The Capital Contribution Principle
The Capital Contribution Principle is a new regulation in Swiss tax law that came into force on 1 January 2011. It replaced the Nominal Value Principle. Under the Nominal Value Principle, only nominal share capital can be repaid to the shareholders tax-free, i.e. without triggering withholding tax or, for Swiss resident shareholders holding the shares as private assets, income taxes. The Capital Contribution Principle exempts not only the repayment of nominal share capital, but also the repayment of additional paid in capital, share premiums and other contributions into the reserves made by shareholders since 1 January 1997 ("Capital Contributions") from Swiss income taxation and withholding tax. The distribution of retained earnings, hidden capital contributions or open capital contributions that have not been made directly by shareholders remain subject to withholding tax and, for Swiss resident shareholders holding the shares as private assets, income taxation.
Reporting requirements and time limitations
Capital Contributions made after 31 December 1996 are subject to and benefit from the Capital Contribution Principle, even though the Capital Contribution Principle entered into force only on 1 January 2011. The Swiss Federal Tax Administration ("SFTA") published circular letter no. 29 on 9 December 2010 with details regarding the implementation of the new regulations ("Circular Letter"). The Circular Letter provides for strict formal requirements and deadlines which have to be observed in order to benefit from the Capital Contribution Principle, whereby non-compliance with the Circular Letter could lead to a forfeiture of potential tax benefits or exemptions, respectively.
A company needs to comply with the following formal requirements in order to benefit from the Capital Contribution Principle:
- Declaration in the financial statements
The most important formal requirement is the correct declaration of Capital Contributions in the company's statutory financial statements. Capital Contributions must be shown in a separate equity account of the balance sheet. According to the Circular Letter, Capital Contributions made between 1 January 1997 and 31 December 2010 must be shown in a separate account at the latest in the balance sheet for the business year ending in the calendar year 2011.
- Reporting to the SFTA
Capital Contributions made have to be reported to the SFTA annually within 30 days after the...