On 28 September 2018 the Swiss Parliament approved the final draft bill regarding the corporate tax reform which includes major changes for Swiss-listed companies in relation to the distribution of dividends paid by repayment of capital contribution reserves. It is proposed that Swiss-listed companies may only pay withholding tax-free capital contribution reserves if in the same amount a dividend will be paid from taxable distributable reserves (so-called 50/50 rule).

By Elga Reana Tozzi (Reference: CapLaw-2019-03)

1) Corporate Tax Reform in General

The objective of the proposed corporate tax reform is to ensure that the Swiss corporate tax system is in line with the international minimal standards, which recognises as harmful the cantonal preferential tax regimes for holding, domicile and mixed companies. Accordingly, these privileged tax regimes need to be abolished. It is proposed that in order to remain attractive business locations for international groups, the cantons would reduce their corporate tax rates. Furthermore, various other measures have been proposed, e.g. introduction of a patent box, R&D super deduction, notional interest deduction in case of the Canton of Zurich. Also, further adjustments would be necessary to ensure additional fiscal revenues to compensate some of the expected shortfall due to the general reduction of the corporate tax rates. Amongst others, one of these measures would be the introduction of a distribution restriction and partial liquidation rules for capital contribution reserves of Swiss-listed companies.

The corporate tax reform is subject to public vote which will take place on 19 May 2019. Some of the new tax provisions could enter into force in 2019, with the main part in 2020. If the corporate tax reform were to be rejected, the Swiss Government has announced its plan to abolish the privileged tax regimes by the end of 2020 otherwise the OECD/EU will put Switzerland on their blacklist, which would result in adverse tax treatments of cross-border transactions for Swiss tax resident companies. 

2) Adjustments of Capital Contribution Reserves Tax Provisions for Swiss-listed Companies

As of 1 January 2011, dividends could be paid out of capital contribution reserves without being subject to 35% withholding tax and therefore, be income tax-free for Swiss tax resident individual shareholders. In practice most of the Swiss-listed companies use this possibility and pay dividends without withholding tax instead of paying dividends from their distributable reserves which would be subject to withholding tax. The capital contribution reserves principle has been extensively discussed due to the fact that as a consequence of the implementation the fiscal revenues have decreased substantially. The parliament has reviewed the capital contribution principle in more detail in view of the shortfall resulting from the proposed reduction of the corporate tax rates and proposed new rules regarding the use and repayment of capital contribution reserves.

The proposed new rules regarding the distribution restriction of capital contribution reserves would only affect Swiss-listed companies, i.e. Swiss tax resident companies which are not Swiss-listed or listed on a foreign stock exchange could still pay dividends out of capital contribution reserves without any deduction of withholding tax (e.g., Glencore Plc). The proposed distribution restriction would be limited only to Swiss-listed companies given from a fiscal revenue perspective there would have been no substantial advantage to include foreign-listed Swiss tax resident companies. 

It is proposed that Swiss-listed companies could only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Not affected by this new tax provision would be intra-group dividends and capital contribution reserves from assets transferred from abroad after 24 February 2008 and in the case of a liquidation or transfer of place of incorporation or effective management and control to abroad. The above rules would also apply to the issue of bonus shares and bonus increases in the par value from capital contribution reserves.

a) Proposed Distribution Restriction Rule

If a Swiss-listed company having distributable reserves declares a dividend only from its capital contribution reserves, a withholding tax would be due on 50% of the repayment of the capital contribution reserves, however, not more than the amount of the available distributable reserves. In the case of such a tax adjustment the amount of distributable reserves subject to withholding tax would be credited for tax purposes to the capital contribution reserves. In other words, the available capital contribution reserves amount would not be affected by such a tax correction and would still be available for a later repayment, in particular in case no further taxable distributable reserves would be available (i.e., deferral on the timeline for tax purposes). This would result in the available amount of capital contribution reserves in the stand-alone statutory balance sheet would differ from the amount available for tax purposes. However, in practice it might be that no such tax corrections arise given the distributing companies should be aware in advance of the proposed distribution restriction rule and declare any dividends in line with the new distribution restriction rule.

