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Switzerland Update: On 11 February, the Federal Tax Administration published a long-awaited circular letter
14/02/2022On 1 February 2022, the new Circular Letter (CS) of the Federal Tax Administration (FTA) No. 5a came into force, replacing KS No. 5, which has been in force since 2004. Like its predecessor, the new circular letter deals with the tax consequences at the federal level (direct federal tax, withholding tax, stamp duty) on the restructuring of partnerships and legal entities at the level of companies as well as shareholders. Although the KS is not binding on cantonal taxes, it is also applied in principle by the cantons, whereby individual cantons deviate from the KS in their practice. The reason for a comprehensive revision of the circular letter was the legal and practical changes that have occurred since its entry into force. In addition to general editorial changes, the new KS contains such as the adaptation of terminology to the new accounting law, above all legal amendments to various federal laws and the adoption of the current relevant case law. The structure of the KS was retained.
General changes
The new CS takes into account the changes to the Corporate Tax Reform II, such as the reduction of the qualifying shareholding from 20% to 10% for the deduction of shareholdings and the introduction of the capital contribution reserves (KER). Furthermore, the instruments introduced as part of the tax reform/AHV financing (TRAF or Corporate Tax Reform III) such as the “immigration step up” will be included. The circular also clarifies that the tax neutrality of a restructuring in the issue and turnover levy does not presuppose the assumption of the profit or income tax values and that the civil law structure of the restructuring is irrelevant for tax purposes.
The most significant changes in the new KS are:
- Additional possibility to split a holding company. A holding company which holds more than 50 % of the voting rights in two or more operating companies may spin off one of these operations to a new holding company in a tax-neutral manner;
- Reduction of the participation rate. The KS now confirms that a 10 % stake (previously 20 %) in both the transferred shareholding and in the receiving subsidiary is sufficient for the tax-neutral transfer of a stake to a subsidiary (sub-holding). A 10 % shareholding is now also sufficient for the purposes of procuring a replacement shareholding;
- Partially profit tax-neutral restructuring possible. If, as part of a restructuring, hidden reserves on individual assets are not transferred in a completely tax-neutral manner by increasing the relevant profit tax values to a value below the market value, only the difference between the profit tax values before and after the restructuring is generally recognised with the profit tax on the company being transferred. The transferred hidden reserves are not taxed;
- No legal basis for the collection of stamp duties in the event of a breach of the blocking period. The new KS also confirms the case law that the emission levy and the turnover levy do not have any blocking periods and thus a possible violation of the blocking period for profit taxes does not lead to any tax consequences for the emission levy or the turnover levy, whereby the possibility of tax avoidance can be examined in the case of the emission levy.
In addition, various detailed adjustments have been made to the KS, so that an examination of the new KS before planning and carrying out a restructuring is also essential for experienced tax consultants.
The aforementioned material changes as well as other changes are discussed in detail below.
Selected changes in detail
Merger
a) Flexibilisation of the rules on loss assumption – economic aspect decisive
As in the past, in the event of a merger, the untaxed hidden reserves can be transferred to the acquiring company in a tax-neutral manner, provided that the tax liability in Switzerland continues cumulatively and the values previously decisive for the profit tax are assumed. The acquiring company may claim the previous year’s losses of the transferring company that have not yet been taken into account in the calculation of the taxable net profit in accordance with Article 67 paragraph 1 of the Federal Act on Direct Federal Tax (DBG). As a result, a previous restructuring of the acquired companies is explicitly no longer harmful. A “doubling” of the value adjustment on participation and loss assumption is permissible.
An assumption of the previous year’s losses was and is excluded if there is tax avoidance. Until now, according to KS No. 5, this has always been the case with a so-called shell trade, i.e. if the transferring company has been economically liquidated or if a business transferred by the merger was discontinued shortly after the merger.
The cessation of a business transferred by the merger is no longer classified as tax avoidance in every case due to existing decisions of the Federal Supreme Court (BGer). A takeover of the previous year’s losses is now only excluded if there are no economic reasons for a merger from a dynamic point of view. The terminology of a “dynamic view” refers to the federal court case law and means that business reasons or the intention of the acquiring company to use the acquired assets after the merger are also taken into account. A lack of economic reason, therefore, exists if the transferring or acquired company is inactive and therefore no longer uses its assets and the other active company has no benefit from these assets (lack of synergies). However, if the other active company is able to use the acquired assets, e.B. patents or customer lists, for business purposes again, there is no tax avoidance and the assumption of the previous year’s losses must be recognised.
