Current problems of taxation of joint-stock companies and shareholders (2018)

Case 1: Transfer of assets within the group and treatment of losses carried forward

Facts

The operating company GROSSMUTTER-AG has a 100 percent holding in TOCHTER Holding-AG. These participation rights were acquired from third parties ten years ago. For decades, TOCHTER Holding-AG has held only the participation rights in ENKEL-AG (100 percent). All three companies are domiciled in Switzerland.

In 2014, ENKEL-AG posted substantial losses in its annual financial statements due to the difficult market environment. From a commercial-law perspective, the investment rights in ENKEL-AG therefore had to be written down at TOCHTER Holding-AG level. On the other hand, no value adjustment of the participation rights in TOCHTER Holding-AG at the level of GROSSMUTTER-AG was necessary at that time. As the economic prospects were also bleak for the future, ENKEL-AG was merged into TOCHTER Holding-AG in 2015 as part of a structural adjustment programme (absorption merger, no merger gain). Despite extensive investments in the merged TOCHTER Holding-AG, further operating losses were generated. The tax loss carryforwards in the merged TOCHTER Holding-AG amounted to a total of TCHF 5,000 at the end of 2017. TCHF 1,000 stemmed from the value adjustment of the former holding in ENKEL-AG and TCHF 4,000 from operating losses of ENKEL-AG taken over in the course of the merger, as well as the operating losses for the years 2015 to 2017. At the end of 2017, GROSSMUTTER-AG recorded a value adjustment of the participation rights in TOCHTER Holding-AG.

In order to increase productivity and harmonize IT systems, the operations of the merged TOCHTER Holding-AG are to be acquired from GROSSMUTTER-AG at book value in the first half of 2018. Only one investment property (residential property) remains in the merged TOCHTER Holding-AG.

Questions:

1. Can the transfer of assets in 2018 be carried out as planned without affecting profit tax?
2. Can GROSSMUTTER-AG claim the existing loss carryforwards for profit tax purposes in the future?

Variant 1

Initial situation according to the basic facts. As part of the planned transfer of the Group in the first half of 2018, however, a part of the business will remain with the merged TOCHTER Holding-AG in addition to the investment property. This part of the business was not loss-making in the past.

Questions:

1. Can the transfer of assets in 2018 be carried out as planned without affecting profit tax?
2. Can GROSSMUTTER-AG claim the existing loss carryforwards for profit tax purposes in the future?

Case 2: Merger of overindebted companies / Tax consequences for the shareholder / Variants

Facts

Sole shareholder and gastronomy entrepreneur Müller holds 100% of two stock corporations each. Zebra AG runs a restaurant in the city of Zurich. Although the profit situation is narrow, the business is not loss-making. Giraff AG operates a bar and club at another location in the city of Zurich. Giraff AG has incurred considerable losses over the past years, which Mr. Müller has covered with personal loans. To the extent of the existing over-indebtedness of Giraff AG, Mr Müller has subordinated his loans.

The initial situation can be represented graphically as follows:

The current balance sheets of the companies are as follows:

Mr. Müller's trustee proposes to merge the companies in order to save costs and to be able to offset future losses against profits.

The reorganisation of the companies envisaged by the trustee is conceivable in the two variants described below.

In both variants, the "Giraff" operation is discontinued shortly after the reorganization.

Variant 1

Giraff AG and Zebra AG are immediately merged (merger of the sister companies), with Zebra AG taking over Giraff AG.

Balance sheet picture of Zebra AG after the merger:

variant 2

In the first step, Mr. Müller transfers the participation Giraff AG to Zebra AG for CHF 1.00. In a second step, Giraff AG (now a subsidiary of Zebra AG) is merged into Zebra AG (subsidiary absorption).

Balance sheet after merger:

In both variants, the tax administration claims, in the course of a tax audit, that tax avoidance has occurred and that the reorganisation was carried out only with a view to the closure of Giraff AG. In variant 2, the tax administration also claims that the purchase price of CHF 1.00 for Giraff AG did not correspond to a third party price and that Mr Müller immediately received income in the difference between the price received and the third party price.

Questions:

Variant 1

What are the tax consequences for companies and shareholders if the tax authorities' allegation of tax avoidance proves to be justified?

What are the tax consequences if the allegation of tax avoidance proves to be inappropriate?

variant 2

Same questions as for option 1.

Additionally: Is the accusation justified that the price of CHF 1.00 for Giraff AG does not correspond to a third party price? Does this idea mean that the purchase price for the shares of Giraff AG must be negative?

