Current problems of taxation of stock corporations and shareholders (2024)

Case 1: Tax-free repayment of hidden capital contributions

1. facts of the case

B. AG, domiciled in the canton of Nidwalden, was held by A., domiciled in the canton of Nidwalden, as the sole shareholder and acquired a hotel property in Germany from A. for a purchase price of EUR 4,610,000 or CHF 6,851,382 in accordance with the purchase agreement dated December 10, 2003. In addition to the purchase price, purchase costs of
CHF 285,545 were incurred. This resulted in total acquisition costs of CHF 7,136,927
. However, the hotel property was not recognized in the annual financial statements of B. AG at the actual acquisition costs, but only at the amount of CHF 1,865,995. The book value of the property was continuously adjusted in the period from 2004 to 2014. When the property was sold as part of the liquidation of B. AG in 2015, the carrying amount was CHF 3,426,930.

The mortgage debt for the hotel property of EUR 4,577,973 was taken back by A.. A recourse claim resulting from the assumption of the debt was not asserted by A. and was not recognized as a debt to A. in the annual financial statements of B. AG.

The sale of the property in 2015 resulted in gross proceeds of CHF 5,702,094 and, after deducting the carrying amount of CHF 3,426,930, an accounting profit of CHF 2,275,164. The accounting profit was credited directly to the current account or loan of shareholder A.

The Nidwalden cantonal tax office assumed a taxable liquidation dividend for A. for the 2015 tax year in the amount of the realized liquidation gain of CHF 2,275,164 for income tax purposes on the grounds that hidden capital contributions had previously been made to the liquidated B. AG had previously received hidden capital contributions.

Questions

1. Can hidden capital contributions also be repaid tax-free in accordance with Art. 20 para. 3 DBG?
2. What challenges and follow-up questions arise in tax practice?

Case 2: Employee shareholdings

1. facts of the case

1.1 Case 2A: Founder participations

B. founds C. AG in June _3 with a share capital of CHF 150,000, consisting of 1,500 shares with a nominal value of CHF 100 each. On the occasion of the foundation, B. agrees with A. that A. will acquire 750 shares in C. AG with a nominal value of CHF 75,000 as of January 1, _4 and take up employment with C. AG. At the time of the formation of C. AG, A. is employed by another company and has yet to terminate the existing employment relationship.

Question

• How are the shares in C. AG acquired by A. to be treated for tax purposes?

1.2 Case 2B: Purchase of genuine employee shares

C. AG was founded several years ago. A begins employment with C. AG on January 1, _4 and acquires 750 of the total of 1,500 shares in C. AG from B. on December 29, _3 at a nominal value of CHF 100 per share.

A. and B. conclude a shareholders' agreement in which it is agreed that the shares in C. AG held by the parties may not be sold, pledged or encumbered in any other way. In addition, the parties agreed a mutual right of first refusal with a purchase price based on the net asset value.

As at December 31, _3, the market value according to KS 28 of the SSK
was CHF 369,299 and the net asset value CHF 173,312 (in each case for 750 shares in C. AG).

In the opinion of the cantonal tax office, the acquisition of the shares results in income from employment of CHF 278,007 for A. based on the market value according to KS 28 of the SSK and taking into account the social security contributions owed.

Question

• Does the acquisition of the shares in C. AG have income tax consequences for A.? If so, how is the income determined?

1.3 Case 2C: Taxation of genuine employee shareholdings on assets

Question

• How are genuine employee shareholdings taxed on assets?

1.4 Case 2D: Sale of genuine employee shareholdings

A. is employed by C. AG as CEO and acquires 100 shares in C. AG in March of _3 as part of an employee participation program at a recognized formula value of CHF 1,000 each (as at 31.12._2) with a discount of 25.274% for the planned vesting period of 5 years, i.e. at a purchase price of CHF 747.26 each, a total of CHF 74,726.

In March of _7, C. AG is sold to a new investor, and A. receives a total selling price of CHF 500,000 for his 100 shares. The formula value as at 31.12._6 is CHF 3,000 per share.

Variant: the shares in C. AG are only sold after 5 years in the year _9.

