Waiver of claims/assignment of claims/ debtor warrants and profit participation certificates

Case 1: Debt waiver by parent company

Case 1.1: Debt waiver by parent company / profit tax / based on BGer 2C_576/2020

Basic facts

Variant 1

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 8, which would also still have been granted by a third party. In the course of the 2020 financial year, X wrote down this loan to MCHF 1 due to poor business performance (debt waiver). The write-off of MCHF 7 was recognised as an expense in profit or loss.

variant 2

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 8, which would also still have been granted by a third party. In the course of the 2020 financial year, X wrote off this loan down to MCHF 1 due to poor business performance (debt waiver). The write-off of MCHF 7 was credited to the "Profit and loss carried forward" account without affecting profit or loss.

Question

How should A's waiver of claims be assessed for direct tax purposes in the respective variants?

Case 1.2: Debt waiver by parent company / Hidden equity capital

Modification of the basic facts - hidden equity capital

Variant 1

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 8, which would also have been granted by a third party. In the course of the 2020 financial year, this loan was written down to MCHF 1 due to poor business performance (debt waiver) and income of MCHF 7 was recognised in profit or loss for A. The loan already represented fully hidden equity in 2019, but was not declared as such in the tax return. Company A has already been definitively assessed for the 2019 tax year.

variant 2

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 8, which would also have been granted by a third party. In the course of the 2020 financial year, this loan was written down to MCHF 1 due to poor business performance (debt waiver) and income of MCHF 7 was recognised in profit or loss for A. The loan already represented fully hidden equity in 2019, but was not declared as such in the tax return. Company A has not yet been definitively assessed for the 2019 tax year.

Question

How is the waiver of claims at company A to be assessed for direct tax purposes for each variant?

Case 1.3: Waiver of claims by parent company / capital contribution reserves

Modification of the basic facts - capital contribution reserves

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 8, which would also still have been granted by a third party. During the 2020 fiscal year, this loan was written down to MCHF 1 due to poor business performance (debt waiver) by recognizing an amount of MCHF 7 in profit or loss. The losses are not derecognized under commercial law.

Question

Can contributions from capital contribution reserves (KER) be made at company A?

Case 1.4: Waiver of claims by parent company/issuance fee (variant 1)

Variation of the basic facts - emission levy

At the beginning of the 2019 tax period, Company A received a loan from its parent company X of MCHF 20 due to poor business performance, which would no longer have been granted by a third party. During the 2020 fiscal year, this loan was written down to MCHF 8 (debt waiver in the amount of MCHF 12). Prior to the debt waiver, Company A had a loss carryforward of MCHF 12 and share capital of MCHF 1. Apart from the share capital, there is no further equity (over-indebtedness of MCHF 11). The restructuring allowance of MCHF 10 was not yet utilized in previous years.

Question

In the present case, can remission be granted in respect of the issue duty?

Case 1.4: Waiver of claims by parent company / issue levy (variant 2)

Variation of the basic facts - emission levy

At the beginning of the 2019 tax period, Company E received a loan from its parent company X of MCHF 20 due to poor business performance, which would no longer have been granted by a third party. During the 2020 fiscal year, this loan was written down to MCHF 8 (debt waiver in the amount of MCHF 12). Prior to the debt waiver, Company A had a loss carryforward of MCHF 12 and share capital of MCHF 1. Apart from the share capital, there is no further equity (over-indebtedness of MCHF 11).

A profit of MCHF 4 will be generated in the period between the revised annual financial statements 2020 and the restructuring resolution of the Annual General Meeting.

The restructuring allowance of MCHF 10 was not utilised in previous years.

Question

In the present case, can remission be granted in respect of the issue duty?

Case 1.4: Waiver of claims by parent company / issue levy (variant 3)

Variation of the basic facts - emission levy

At the beginning of the 2019 tax period, Company B received a loan from its parent company X of MCHF 20 due to poor business performance, which would no longer have been granted by a third party. During the 2020 fiscal year, this loan was written down to MCHF 9 (debt waiver in the amount of MCHF 11). Prior to the debt waiver, Company A had a loss carryforward of MCHF 14 and share capital of MCHF 1. Apart from the share capital, there is no further equity (over-indebtedness of MCHF 13).

The restructuring allowance of MCHF 10 was already fully utilized in previous years.

Question

In the present case, can remission be granted in respect of the issue duty?