Case 3: Merger and treatment of losses carried forward

Facts

MUTTER Holding AG holds 100 percent of the two Swiss subsidiaries TOCHTER 1-AG and TOCHTER 2-AG. Both subsidiaries are active in the metal processing sector.

In recent years, TOCHTER 2-AG was no longer profitable due to changed market conditions. It therefore shows losses that can still be offset against tax in the balance sheet. After a market-driven gradual reduction of production activities, the Group Executive Board decided to completely discontinue production. In the last financial year, among other things, production machinery was sold as far as possible. Intangible property rights (production processes), patents and the customer list were not sold.

TOCHTER 1-AG intends to absorb TOCHTER 2-AG at the end of the financial year.

Questions:

1. Can the merger be carried out in a profit-tax-neutral manner as planned?
2. Will TOCHTER 1-AG be able to claim the existing loss carryforwards in accordance with the merger balance sheet for profit tax purposes in the future?

Variant 1

Among other things, MUTTER Holding AG holds 100 percent of the two Swiss subsidiaries TOCHTER 1-AG and TOCHTER 2-AG. Both subsidiaries are holding companies.

TOCHTER 1-AG intends to absorb TOCHTER 2-AG by streamlining its management structure.

Questions:

1. Can the merger be carried out in a profit-tax-neutral manner as planned?
2. Will TOCHTER 1-AG be able to claim the existing loss carryforwards in accordance with the merger balance sheet for profit tax purposes in the future?

variant 2

MUTTER AG holds a 100 percent share in the subsidiary TOCHTER-AG. Both companies are active in the metal processing sector.

In recent years, TOCHTER-AG was no longer profitable due to changed market conditions. It therefore shows losses that can still be offset against tax in the balance sheet. After a market-driven gradual reduction of production activities, the Group Executive Board decided to completely discontinue production. In the last financial year, among other things, production machinery was sold as far as possible. Intangible property rights (production processes), patents and the customer list were not sold.

TOCHTER-AG intends to take over MUTTER AG at the end of the financial year by means of a reverse merger.

Questions:

1. Can the merger be carried out in a profit-tax-neutral manner as planned?
2. Can TOCHTER-AG continue to claim the existing loss carryforwards in accordance with the merger balance sheet for profit tax purposes in the future?

Case 4: Capital gains and taxable income

Basic facts

Müller is a gastronomy entrepreneur and together with the chef Ratatouille he holds a 50% stake in Zebra AG. Müller has designed a catering concept and successfully implemented it at various locations in Switzerland. Ratatouille is a personality also known from television and develops all the dishes offered in the restaurants.

An international catering company now wants to acquire Zebra AG for a purchase price of CHF 5 million. The following purchase options should be examined from a tax perspective:

Variant 1

In the past, Müller and Ratatouille have paid quite generous wages compared to the rest of the industry. The purchase agreement stipulates that both must remain with Zebra AG for another 2 years and that during this time successors are to build up their positions. Their wages will be reduced to the usual level for the industry while retaining their functions. The purchase price is paid immediately.

variant 2

Müller and Ratatouille received very modest wages and no dividends from Zebra AG during the start-up phase. They are leaving Zebra AG with the sale. The purchase price is paid immediately. The contract includes a non-competition clause for similar activities in Switzerland for the next 2 years.

Variant 3

According to the buyer's assessment, Müller and Ratatouille are almost indispensable for the success of the company. The buyer therefore obliges both parties in the purchase contract to remain active in the same functions for at least 5 years. The purchase price will be paid in tranches, with individual tranches being linked to the achievement of various sales and EBIT targets (earn-out). The first

The purchase price tranche of CHF 2 million is due upon signing of the contract and is not subject to any earn-out conditions. The remaining CHF 3 million is subject to contractual earn-out conditions. This provides for a 30% higher additional compensation for millers than for ratatouille (i.e. different maximum purchase prices). The wages paid so far will remain the same for the future.

Alternative situation

Müller and Ratatouille have just left their previous positions and decide to found Zebra AG together. Together they develop the business concept. Before the first restaurant is opened or the first investments are even made, an international gastronomy company acquires the company for CHF 5 million, but commits Müller and Ratatouille to implement the business concept over the next five years. The wages received by Müller and Ratatouille during this period are customary in the industry.

Questions on all variants:

Do the sellers achieve a tax-free capital gain from the sale? On what legal basis can any shares of the capital gain be reclassified for tax purposes?