Question

• Does the sale of the shares in C. AG have income tax consequences for A.? If so, how is the income determined?

1.5 Case 2E: Non-genuine employee shareholdings

A. is employed by D. AG as CEO and acquires 142,500 shares in Group company F in _6 as part of a management participation program (MPP) for the amount of DKK 2,850,000, which corresponds to CHF 604,427. In November _9, A. acquires 9,928 warrants at a price of DKK 427,500 as part of a "top-up investment" in addition to his previous investment. Due to a new edition of the D. employee participation program entitled "The New Beginning", the previous investment is converted in _12 and A. receives shares and warrants in Group company K.

The IPO of the D. Group takes place in _14. The shares and warrants acquired by A. as part of the employee participation program are converted into "IPO shares" with a value of DKK 7,283,860, which A. sells in the same year _14.

In deviation from the tax return submitted, the cantonal tax office adds additional income from employment for A. in tax year _14.
The tax offset is justified by the fact that A. received IPO shares with an equivalent value of DKK 7,283,680 (CHF 1,190,153) from the IPO of the D. Group, resulting in additional taxable income from employment for A.
(CHF 590,015 according to the assessment and CHF 502,277 according to the objection decision).

A., on the other hand, assumes a tax-free capital gain and disputes the offsetting against income for tax purposes.

Questions

1. How do A.'s MPP shares qualify for tax purposes?
2. Can A. realize a tax-free capital gain as part of the IPO and the sale of the IPO shares?

Case 3: Hidden profit distributions / triangular theory

1. facts of the case

1.1 Case 3A: Judgment of the Federal Supreme Court 2C_824/2021 of October 12, 2022

Leo AG is based in the canton of Appenzell-Ausserrhoden (AR) and its purpose is the distribution, marketing, sale and financing of real estate, trading in building materials and holding investments. It is wholly owned by the Tiger Foundation based in the Principality of Liechtenstein. This foundation, in turn, is also the beneficial owner of Anstalt Jaguar. Anstalt Jaguar is also domiciled in the Principality of Liechtenstein. In addition to other activities, Anstalt Jaguar is also the owner of the "Wild" brand. This trademark was filed in the Liechtenstein trademark register on September 29, 2015 and trademark protection has been in place for various countries since October 20, 2015. On 7 November of the same year, Anstalt Jaguar decided to conclude a license agreement with Leo AG, under which it allowed Leo AG to use the "Wild" trademark. The licensee had to pay an amount of CHF 100,000 for this granting of the right of use and also pay an ongoing license fee amounting to 10% of the basis of assessment.

Leo AG declared a profit after tax of around CHF 53,000 for the 2016 financial year. During the assessment of Leo AG, the tax authorities determined that license payments totalling around CHF 730,000 had been charged to expenses. Of these, the tax authorities recognized an amount of CHF 73,000 and added an amount of CHF 657,000 to the taxable profit as a non-cash benefit to the Tiger Foundation based in the Principality of Liechtenstein.

Questions

1. What considerations did the Federal Supreme Court make in this case and how did it justify its decision?
2. How did the Federal Supreme Court assess the calculation of the monetary benefit?

1.2 Case 3B: Decision of the StRG ZH 1 VS.2021.1 of August 19, 2021

A. is the sole owner and sole member of the Board of Directors of D AG.

The cantonal tax office carried out an audit of the accounts of D AG for the tax periods 2008 - 2013, which led to the offsetting of hidden profit distributions.

In September 2017, the cantonal tax office carried out another audit of D AG's accounts for the 2014 and 2015 tax years and identified hidden profit distributions to A. totaling CHF 85,509 and to her partner B. totaling CHF 53,148, for a total of CHF 138,658 (including the costs of a construction consultancy that was not justified on business grounds, inadmissible or excessive wages for A.'s son and another person and a share for the private use of a property held by the company).

A. prepared her own 2014 tax return in March 2016 and the 2015 tax return in November 2016, in which she did not declare any capital gains from the investment in D AG. With assessment proposals dated November 30, 2018, the tax commissioner added the benefits of D AG attributable to her to her taxable income. The taxpayer agreed to this on January 7, 2019.