Case 1.4: Waiver of claims by parent company / issue levy (variant 4)

Variation of the basic facts - emission levy

At the beginning of the 2019 tax period, Company D received a loan from its parent company X of MCHF 20 due to poor business performance, which would no longer have been granted by a third party. During the 2020 fiscal year, this loan was written down to MCHF 6 (debt waiver in the amount of MCHF 14). Prior to the debt waiver, Company A had a loss carryforward of MCHF 13 and share capital of MCHF 1. Apart from the share capital, there is no further equity (over-indebtedness of MCHF 12).

The restructuring allowance of MCHF 10 was not utilised in previous years.

Question

In the present case, can remission be granted in respect of the issue duty?

Case 2: Debt waiver with subsequent sale - profit tax

Facts

In 2014, Company X establishes Company A (share capitalMCHF 1, statutory reserve MCHF 0.5), in which it holds a 100% interest.

Company A will incur substantial losses in the following years. Company X therefore grants Company A a long-term loan of MCHF 10 in 2016 (which would no longer have been granted by a third party).

In 2018, Company A becomes overindebted (loss of MCHF 10). In the course of the restructuring measures, Company X waives the existing loan and writes down the participation increased by the debt waiver to the carrying amount before the debt waiver. At the same time, it receives a dividend of MCHF 10 from another subsidiary (Company X does not generate any tax loss carryforwards).

In 2019, Company A will be sold to an independent third party at a selling price of MCHF 11.5.

Question

How should the proceeds from the sale of company A be assessed for profit tax purposes?

Case 3: Waiver of claim through rent reduction

Facts

Company X is the sole shareholder of various subsidiaries. While the subsidiaries A and B are engaged in operational activities, the real estate company rents the premises required for the business model to its sister companies. The rent charged stands up to a third party comparison.

The economic effects of the Corona pandemic had a severe impact on the companies, which is why subsidiaries A and B are threatened with a loss of half of their capital and over-indebtedness, respectively.

In order to improve the balance sheet picture of the sister companies, the real estate company decides to waive the receivables existing at the end of the year with the subsidiaries in need of restructuring (recognition in the income statement).

Question

How should the waiver of rent claims be assessed for tax purposes in the case of subsidiaries A and B, the real estate company and parent company X?

Case 4: Transfer of claims

Basic facts

The top holding company (Top Co) of an international group directly holds 100% of the shares in the group finance company (Fin Co) as well as various operating companies, including the one in Switzerland (Swiss Co).

For various reasons, Swiss-Co now only has a very thin equity base. The equity capital is to be strengthened. However, there is still no over-indebtedness and no shortfall in nominal capital.

Fin-Co has an outstanding loan of approximately MCHF 300 to Swiss-Co.

Of this loan, MCHF 100. was transferred to Swiss-Co on 15 December 2020.

The transfer resulted in Swiss-Co's equity increasing by MCHF 100.

Question

How should this situation be treated in the case of profit tax, stamp duty and withholding tax?

Variant 1 - Facts

In a change in the basic facts, the claim was transferred on January 15, 2021, rather than December 15, 2020.

How should this situation be treated in the case of profit tax, stamp duty and withholding tax?

Variant 2 - Facts

In a change of the basic facts, the claim was not transferred on 15 December 2020, but on 15 January 2021. In addition, the transfer was not made to Swiss-Co in Switzerland but to another sister company in Germany, German-Co.

Question

How should this situation be treated in the case of profit tax, stamp duty and withholding tax?

Case 5: Debtor warrants and profit participation certificates

Basics on the subject of debtor warrants and profit participation certificates

In order to make the financial losses suffered by the restructurers in the course of the restructuring more bearable or to increase the motivation to participate in a restructuring, a company in need of restructuring can issue so-called debtor warrants or profit participation certificates.

Debtor warrant

According to KS 32, point 4.2.1.1, a debtor warrant can be defined as follows: "A debtor warrant exists if the corporation or cooperative released from its obligation grants the creditor, who does not hold a stake in the corporation or cooperative being restructured, the right to recover its claim in the event of an improvement in its financial situation".

The debtor warrant represents a conditional promise to pay, whereby the Company undertakes to pay compensation to the redeveloper upon the occurrence of certain betterment conditions.

KS 32 deals with the debtor warrant under the aspect of debt waiver. In principle, it is conceivable that a debtor warrant is also issued in the case of other restructuring measures, e.g. in the case of an à fonds perdu grant. The fact that the other restructuring measures are not mentioned in the circular can be interpreted as an indication that, particularly in the case of debt waivers, the tax consequences are not always clear and therefore require explanation.

According to KS 32, the revival of the original debt as well as any interest paid to the company in need of reorganisation or to the reorganised company constitutes a business-related expense "provided that the debt waiver was treated as genuine reorganisation income".