If a natural person experiences an increase in the nominal value of the shares held by him as a result of a restructuring, this triggers income and withholding tax consequences to a corresponding extent as before (free nominal value increase). The tax consequences of an increase in nominal value or compensation payments can still be prevented by offsetting against nominal value losses. The new KS also confirms the FTA’s practice that the taxation of a nominal value increase can also be averted by offsetting it with KER. An increase in the proportionate KER without an increase in nominal value is not taxed due to the lack of a legal basis for the shareholder.
2.Division
a) Mandatory assumption of previous year’s losses
There is a change with regard to the assumption of the previous year’s losses in the event of divisions. In the event of a division, the previous year’s losses attributable to the transferred operation or partial operation, which are not yet taken into account in the calculation of the taxable net profit, must be transferred to the acquiring company. This mandatory provision replaces the optional regulation in the old KS. In the case of a transfer of a business, a detailed breakdown of the losses arrested with the business must now always be made. As already mentioned, however, a transfer of the previous year’s losses is excluded if there is tax avoidance. In the event of a division, this is examined in particular if the transferred holding is discontinued shortly after the division. The mandatory distribution of losses also applies in the event of a transfer of a business or partial operation to a subsidiary or group company.
b) Additional possibility of splitting a holding company
The holding and management of securities that only serve to invest one’s own assets is an operation as never before (asset management companies), even with large assets. In contrast, holding and managing holdings can qualify as an operation. A tax-neutral holding division is possible in cases where, from a tax point of view, for the purposes of restructuring, the operating requirement is fulfilled both for the spin-off holding structure and for the remaining structure consisting of holding company and subsidiary. As before, the operating requirement can be met at the level of a holding company (so-called holding company). In compliance with the so-called transparency principle, the operating requirement can now also be met at the level of the active company in which the holding company holds a stake.
(i) Holding company (existing practice)
A holding company exists when (i) they are mainly operational (active) companies, (ii) the shareholdings represent at least 20% of the share capital of the other companies or otherwise make it possible to have decisive control, (iii) the holding companies existing after the division actually perform a holding function (at least two holdings of 20% each with their own staff or through authorized persons, and (iv) the holding company activities will continue after the division.
(ii) Operational operation (new practice based on case law)
According to the new KS, a tax-neutral division of a holding company is also possible if the holding company does not have an actual holding company with personnel, but holds a majority of votes (more than 50%) in two (or more) domestic or foreign active, operating companies (so-called transparency principle). In application of this so-called transparency principle, the transfer or spin-off of one of these investments to the acquiring company is sufficient for both the existing and the new holding company to qualify as operations at the level of the holding company (BGer judgment 2C_34/2018 of 11 March 2019).
(i) Tax trap – timely absorption
In the event of a holding company split with timely absorption of the new holding company with the new operating subsidiary held by it (within 2-3 years after the split), the FTA may assume that the originally tax-neutral holding company will be requalified as a distribution of the stake in the operating company to the shareholder (dividend in kind) in accordance with the new KS.
In the amount of the realized hidden reserves on the participation in the new operating company, the old holding company realizes a taxable profit, which is largely exempted with the participation deduction if the one-year holding period is fulfilled. In addition, the dividend in kind is subject to withholding tax at the old holding company. For the shareholder, on the other hand, the dividend represents a taxable return on assets. This is subject to partial taxation if the shareholding in the old holding company was at least 10%. If necessary, taxation takes place in the after-tax procedure.
(ii) Tax-free capital gain despite timely absorption on sale of the new holding company
A division of a holding company with timely absorption of the operating company with the new holding company after the sale of the new holding company to a third party, on the other hand, is in principle harmless. The prerequisite for this is that the seller does not know at the time of sale that the buyer of the new holding company will carry out the absorption of the operating company (absorption must be uncertain).
