Swiss Supreme Court: tax-privileged quasi-merger status is only granted if the receiving company is issuing its own shares

Swiss Supreme Court denies qualification of a specific transaction as a quasi-merger and hence as a Swiss tax-neutral restructuring

In Switzerland, the quasi-merger is not formally stipulated under Swiss merger law. Yet, in Swiss tax practice, quasi-mergers typically qualify as tax neutral restructurings (“tax privileged” restructurings), if certain criteria are met.

According to Swiss Tax Administration Circular Letter No. 5, “Reorganisations”, a Swiss tax-privileged quasi-merger usually requires that the receiving company takes over at least 50% of the target’s voting power. In addition, the target’s shareholders may receive a maximum of 50% of the total consideration in cash for their previously held shares in the target. Consequently at least 50% of the total consideration must be paid in new shares (of the receiving company). Typically, the receiving company procures the shares for the share-exchange by way of a capital increase.

In the case at hand, individual A held 100% of the shares of X-AG and 50% of the shares in Y-AG as part of his private wealth. In 2007, A transferred his interest of 50% of Y-AG at book value to X-AG. Subsequently, A held his interest of 50% in Y-AG indirectly via X-AG.

In its decision of 10 June 2015 (2C_976/2014), the Swiss Supreme Court confirmed Circular Letter No. 5 and ruled that in the absence of an increase of the capital level of X-AG, the transfer of the Y-shares does not qualify as a quasi-merger for Swiss tax purposes. As a result, the difference between the market value and the book value of the 50% interest in the Y-shares was subject to Swiss stamp duty on the issuance of capital.

Companies and individuals engaging in quasi-mergers must therefore carefully structure a transaction in order to ensure qualification as a tax neutral reorganisation.

Swiss Administrative Court disallows capital contribution reserves that were previously offset with losses

In its decision of 4 June 2015, the Swiss Administrative Court came to the conclusion that capital contribution reserves, which were in the past offset with losses, are definitely lost.


Until 31 December 2010, any repayment of share premium and any other shareholder contributions that have not resulted in an increase of nominal capital were generally treated as a distribution of profit for both income tax and withholding tax purposes. As part of “Corporate Tax Reform II”, this so-called nominal principle was replaced by the capital contribution principle, which entered into force as of 1 January 2011.

The capital contribution principle allows repayment of shareholder contributions without triggering a liability for Swiss withholding tax at the level of the distributing company (article 5 para. 1bis Federal Withholding Tax Act), and without income tax consequences at the level of the Swiss individual shareholder.

Under the transition period specified by the Act, capital contributions are in principle qualified for the aforementioned tax treatment if accumulated after 31 December 1996, provided some further requirements are met, e.g. proper declaration vis-à-vis the Swiss Federal Tax Administration and recording in a special sub-account of the statutory reserves.

On 9 December 2010, the Swiss Federal Tax Administration (SFTA) published the Circular Letter “Capital Contribution Principle” No. 29 that covers questions regarding this change in law. The Circular Letter states that the offsetting of capital contributions with losses – even during the transition period between 31 December 1996 and 31 December 2010 – leads to a definitive elimination of such capital contributions. This part of Circular Letter No. 29 was extensively discussed within the tax community.

Decision of 4 June 2015 of Swiss Administrative Court

Relevant Tax
The company at question received during the transition period two potentially qualifying contributions, namely a direct contribution of CHF 840,000 in 2002 and a waiver of shareholder loans in the amount of CHF 425,479 in 2004, in total CHF 1,265,479. The waiver of CHF 425,479 was reported as income in the company’s 2004 profit and loss statement. The surplus of CHF 840,000 was offset with losses in the balance sheet of the company as per 31 December 2006. Consequently, both items no longer appeared as such on the balance sheets dated 31 December 2004 and 31 December 2006, respectively.

In its balance sheet dated 31 December 2009, the taxpayer reported capital contribution reserves of CHF 1,265,479 and declared that amount to the SFTA. The SFTA subsequently rejected those capital contribution reserves.

Considerations of the Swiss Administrative Court
In its decision of 4 June 2015, the Swiss Administrative Court came to the conclusion that capital contribution reserves which have been offset with losses are finally eliminated at the time they were offset. The Court justified its ruling with the following main arguments:

  • Firstly, the Swiss Administrative Court recognises that the amount of CHF 1,265,479 is eligible for qualification as a capital contribution reserve.
  • As to the question at hand, the principle that Swiss tax accounting follows Swiss book accounting (“Massgeblichkeitsprinzip”) is also relevant for Swiss withholding tax matters.
  • Consequently, the (potential) capital contribution reserve of CHF 1,265,479 was – due to the previous offset with losses – definitively consumed “at the latest by 31 December 2006”.
  • The decision of the Swiss Administrative Court further states that the interpretation of article 5 para. 1bis Federal Withholding Tax Act already leads to the conclusion that (potential) capital contribution reserves are definitively consumed when offset with losses. Accordingly, the court takes the view that Circular Letter No. 29 is consistent with the existing law.
  • In the opinion of the Swiss Administrative Court, it was not possible to re-establish the capital contribution reserves of CHF 1,265,479 in the company’s 2009 balance sheet as the full amount had already been offset with losses in the past.
  • The Swiss Administrative Court does not see a discrimination against those who did not offset but instead “kept” their losses.

Current conclusion

In our view, the relevant legal provisions of the various tax laws – in particular article 5 para. 1bis Federal Withholding Tax Act – do not mention any limitations for qualifying capital contributions. Therefore, a limiting interpretation of this principle would be contrary to its purpose and it should therefore be possible to re-establish capital contributions which were – in particular during the transition period – offset with losses.

This decision of the Swiss Administrative Court could still be appealed to the Swiss Supreme Court. If no appeal is lodged, this decision will become final and legally binding within a few weeks. In any case, an envisaged shareholders’ waiver and/or an offsetting of contributions with losses should be carefully analysed to prevent unintended tax consequences.

Should you have any questions in this regard, please get in touch with your usual PwC contact or the following PwC Corporate Tax specialists:

Stefan Schmid
Partner, Tax and Legal
+41 58 792 44 82

Dr Sarah Dahinden
Senior Manager, Tax & Legal, Attorney at Law
+41 58 792 44 25