In the case of the redeveloper, the repayment represents a capital gain, which is taxable in the business assets or for legal entities and tax-exempt for natural persons.

The following table provides an overview of the debtor warrant provisions set forth in Circular 32.

Some of the literature criticises the view that debtor warrants can only be issued to non-participants. If a debtor warrant is issued to a shareholder, it is assumed to be a profit participation certificate.

Prof. Peter Böckli, for example, took the same view as the ITA. With convincing arguments, Oesterhelt/Schreiber are of the opinion that debtor warrants may also be issued to shareholders. In particular, this should not constitute a violation of the return of deposits (Art. 680 para. 2 CO), "since this only relates to deposits made when issuing share certificates". In addition, the granting of partial loans to unit holders is also permissible.

According to the opinion expressed here, however, the actual problem does not lie in the tax treatment of the debtor warrant or profit participation certificate, but rather in the tax treatment of the underlying debt waiver.

Thus, the practice of the FTA appears to be fundamentally appropriate. This means that even if a debtor warrant is issued to a shareholder under commercial law, it should be treated as a profit participation certificate for tax purposes.

At the same time, however, the waiver of claims by shareholders would also have to be treated consistently as a tax-neutral capital contribution. Otherwise, situations with contradictory tax consequences will arise again and again:

• Taxable waiver of claims by shareholders, but the subsequent profit participation certificate payment constitutes taxable investment income, or
• Taxable debt waiver by shareholders, but treated as capital contribution for issue tax purposes.

In this context, the statements in KS 32, para. 4.2.4, lit. a, 2nd paragraph, probably represent an editorial oversight. Since, according to the ITA, debtor warrants may only be issued to non-participants, the preceding reorganisation service cannot be a tax object of the stamp duty.

Profit participation certificate

According to KS 32, point 4.2.1.2, a (restructuring) profit participation certificate can be defined as follows: "If the creditor definitively waives his claim and the debtor promises him to distribute part of the profit in the event of an improvement in its financial position, based on resolutions of the general meeting of shareholders, a restructuring profit participation certificate exists."

Profit participation certificates represent a participation right that grants only asset rights, but no membership rights. The number of participation certificates and the property rights associated with them must be specified in the articles of association (Art. 627 No. 9 CO) and the creation of participation certificates is subject to a resolution of the general meeting of shareholders (Art. 698 II, No. 1 CO).

According to KS No. 32, item 4.2.2.1., lit. b), payments on the basis of profit participation certificates do not constitute tax-deductible profit distributions.

For the redeveloper, the repayment represents taxable investment income.

The following table provides an overview of the regulations on profit participation certificates set out in Circular 32:

The introductory comment in KS 32, section 4.2.2.2., lit. b), that receivables in business assets can be written off through profit or loss in the event of a waiver of receivables at the level of the restructurer, probably represents an editorial oversight. This statement is accurate in the context of the issuance of debtor warrants (to non-participants) and should therefore only be mentioned under this subtitle. If, however, the debt waiver is treated as tax-neutral at the company to be restructured (which should always be the case according to the present opinion, but according to the opinion of the FTA and the Federal Supreme Court is only applicable in two exceptional situations), then the debt waiver should not be written off at the level of the restructurer with an effect on income and tax, but should be capitalised on the participation in the company to be restructured.

Basic facts

The facts of the case are based on the decision of the Federal Administrative Court of 16 July 2010 (A-5872/2008). Loss-AG shows a loss of CHF 7 million and has received loans from its two parent companies. The two parent companies irrevocably (partially) waived their loans. In return, a "better fortune" agreement was made.

The court case concerned the remission of the issue tax. However, the tax consequences for profit and income tax in connection with the "better fortunes agreement" are also to be examined here.

• MG 1 AG irrevocably waives CHF 1.4 million of the loan
• MG 2 AG irrevocably waives CHF 5.6 million of the loan
• "Better fortunes agreement": payment of better fortunes of CHF 1.4 million and CHF 5.6 million, respectively, if the following conditions are met:

1. the remaining loan debt of CHF 3 million has been settled in full
2. the share and participation capital of Loss AG is fully intact as at 31 December of the year in question, i.e. there is no accumulated deficit
3. the equity capital incl. reserves and retained earnings before recovery payment and appropriation of profit amounts to at least CHF 9 million.
4. the equity capital under commercial law may not fall below CHF 8 million due to recovery payments
5. MG 1 AG and MG 2 AG must hold an interest in Loss AG at the time of the payment approximately to the same extent as today

Variant: Natural person as shareholder

Variant debtor warrant

A third party company (DG) waives CHF 7 million of an outstanding loan.