Switzerland Update: The (Re)sale of Own Shares at a Profit Does Not Constitute Taxable Income

Landmark decision of the Swiss Federal Supreme Court (9C_135/2023)

In its ruling of 6 June 2024, the Federal Supreme Court held that the tax-neutral proceeds from the sale of treasury shares to employees do not constitute taxable income, but a tax-neutral capital contribution.

Circumstance

In accordance with the relevant accounting standards, the Group had reported treasury shares intended for an employee participation program in the balance sheet as negative reserves under commercial law. The sale resulted in a “profit”, i.e. additional proceeds in the difference between the reissue price within the framework of the employee participation programme and the lower acquisition costs of the shares in question. Apparently, the price value of the shares in question had risen significantly in the meantime. The Group booked the additional proceeds into the statutory capital reserve without affecting profit or loss. This procedure is indisputably correct under commercial law. The cantonal tax office and subsequently the Federal Tax Administration, on the other hand, invoked a correction provision under tax law and qualified the additional proceeds as taxable capital gains. The taxable listed company defended itself against this, unsuccessfully before the first instance (tax appeal court), but successfully before the second instance (administrative court). In its ruling of 6 June 2024, the Federal Supreme Court has now confirmed the administrative court’s decision in favour of taxpayers.

Considerations

The basis of the decision is the so-called authoritative principle. In other words, the starting point for determining a company’s net profit is accounting in conformity with commercial law, i.e. the profit as presented in the income statement. This result may only be deviated from if the law contains an explicit corrective provision that violates the aforementioned principle of decisiveness. After a detailed examination, the Federal Supreme Court came to the conclusion that there was no such correction provision in the present case, in particular that Article 58 (1) (c) of the Federal Act on Direct Federal Tax (DBG) regarding capital, revaluation and liquidation gains could not be used to justify a taxable profit.

In the consistently and very logically reasoned judgment, the Federal Supreme Court thus held that when a company acquires its own shares, it is first of all impoverished. In other words, the acquisition of treasury shares constitutes a partial liquidation event, the tax consequences of which are absent only if the relevant provisions are complied with in qualitative, quantitative and temporal terms. From the company’s point of view, treasury shares do not represent a real asset. Since the company is thus being depleted, accounting law, which has been in force since 1 January 2013, requires the disclosure of a negative reserve and, therefore, unlike in the past, no longer permits the capitalisation of the company’s own shares. As a result, the buyback of own shares represents a kind of capital reduction.

If the repurchased treasury shares are reissued, the negative item must be reversed under commercial law and, just like a capital increase, must be shown in equity in a tax-neutral manner.

The Federal Supreme Court recognised that if the treasury shares do not qualify as an asset under commercial law, they cannot be said to be a capital gain and thus not a capital gain, even if they are reissued. This is to be agreed.

In the opinion of the Federal Supreme Court, the tax administration cannot rely on any correction provision under tax law that would allow the “increase in value” of the reissued shares to be taxed. Rather, the capital gain is to be booked as a tax-neutral capital contribution within the meaning of Art. 60 lit. a DBG.

Appreciation

The Federal Supreme Court’s decision deserves unreserved approval. It is remarkable for several reasons: on the one hand, the Federal Supreme Court once again upholds the principle of authoritativeness. On the other hand, the court emphasizes the principle of legality, which is to be taken particularly seriously in tax law, in that one may not carelessly assume a corresponding corrective provision without a clear legal basis. Finally, the Federal Supreme Court also makes it clear that not every increase in assets has to lead to a taxable profit for a company. This is only the case if a company provides a service or sells a real asset. Of course, the decision applies not only to cases in connection with employee shares, but also to other situations in which a company reissues previously acquired treasury shares.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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