2024

Julia von Ah

Thomas Gammeter

Intra-family succession and management succession

Julia von Ah

Thomas Gammeter

Case 1: Longstanding employee takes over company succession in return for partial payment

1. facts of the case

BergGipfel Asset Management AG (BGAM AG) was founded on March 1, 2007, with the main purpose of providing advice and services in the field of asset management and has its registered office in Horgen. Its share capital, divided into 1,000 NA à nom. CHF 100 each, is held 99% by BI (999 shares with a nominal value of CHF 100 each) and 1% by his wife NI (1 share with a nominal value of CHF 100 each). Both are resident in Wädenswil and are members of the company's Board of Directors. In contrast to NI, BI is also operationally active in the company as Managing Director of BGAM AG.

BI would like to hand over BGAM AG to younger hands as part of a company succession. To this end, he would like to transfer all shares to SU, a long-standing employee of BGAM AG with a joint signature of two. SU is resident in Landquart (canton of Graubünden).

The plan is for NI to transfer its 1% stake to BI at a price of CHF 30 in a first step. BI would then like to transfer its 100% stake to SU at the same price, i.e. for a total of CHF 30,000 (CHF 30 per share: a total of 1,000 NA at CHF 30 = CHF 30,000). SU is to continue to manage BGAM AG in the same way as BI and continue to serve its long-standing clients in the area of asset management.

The parties are aware that the price per share of CHF 30 is not only below the nominal value, but also below the formula value (according to Praktiker Method I pursuant to KS SSK 28 as of December 31, 2023: CHF 280) or a market value.

Question

How does a share acquisition by SU as of July 1, 2024 qualify for tax purposes?

Variant 1

Same facts as in the basic facts, but BI sells its shares to SU in two tranches: The plan is that BI

a 40% stake in BGAM AG as at July 1, 2024 at a price of CHF 30 per share and
as of January 1, 2027 to purchase the remaining 60% at the same price of CHF 30 per share.

BI and SU conclude a shareholders' agreement. In the event that SU should leave the company contrary to expectations (for whatever reason), an obligation to return its shares to BI at the then current formula value (practitioner method model 1 KS SSK 28) is agreed.

Question

Does this change the tax qualification of the share acquisition by SU?

variant 2

Same situation as in variant 1; the shareholders' agreement stipulates a right of return for SUs, but no obligation to return them.

Question

Does anything change in the tax qualification of the share acquisition by SU compared to variant 1?

Case 2: Long-standing employees acquire shares from the previous founding shareholder via Personal HoldCo

1. facts of the case

UA, resident in Illnau-Effretikon, is Managing Director and Chairman of the Board of Directors of IAG. BZ, resident in Kollbrunn, is a long-standing employee and has been a member of the Board of Directors since 2020. Another member of the Board of Directors is AS (retired since October 2019), resident in Bülach.

In 2010, UA and AS acquired IAG from SG as part of a management buy-out via Ing Holding AG (IHAG), which was founded for this purpose and in which they each hold a 50% stake. The purchase price for 100% of the shares was CHF 4 million. In a shareholders' agreement, UA and AS agreed a right of first refusal in the event of share capital increases and a right of first refusal in the event of share sales for the other shareholder. According to the shareholders' agreement, the share price is to be agreed by the shareholders or determined by the auditors if the shareholders are unable to reach an agreement.

Finally, in 2016, UA transferred its 50% stake in IHAG to its personnel holding company, UA Holding AG (UAAG), which it holds 100%. In 2018, IHAG was merged with IAG (reverse merger) and subsequently deleted. Since then, AS and UAAG have each held 50% of IAG. There is still an ABV between the shareholders with unchanged clauses regarding the right of first refusal and pre-emption rights as well as the determination of the sale price.

Since the takeover in 2010, IAG has distributed most of its current profit to its shareholders as an annual dividend.

AS would like to withdraw completely from the company upon retirement and sell its 50% stake in IAG retroactively as at January 1, 2024 to UA (20%) and BZ (30%), who both hold management positions at IAG. The enterprise value of IAG calculated in accordance with the practitioner's method amounts to CHF 7 million at this time (→ 50% = CHF 3.5 million).

UA would like to acquire the 20% stake via UAAG, as it already holds the 50% stake acquired earlier.

BZ would like to acquire the 30% via its personnel holding company, BZ Holding AG (BZAG), which is yet to be founded and will be wholly owned by BZ. The purchase price for the 30% stake is to be financed on the one hand by a bank loan in favor of BZAG and on the other hand by a loan from BZ to BZAG. BZ refinances the loan via an additional mortgage on the owner-occupied primary residence.

