Sale of shares
If the seller is an individual tax-resident in Switzerland, capital gains on his or her private portfolio are usually tax-exempt. In specific cases, however, the tax authorities tend to perceive capital gains as:
- de facto dividends (in ‘transformations’, if the individual sells his or her shares to a company that he or she controls);
- business income (if the seller qualifies as a professional securities dealer, which is also the case, according to jurisprudence, if an individual seller regularly and systematically deals with securities), which makes the seller subject to income taxation and social security contributions; or
- liquidation proceeds (in ‘indirect partial liquidation’, if the sale is refinanced by the assets of the acquired company), namely, if shares representing at least 20 per cent of the share capital of a company are sold from the private assets of an individual investor (or a group of individual investors) to the business assets of a corporate or individual buyer and the target distributes current assets not needed for business operations out of distributable profit or reserves within a period of five years after the sale of the shares with the cooperation of the seller.
If the seller is a company tax-resident in Switzerland, subject to exemptions below, capital gains are subject to federal and cantonal income taxation of about 12 to 24 per cent (effective tax rate from profits before taxes), depending on the canton of residence. Capital gains from the sale of a qualifying investment (namely, at least a 10 per cent participation), if held for at least one year, qualify for ‘participation relief’, usually leading to an almost full capital gains tax exemption at both the federal and the cantonal level. Qualifying investments may be transferred tax-neutrally to a Swiss or foreign group company.
Sale of assets
If a public M&A transaction were structured as an asset deal, capital gains on business assets sales would be fully taxable by all Swiss sellers (individuals and companies). The seller of a business may avoid these tax consequences if his or her company first spins off the assets and liabilities to be sold into a new company in a tax-neutral reorganisation and the seller then sells the shares in the new company, provided that the spun-off activities and the activities left behind both constitute businesses to be continued by the old and the new company, respectively. Furthermore, the sale of assets is subject to 7.7 per cent VAT, which is recoverable by the purchaser if it qualifies as a Swiss VAT subject and uses the assets for Swiss VAT underlying activities. In the transfer of an entire group of assets (and liabilities) or a closed group of assets (and liabilities), the VAT liability can be discharged with a notification to the federal tax administration rather than payment of the tax.
Tax aspects for the purchaser
Purchase of shares
The tax base for the shares in the purchaser’s books is equal to the purchase price. It is not possible to write off the goodwill component for tax purposes, except in case of impairment. In contrast, in an asset purchase, the goodwill may be recorded separately and written off against taxable income.
Swiss tax law does not acknowledge the concept of tax grouping or tax consolidation, which makes it difficult to set off the acquisition debt or losses carried forward against operational income of an acquired company. Therefore, before the acquisition of a Swiss operating company or a group holding company, foreign investors very often form a Swiss leveraged acquisition vehicle (NewCo), which subsequently purchases the shares of the Swiss target company. If the NewCo and the target company are merged thereafter, the NewCo’s debts will be taken up into the operating company. Tax authorities will likely qualify this as abusive with the result that the interests paid on debt are not tax-deductible (in certain cantons denial of deduction may be limited to the subsequent five years). If the NewCo is not merged with the target company, dividends paid out by the target company may serve to finance the acquisition debt. However, there is a risk that tax authorities could qualify such dividend payments in the case where the shares have been purchased from a private individual seller as an indirect partial liquidation, triggering unfavourable tax effects on the seller (see above). Even if the acquisition vehicle is not merged with the target company, it may be advantageous to incorporate such an acquisition vehicle.
An alternative to push down debt is to leverage the NewCo by having it repay its share capital and additional paid-in capital to the extent legally permissible against assumption of debt. Furthermore, additional leverage may be created by having the NewCo first sell qualified participations to subsidiaries outside Switzerland where the debt is deductible and distribute the sales receivables to the foreign investor. Dividends, which are taxable income for a Swiss resident individual or company, may be sheltered if the shares are held by a Swiss holding company or by an operational company taking advantage of the participation relief. If dividends are not sheltered, the company’s income is taxed twice, as profit of the acquired company and as dividend income of the private individual shareholder. The taxation of dividends for private individuals holding qualified participations of 10 per cent in the stated capital of the company making the distribution is reduced by way of a reduction of the tax rate or the taxable amount. In any event, the distribution of dividends (but not repayment of stated capital and additional paid-in capital contributed after 1996) is subject to a 35 per cent withholding tax that may be fully recovered by a Swiss taxpayer or fully or partially recovered (or reduced at source) in the event of a foreign recipient under an applicable double taxation treaty. In cross-border transactions the tax authorities may refuse to refund all or part of the withholding tax if the purchaser, under an applicable double taxation treaty, is entitled to a refund that is higher than that which the seller would have obtained.
