New Capital Contribution Principle Restrictions

Author:Ms Susanne Schreiber and Kerem Altay
Profession:Baer & Karrer

In a referendum held on May 19 2019, the Federal Act on Tax Reform and AHV Financing (TRAF) was adopted by the Swiss people and the cantons. The reform includes several measures directed at corporate income taxation, such as the abolition of tax privileges for certain types of companies (status companies) and the implementation of internationally accepted replacement measures such as a patent box or the ability to super-deduct R&D costs (up to 150% of actual costs). The reform also contains tax measures at the shareholder level. The majority of the measures will be in force as of January 1 2020.

Capital contribution principle

The most relevant change regarding the taxation of dividends and share buybacks including the withholding tax consequences is the implementation of restrictions on the capital contribution principle (CCP). The CCP , which was implemented in Swiss tax laws as of January 1 2011, stipulates that the repayment of capital contributions made after December 31 1996 will be treated for Swiss tax purposes as a repayment of share capital or nominal capital. In other words, capital contribution reserves (CCR) can be distributed without being subject to (i) Swiss income tax for Swiss resident individuals holding the shares as private assets; and, (ii) 35% Swiss withholding tax (WHT). According to the Swiss tax authorities, only CCR made by the direct shareholder and separately accounted for in the Swiss statutory accounts qualify as such. Further, the CCR as well as any decreases or increases must be reported to the Swiss Federal Tax Administration (SFTA).

Newly implemented restrictions of the CCP

Starting from January 1 2020, the CCP will be restricted in two ways for companies that are listed on a Swiss stock exchange, such as SIX:

Repayment restriction: A Swiss listed company wishing to distribute (tax-free) dividends from CCR is required to distribute at a minimum an equal amount of (taxable) dividends deriving from other reserves (that is, retained earnings), subject to the availability of such other reserves. If the company fails to do this, half of the dividend amount will be taken from other reserves for tax purposes and will be subject to Swiss WHT and income tax if the shareholder is an individual holding the company's shares as private assets and is taxable in Switzerland. If, for example, the Swiss listed company distributes a dividend of 100 deriving from 60 CCR and 40 deriving from other reserves, the new regulation...

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