BZ will charge BZAG the same interest as it has to pay for the additional mortgage.

BZAG and UAAG each acquire at enterprise value according to the practitioner method, i.e. BZAG 30% at CHF 2,100,000, UAAG 20% at CHF 1,400,000. The ABV is retained.

Questions

How should the acquisition of shares by UA and BZ via the Personal HoldCos (UAAG and BZAG) be qualified?

What are the tax consequences if UAAG or BZAG sell IAG shares 3 years after acquisition?
3 years after acquiring the IAG shares, BZ sells its 100% stake in BZAG
- What are the tax consequences for BZ?
- What are the tax consequences for UA?
3 years after acquiring the IAG shares, BZ sells a 25% stake in BZAG
- What are the tax consequences for BZ?
- What are the tax consequences for UA?
Can the acquisition via a Personal HoldCo be considered a tax avoidance?

Variant 1

Same facts as the basic facts, but BZAG and UAAG each acquire CHF 1,200,000 (BZAG 30%) and CHF 800,000 (UAAG 20%), i.e. at the value on which the previous transaction was based and therefore below the formula value.

variant 2

Same situation as variant 1, but BZ is AS's son and has already held a management position at IAG for several years.

Question

How should BZ's acquisition of shares via BZAG be qualified?

Case 3: Managing director and minority founding shareholder acquires further tranche of shares from majority founding shareholder

1. facts of the case

Gründer-IT AG (GITAG), based in Dietlikon ZH, was founded on May 20, 2019 by Gründer Holding AG (GHAG), based in Zurich, with a share capital of CHF 200,000 divided into 2,000 registered shares of CHF 100 each. According to the entry in the commercial register, the purpose of GITAG is to provide IT services, trade in IT products, advise individuals and legal entities on strategic and operational issues and provide related services. To this end, GITAG rented office and store premises in Dietlikon in June 2019. For its part, GHAG was founded by IT specialists and has expertise in this sector. It has already used the following procedure on various occasions for the establishment of IT companies or for company takeovers.

To finance the interior fit-out, the warehouse, marketing and other costs in the start-up and development phase, GHAG made a contribution of CHF 600,000 to GITAG's equity and also granted it a loan of CHF 100,000.

RS is a computer scientist and took up his position as Managing Director of GITAG on June 1, 2019.

Immediately after GITAG was founded (on the same day), RS acquired a 10% stake in GITAG by purchase agreement dated May 20, 2019. The purchase price for the 10% stake amounted to CHF 80,000 (share capital of CHF 200,000 and contribution to equity of CHF 600,000 = CHF 800,000 → 10% thereof).

In the purchase agreement dated May 20, 2019, GHAG granted RS a two-part purchase right, namely that RS

to acquire a further 80% of the shares in GITAG from RS in one or more tranches at any time over the following ten years (from January 1, 2020 to December 31, 2029). The purchase price per share was fixed at CHF 400, subject to capital increases or repayments, which would have to be taken into account accordingly as a price adjustment;
can also acquire the remaining 10% from January 1, 2030 at the then current market value, but at least CHF 400 per share. In the event of disagreement, the market value will be determined by an expert opinion from two experts; the purchase price would be the arithmetic mean of the value of both opinions.

On March 1, 2023, RS and GHAG agreed to acquire a further 10% stake in GITAG in an addendum to the original purchase agreement. The purchase price amounted to CHF 80,000 (CHF 400 x 200). According to the practitioner method model 2, the enterprise value of GITAG as at December 31, 2022 was CHF 380,000. The formula value calculated in this way for the 10% stake amounted to CHF 38,000 at this time.

RS plans to acquire a further 70% stake in GITAG as of June 1, 2024. The purchase price is CHF 560,000 (CHF 400 per share x 1,400 shares).

According to the practitioner method model 2, the enterprise value of GITAG as at December 31, 2023 is CHF 1,560,000. The formula value calculated in this way for the 70% stake is CHF 1,092,000 (CHF 780 per share). The 70% stake is subject to an 8-year lock-up period, which corresponds to a discount of 37.259%. The resulting reduced formula value for the 70% stake is CHF 685,132 (= CHF 1,092,000 x 62.741%).

The shareholders have entered into a shareholders' agreement, which stipulates that the enterprise value is to be determined in accordance with practitioner method model 2 in future as well. According to the ABV, GHAG has a purchase right to the RS shares until December 31, 2029.

if RS dies or becomes permanently incapacitated,
if RS resigns from active employment as a Board member or IT specialist due to termination by RS or termination by GITAG for good cause. Good cause is a decline in sales under RS's management for five consecutive years or a permanent reduction in his gainful employment of more than 50% of his normal working hours.