3.Transfer to subsidiary (subsidiary spin-off)
a) Spin-off of businesses, sub-businesses, and objects of operating fixed assets
(i) Further qualifying participation of 20 % required for transfer without effect on profit tax
In the case of the spin-off, a company transfers assets to a subsidiary, i.e. to a company in which it participates or in which it already has a stake. Such a transfer may be made by way of a contribution in kind, a sale, or a transfer of assets.
Hidden capital contributions generally lead to a taxation of the hidden reserves transferred to a subsidiary and to a corresponding increase in the profit tax value and the production costs of the participation. The transfer of assets to a subsidiary, on the other hand, is tax-neutral in the sense of an exception, provided that five cumulative conditions are met: (i) a continuing tax liability in Switzerland, (ii) a transfer of the profit tax values, (iii) the transfer of an operation, partial operation or objects of business fixed assets, (iv) the transfer to a domestic subsidiary and (v) compliance with a holding period of five years, this period relates to the acquiring subsidiary and the assets transferred to it.
Also in the new KS, with regard to the domestic subsidiary, it continues to apply that it must be a corporation or cooperative with its registered office or actual administration in Switzerland, in which the transferring company holds at least 20% of the share or share capital. Furthermore, a tax-neutral spin-off can also take place to a Swiss permanent establishment of a foreign subsidiary, provided that international tax elimination ensures that the transferred hidden reserves continue to be allocated to Switzerland without restriction. The hopes that a participation of 10% is already sufficient have not been fulfilled.
With regard to the mandatory consideration of previous year’s losses attributable to the transferred operation or partial operation in the calculation of the taxable net profit, reference is made to the execution of the divisions (see, by analogy, the explanations under 2.a).
(ii) Breach of blocking period after spin-off does not trigger subsequent emission levies
The updated KS now states that a violation of the five-year blocking period for the spin-off of a business, partial operation or objects of the company’s fixed assets no longer results in subsequent collection of the emission levy, as there is no legal basis for this. On the other hand, in the event of a timely sale of the acquired assets by the subsidiary, the facts must be checked for possible tax avoidance. However, the tax consequences of profit taxes, subsequent taxation of the transferred hidden reserves, must still be taken into account. The clarification regarding the issue levy also applies to capital transfers within the Group.
(i) 10 % shareholding sufficient in the case of spin-off of a shareholding to a subsidiary
In the event of a spin-off of a shareholding, a company transfers a stake in another company to a domestic or foreign subsidiary. With regard to the tax-neutral spin-off of participations, the new KS confirms the already existing practice that a participation of at least 10 % (according to the old KS No. 5: 20 %) in the share capital of another company or cooperative or a claim to at least 10 % of the profit and reserves of another company is sufficient. This applies both to the transferred investment and to the acquiring subsidiary.
As before, the participation in the sub-holding takes over the profit tax value, the production costs, and the holding period of the previously directly held participation. However, the profit tax value and the holding period of the transferred participation will now be continued by the acquiring company. The production costs of the transferred participation correspond to the profit tax value. The tax neutrality of the stamp duty is not dependent on the assumption of the profit tax values. For example. B the transfer of a holding of at least 10% at market value to a subsidiary is taxable in the case of profit tax to the extent of the hidden reserves discovered, but exempt from taxes in the case of stamp duty since the necessary conditions for a tax-neutral spin-off are fulfilled there. However, in this case, the holding period for the profit tax starts again from the beginning.
In contrast to the spin-off of businesses, partial businesses, and objects of business fixed assets, a tax-neutral spin-off of investments is not limited to the transfer to a domestic subsidiary and there is (as before) no blocking period for disposal.
However, the reference to the fact that no differentiation between subsidiaries and group companies would be made for the turnover tax was deleted in the new KS. The acquisition or sale of taxable documents in the context of transfers of shareholdings of at least 10 % of the share capital of other companies or of shareholdings which give rise to a claim to at least 10 % of the profits or reserves of another company to a domestic or foreign subsidiary is exempt from the turnover tax. In the case of a transfer within the Group, however, a minimum share of 20% of the transferred shareholding applies to the revenue levy (see below).
a) Transfer between domestic group companies
(i) Tax-neutral transfer of shareholdings of less than 20 % possible, provided that the group has an indirect shareholding of at least 20 %
In the case of transfers between domestic group companies, a domestic company transfers assets to another domestic company in which it has no interest. However, a company directly or indirectly controls the transferring and acquiring companies (group). Furthermore, a blocking period of five years applies to profit tax. If during the following five years, the transferred assets are disposed of or control is relinquished, the transferred hidden reserves are taxed at the company being transferred under the post-tax procedure. This blocking period also applies to the spin-off of investments to Group companies that are not subsidiaries of the transferring Group company.