Following a notification from the cantonal tax office, the FTA issued an invoice to D AG for the withholding tax of CHF 48,530 on the total monetary benefits of CHF 138,658 and demanded that the withholding tax be passed on to A. D AG paid the withholding tax and A. transferred the amount to D AG. D AG paid the withholding tax and A. transferred the amount to D AG.

In August 2020, A. submitted an application to the cantonal tax office for a refund of the withholding tax paid.

Question

• Can A. claim a refund of the withholding tax? If so, to what extent?

Case 4: Hidden equity

1. facts of the case

The balance sheet of Kolibri AG as at December 31, _1 shows the following picture:

Questions

1. How is the hidden equity calculated for Kolibri AG in the present constellation?
2. What are the tax consequences (direct taxes, withholding taxes) for all companies involved if the loan is granted by the domestic parent company?
3. Does this question change if the loan from the parent company does not bear interest?
4. What are the tax consequences (direct taxes, withholding taxes) for all companies involved if the loan is granted by a domestic sister company?
5. What are the tax consequences (direct taxes, withholding taxes) for all companies involved if the loan is granted by a foreign group company?
6. The loan from the Group companies in the amount of CHF 69,000 arose from the purchase of Specht AG. The Group has now financed the purchase of Specht AG through a bank, but the parent company of Kolibri AG had to provide security from the bank (collateral in the form of mortgages and/or securities). The bank charges an interest rate of 4% (CHF 2,760) for granting this loan. Does this constellation invalidate the calculation of hidden equity or is there still hidden equity? In this case, is a profit adjustment also made from a tax perspective, as the interest rate of 4% paid is higher than the interest rate specified in the Federal Tax Administration circular (3.75% or 2.25%)?
7. Kolibri AG's accounts are not kept in CHF, but in a foreign currency. Does this have an impact on the calculation of hidden equity?

Option I: Absorption of Specht AG - merger loss is capitalized

Kolibri AG absorbs Specht AG with retroactive effect from 01.01._2. As Kolibri AG does not have sufficient equity, the merger loss is capitalized as goodwill. This is confirmed and recognized by the auditors. This results in the following merger balance sheet.

Note

The tax consequences of a debt push-down are not addressed.

Question

Does this subsidiary absorption change the calculation of hidden equity and if so, in what form?

Option II: Absorption of Specht AG - merger loss is derecognized via equity

In contrast to the initial examples, current assets have been adjusted.

In this constellation, we assume that Kolibri AG has equity of CHF 50,000 prior to the absorption of the subsidiary and can therefore recognize the merger loss of CHF 45,500 directly in equity (profit tax value of the Specht AG investment CHF 50,000 ./. equity of Specht AG CHF 4,500).

The following balance sheet of Kolibri AG is available as at 31.12._2:

Question

• How is the hidden equity calculated on the basis of this subsidiary absorption?

Option III: Asset deal - Kolibri AG acquires the customer base from Specht AG

In this variant, we assume that Kolibri AG did not acquire Specht AG, but rather the customer base in the order of CHF 30,500 (=goodwill) as part of an asset deal.

Based on this assumption, the balance sheet of Kolibri AG as at 31.12._1 is as follows:

Question

• How is the hidden equity calculated based on this purchase of the customer base from a third-party company?

Variant IV: Original goodwill

The balance sheet is the same as in variant III. In addition, the tax office is confronted with the statement that the intrinsic value of Kolibri AG (DCF method or capitalized earnings value method) amounts to a total of CHF 100,000.

Question

• Under this premise, can the Group's entire loan be recognized as debt capital?

Variant V: Replacing bank loans with shareholder loans

In this constellation, we assume that Kolibri AG financed the purchase of Specht AG in full through third parties and that no collateral was provided by Group companies. As the Group has sufficient liquidity in subsequent years, this bank loan will be repaid by the Group.

Based on this assumption, the balance sheet of Kolibri AG as at 31.12._1 is as follows:

Question

• How is the hidden equity calculated based on this constellation? Is there hidden equity?