RS (or its legal successor) has a right of sale vis-à-vis GHAG until December 31, 2029

if RS dies or becomes permanently incapacitated;

when RS retires from active work as a board member or IT specialist.

RS will finance the planned purchase of the 70% stake with private funds. It will also acquire and hold the 70% directly.

Questions

How is the 1st share purchase of 10% on the date of incorporation (immediately after incorporation) to be qualified?
How does the 2nd acquisition of a 10% stake on March 1, 2023 qualify?
How is the 3rd share acquisition by RS of 70% stake as of June 1, 2024 to be qualified?
Does RS have any restrictions to consider from the first share purchases regarding the acquisition of the last 10% after January 1, 2030?

Variant

The 1st and 2nd share acquisitions are the same as in the basic facts. However, the 3rd share acquisition by RS of 70% will take place on June 1, 2026.

According to the practitioner method model 2, the enterprise value of GITAG as at December 31, 2025 is CHF 1,560,000. The formula value calculated in this way for the 70% stake is CHF 1,092,000 (CHF 780 per share). The 70% stake is subject to an 8-year lock-up period (up to and including May 31, 2034), which corresponds to a reduction of 37.259%. The resulting reduced formula value for the 70% stake remains unchanged at CHF 685,132 (= CHF 1,092,000 x 62.741%).

Questions

1st alternative:

On June 2, 2031, an independent third party makes a takeover bid to RS (90% shareholder) and GHAG (10% shareholder) for the acquisition of 100% of GITAG and offers CHF 1,200 per share.

What are the tax consequences for RS?

2nd alternative:

On June 2, 2031, GHAG acquires 90% of the shares of RS at a price of CHF 1,200 per share based on a third-party appraisal by RS.

What are the tax consequences for RS?

Case 4: Managing director and original co-founder takes over the ordinary shares of the other deceased co-founder

1. facts of the case

AN and BS founded ABS GmbH, based in Aarau, in 1998 with a share of CHF 10,000 each. The purpose of ABS GmbH is the planning, installation and commissioning of solar systems. The managing director with sole signing authority is BS. Internally, the business partners managed ABS GmbH on an equal footing from the outset. BS contributed his knowledge in the installation and commissioning of the systems and AN was responsible for the planning of the systems as an engineer.

In 2000, BS founded another company with other business partners, and BS's activities subsequently shifted more and more to this area. BS retired in 2010. At that time, AN was the only employee and wage earner (standard market wage) at ABS GmbH. He continued to expand the planning division. ABS GmbH now employs 8 people in the planning division.

BS passed away in 2021. AN acquired the ordinary share from BS's estate at a price of CHF 60,000. Prior to the purchase of the ordinary share, the non-operating reserves of CHF 420,000 were distributed in full to the ordinary shareholders. The enterprise value of the company at this time was CHF 800,000 according to the so-called practitioner method. The purchase price was calculated according to the net asset value as per the interim financial statements as at June 30, 2021 (rounded figures):

Purchase price: The net asset value was rounded up to CHF 60,000.

The competent tax office qualified the purchase of the additional ordinary share as a genuine employee shareholding and assessed the difference between the purchase price and the formula value as income from employment.

Following an objection, the tax office waived taxation in the 2021 tax year on the condition that AN agreed to the following reverse (referred to as "perpetual formula linkage"):

In the event of a future sale of the ABS GmbH share acquired in the 2021 tax year, the difference between the equity available at that time plus CHF 20,000 and the actual proceeds from the sale will qualify as income from employment for employees.
In the event of a sale of the ABS GmbH ordinary share acquired in 2021, the CO waived the right to claim that the tax realization date should be allocated to the 2021 tax period.
The "first in, first out" principle applies. Accordingly, if an ordinary share is sold, the ordinary share acquired in 2021 is only deemed to have been sold if the second ordinary share is no longer owned by AN or is sold at the same time. Should the number of ordinary shares and their nominal value change due to an amendment to the Articles of Association, the above shall apply mutatis mutandis. If the ordinary share acquired in 2021 is transferred by way of a gift, mixed gift or inheritance, the "perpetual formula" also applies to the new owners. The ordinary share acquired in 2021 is deemed to have been transferred by gift, mixed gift or inheritance if the second ordinary share is no longer owned by AN or is transferred at the same time. Should the number of ordinary shares and their nominal value change due to an amendment to the Articles of Association, the above shall apply mutatis mutandis.
AN expressly declares that the present Reverse shall apply unchanged, even if the tax jurisdiction changes due to a (inter-municipal or inter-cantonal) change of domicile.