For Swiss-listed companies not having any distributable reserves, the distribution restriction would not affect them. Such companies could still pay dividends out of capital contribution reserves which would not be subject to withholding tax and be income tax-free for Swiss tax resident individual shareholders.

i. Proposed Exemptions for “Foreign” Capital Contribution Reserves

The proposed distribution restriction rule would not apply for capital contribution reserves of non-Swiss tax resident companies created abroad and transferred to Switzerland. This exemption is applied to all qualifying capital contribution reserves created after 24 February 2008, which were transferred to Switzerland either through:

(1) a share for share exchange transactions (so-called quasi merger) whereby shares of non-Swiss companies are contributed to a Swiss-listed company in exchange for shares or through; or

(2) cross-border mergers whereby a non-Swiss company is merged into a Swiss-listed company.

Also, Swiss-listed companies which have become Swiss tax resident through the migration by way of transferring its place of incorporation or effective management and control to Switzerland could distribute dividends out of capital contribution reserves created abroad. For benefiting from this exemption the foreign capital contribution reserves need to be reflected in a separate balance sheet account. This exemption rules applies not only for new Swiss-listed companies but also for existing Swiss-listed companies which have “foreign” capital contribution reserves.

b) Introduction of Partial Liquidation Rule

The new proposed partial liquidation rules requires that at least 50% of the surplus amount would need to be debited to capital contribution reserves in case of repurchase of own shares either for the purposes of a capital reduction or to keep the repurchased shares as treasury shares which would deemed to be liquidated if held longer than 6 years (or 12 years in case of employees shares).

The repurchase of own shares by a Swiss-listed company for the purpose of a share capital reduction (direct partial liquidation) would result in the received surplus being the difference between the purchase price and the nominal value would be subject to withholding tax. Since the introduction of the capital contribution principle the surplus amount could also be debited to the capital contribution reserves which would not be subject to withholding tax.

In practice often a second trade line would be opened through which a bank or a broker would repurchase the shares. This has the advantage that the purchaser is known and the withholding tax due could be refunded and the capital contribution reserves would not be required for the purposes of repurchase of own shares and could be used for ordinary dividend distributions. The new partial liquidation rules have been proposed to eliminate this tax planning possibility and to ensure equal treatment of all such transactions.

3) Adjustments of Income Taxation of Dividends from Qualifying Investments for Swiss Tax Resident Individual Shareholders

The distribution restriction rules would result a Swiss tax resident individual shareholder could no longer benefit from dividends which would not be subject to withholding tax and be income tax-free if paid out of capital contribution reserves (in case that distributable reserves would be available).

However, dividend income of Swiss tax resident individuals from qualifying investments (holding at least 10% in the capital of a company) is currently partially exempt from taxation in order to mitigate double taxation at the shareholder level. At the federal tax level, the taxation rate increases from 50% (business investments) and 60% (private investments), respectively, to a standard rate of 70%. At the cantonal level, there is a harmonization of the relief method and an introduction of a minimum taxation rate of 50% (rate at the discretion of the cantons).

4) Summary and Recommendation

The introduction of the new distribution restriction and partial liquidation rules for the repayment of capital contribution reserves would not affect non-Swiss listed companies being Swiss tax resident or companies listed on a foreign stock exchange. Also, capital contribution reserves resulting from the transfer of non-Swiss assets to Switzerland could still benefit from a tax-free treatment of the repayment. Therefore, Switzerland would remain competitive as holding jurisdiction from an international tax perspective.

It is very difficult to assess whether the proposed corporate tax reform will pass the public vote on 19 May 2019. However, Swiss-listed companies need to monitor the position closely regarding:

– the repurchase of own shares through the second trade line. If such a share repurchase program were to be considered it might be advisable to implement such a program before the new partial liquidation rule would enter into force; and

– the upstreaming of cash from subsidiaries by dividend payments resulting in distributable reserves which would be affected by the new distribution restriction rule. Therefore, other ways for financing distributions to the public shareholders could be explored and analysed in more detail.

If the corporate tax reform were entering into force, Swiss-listed companies would need to consider the 50/50 distribution restriction rule if distributable reserves were available. A repayment of capital contribution reserves that would result in a tax correction should be avoided even if it would be only a tax deferral in the timeline (the capital contribution reserves would remain available for tax purposes).

Elga Reana Tozzi (elga.tozzi@nkf.ch)