Domestic group companies are companies with their registered office or actual administration in Switzerland that are directly or indirectly controlled by a domestic or foreign parent company (majority of voting rights or control in any other way).
The transfer of assets to a related domestic Group company at the profit tax values below the market values generally represents a hidden distribution of profits for the company being acquired.
As in the past, directly held participations of at least 20% of the share or share capital of another Group company, operations or sub-operations, as well as objects of the operating fixed assets, can be transferred tax-neutrally to other domestic Group companies (Art. 61 paragraph 3 DBG). The KS is now adopting the existing practice of the FTA, according to which participations of less than 20%, e.B. 5%, can also be transferred, provided that there is a direct or indirect participation of at least 20% in the share capital of this company under the control of a corporation or cooperative. As a result, shareholdings of less than 20% can also be transferred between domestic group companies in a tax-neutral manner. The transfer is also tax-neutral in the case of withholding tax and the turnover tax.
As before, it should be noted that a spin-off of an investment still leads to tax consequences if a stake of less than 10% is transferred to a subsidiary with at least 10% (tax-systematic realisation due to the participation deduction). Likewise, the accounting for the transferred participation in the acquiring subsidiary at a value that is higher than the previous profit tax value of the transferring parent company represents a properly taxable revaluation gain and not investment income.
The tax-neutral transfer of a shareholding to a foreign company requires, as before, a participation of at least 20% of the share capital or share capital in another corporation or cooperative. In addition, in the case of withholding tax, only a tax-neutral transfer to a foreign subsidiary of the transferring domestic parent company (see subsidiary spin-off under 3.B.), but not to a sister company, is now possible.
(i) Tax-neutral transfer of profit taxes and turnover tax still possible
The transfer of a shareholding to a foreign group company may continue to be tax-neutral, provided that there is a direct or indirect participation of at least 20% of the share capital or share capital in the transferred company under the control of a domestic corporation or cooperative and the acquiring foreign group company is itself controlled by a domestic group company and thus the transferred hidden reserves remain indirectly arrested in Switzerland.
However, if there is a transfer of an investment to a foreign Group company without it being controlled by a domestic Group company, the deferred tax burden in Switzerland is abolished. A tax-neutral transfer is therefore not possible and the amount of the realized hidden reserves results in a taxable capital gain, which – if the conditions are met – entitles to a participation deduction.
In the case of the turnover tax, a tax-neutral transfer of a shareholding to a foreign group company is also possible, but the transfer of a direct participation of at least 20% in the share or share capital of another corporation is required. In contrast to the transfer between domestic group companies, an indirect participation of 20% in the turnover tax is therefore not sufficient. For example, in the case study below, a transfer of 20% is missed; which is why a turnover tax is due.
(ii) Transfer to foreign group company triggers withholding taxes
The transfer of an investment at the profit tax value to a foreign (sister) Group company – regardless of whether it is controlled by another domestic Group company – can no longer be exempt from withholding tax. On the basis of the theory of direct favouritism, the recipient of the benefit and entitled to reimbursement is the foreign group company receiving the participation (in the present case study, company B). The application of the notification procedure is excluded.
Result
The update of KS No. 5 was urgently needed after almost 20 years and two corporate tax reforms. The two corporate tax reforms, the introduction of the capital contribution principle but also the tightening of the FTA’s practice with regard to the combination of tax-neutral restructurings, e.B. with the timely absorption of a spin-off participation, have made the planning of tax-neutral restructurings more complex in recent years. We, therefore, welcome the follow-up of previous changes in practice as well as the clarification of various administrative practices in the new KS No. 5a. These lead to legal certainty for companies. Despite the present circular letter, an examination of the prerequisites for a tax-neutral restructuring, the planned transaction, and the cantonal administrative practice is essential in individual cases, especially since the tax assessment is only binding for the tax authorities if a written advance tax assessment has been obtained in advance.
By Nadia Tarolli Schmidt, Adrian Briner & Jannick Walleser, Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.
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