If the target company provides upstream or cross-stream security in the acquisition financing and has not received or will not receive the equivalent value in exchange for such security, then the entering into or the performance of any obligation under such a security by the target company may be classified as a conveyance of an economic benefit by the target company to NewCo or an affiliated company, for which the target company may, at the time of the entering into or the performance of any obligation under the security, as the case may be, be liable to a 35 per cent withholding tax on any actual or constructive dividend distribution resulting from such conveyance of an economic benefit.
Purchase of assets
In a purchase of assets, the tax base in the purchaser’s book is equal to the purchase price of the assets purchased. The goodwill may, to some extent, be recorded separately and written off against taxable income. In a purchase of assets, the operating income of the purchase may be used for the payment of interests on the acquisition debt.
The sale of shares, whether by Swiss residents or non-Swiss residents, may be subject to a Swiss securities transfer stamp duty of up to 0.15 per cent (for shares of a Swiss company) or up to 0.3 per cent (for shares of a foreign company) calculated on the sale proceeds if it occurs through or with a Swiss bank or other securities dealer as defined in the Swiss Federal Stamp Tax Act. In addition to this stamp duty, the sale of shares by or through a member of SIX may be subject to stock exchange levy. The transfer of assets is subject to VAT (see above). The transfer of real estate is in many cantons subject to real estate gains tax or real estate transfer tax.
Taxes on mergers
Shares issued in a statutory merger are exempt from the 1 per cent issuance stamp duty. Capital gains of individual shareholders of the acquired company resident in Switzerland are normally tax-free. Should the nominal value of the new shares exceed the nominal value (plus proportional additional paid-in capital) of the shares of the merged company, however, the difference may be subject to income tax. Corporate shareholders are not taxed if they retain the same tax base for the new shares. Squeeze-out payments and payments for fractional shares made by the merging companies may be subject to income tax. Corporate shareholders may claim participation relief for such payments if they hold a participation representing either a value of at least 1 million Swiss francs or at least 10 per cent of the stated capital of the other company. If in a reorganisation, assets and liabilities are transferred at book value, no income tax is usually incurred. Transfers of real estates in the context of a merger do not trigger a real estate transfer tax.
A share-for-share transaction (quasi-merger) where: the acquisition of shares of one corporation in exchange for newly issued shares of the acquiring company leads to the acquisition of at least 50 per cent of the voting rights of the acquired company and not more than 50 per cent of the consideration for the shares in the acquired company is paid in cash (namely, at least 50 per cent of the consideration consists of newly issued shares of the acquiring company), is exempt from both the 1 per cent issuance stamp duty and securities transfer stamp duty. Treasury shares of the acquiring company used as acquisition currency are considered cash consideration.
The acquiring company using treasury shares as acquisition currency will be treated as having sold the treasury shares and, depending on the tax base and the market value of the treasury shares, realises a taxable gain or a tax-deductible loss on the treasury shares used for the acquisition. Except if deemed an indirect partial liquidation, a share-for-share transaction is tax-neutral for individual shareholders resident in Switzerland: cash consideration paid by the acquiring company constitutes a tax-free capital gain and an increase in nominal value of the shares in the acquiring company over the shares in the acquired company as a result of the exchange ratios is tax-neutral. Cash consideration paid to individuals that are deemed securities dealers or hold the shares in the acquired company otherwise within a business and corporate shareholders are not taxable for shares exchanged if they retain the same tax base for the new shares. Cash consideration paid to them is taxable. It may, however, be offset against a charge to expenses if an impairment is required. If the aforementioned conditions for a tax-free quasi-merger are not met, the 1 per cent issuance stamp duty or the securities transfer stamp duty of 0.15 per cent (for shares in a Swiss company) and 0.3 per cent (for shares in a foreign company) apply. If after a tax-neutral share-for-share transaction the acquired company is merged within five years with the acquiring company, the transaction will retroactively be taxed like a statutory merger (see above).
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