careful structuring of debt financing instruments. While convertible loans are an invaluable tool, their tax implications are not trivial. Proactive planning and obtaining precise legal and tax advice from the outset are essential for protecting your company's financial health and ensuring a smooth journey to your next financing round.

Author: Timothy Woodtli, Nadia Tarolli

More blogs from the series:

• From Concept to Reality: A Practical Guide for Start-up Founders on In-corporating a Swiss Legal Entity (Nr. 1)
• Successfully growing a Start-up: Stages of Funding (Nr. 2)
• The shareholders' agreement in the Start-up (Nr. 3)
• Best Co-Founders Forever? Anticipating Legal and Tax Considerations for Founders of Swiss Startups (Nr. 4) - VISCHER
• Preferential rights for start-up investors (Nr. 5)
• Convertible Loans in Switzerland: A Quick Guide to the Tax Framework (Nr. 6)