Case 1: Transaction-related risks
Indirect partial liquidation, legacy reserves and employee participation

1. facts of the case

X. AB (Sweden) plans to acquire 100% of the shares in Y. Holding AG (Zurich). The current shareholder structure of Y. Holding AG is as follows[1]:

• 40% of the shares will be held by A residing in Konstanz (Germany),
• 30% of the shares are held by B, who resides in Zurich, and
• 30% of the shares are held by C, who resides in Frauenfeld.

The Y. Group is an IT company, with the main activities carried out by B. AG (Zurich) (owner of the IP and customer contracts). A. GmbH is a service company that carries out software development on behalf of B. AG. Y. Holding AG is a pure holding company.

The structure can be simplified as follows:

Y. Holding AG was founded in 2010 by A and B. C (Managing Director) acquired the shares from A and B in 2020 at the market value at the time (EBITDA x8 multiple less net debt).

[1] These findings can be found, among other things, from the share register, old purchase contracts, etc.

‍

It is currently planned to sign the purchase agreement in Q2 2024. As part of a letter of intent, the parties have agreed that the purchase price will be determined on the basis of the consolidated Swiss GAAP FER financial statements as of December 31, 2023 (locked box mechanism). For the calculation of the enterprise value, the EBITDA multiple method is to be used (multiple of 10). The transaction is expected to close shortly after the signing of the purchase agreement.

The statutory balance sheet of Y. Holding AG showed the following picture on 31.12.2023:

Questions

1. What are the income tax consequences for the sellers as a result of the sale of the shares in Y. AG?
2. What does X. AB have to consider as a buyer and how can it take into account the possible tax consequences/risks in the negotiations?
3. Would anything change in your recommendation if a closing account mechanism was agreed instead of a locked box mechanism?

‍

Case 2: Historical risks
Recovered value adjustments

1. Facts

As part of the due diligence process, you requested the cost overview[1]. This shows the following picture:

In the Swiss GAAP FER financial statements, the investments are listed at their historical acquisition costs (B. AG with CHF 3 million and A.GmbH with CHF 1 million).

‍

[1] Often a supplement to the tax return or a separate overview.

Question

What does X. AB have to consider as a buyer?

‍

Case 3: Historical risks
Related Party Transactions

1. Facts

As part of the due diligence process, you will have gained the following insights[1]:

• The sellers' legal and consulting fees incurred so far in connection with the sale were invoiced to Y. Holding AG (CHF 250,000 in 2023).
• To date, the Y. Group has not prepared a transfer pricing study. Your analysis of the intra-group settlements has shown that the compensation paid to A. GmbH by B. AG has been too high over the last two years (CHF 160,000 per year).

‍

Question

What does X. AB have to consider as a buyer?

‍

[1] These insights can be gained through a discussion with management or, among other things, by reviewing the following documents: contracts, balance sheets and, if applicable, account statements, separate overview of the target company for intra-group settlements.

‍

Case 4: Tax Items in Valuation Accounts
Current taxes

1. Facts

As of December 31, 2023, B. AG recognized a provision for current taxes of CHF 35,608. Based on the tax documents you received, you have gained the following insights:

• B. AG has submitted the tax returns up to and including 2022.
• The company has a final assessment until 2019.
• For the years 2020 to 2022, the company has claimed a special R&D deduction of CHF 175,000 per year.
• In Q1 2024, the Zurich Tax Office asked a number of questions about the activities of B. AG and stated in its assessment decision as of 15 March 2024 for the year 2020 that the underlying personnel costs do not qualify for the R&D special deduction. Accordingly, the R&D special deduction was corrected in the assessment decision for 2020.
• The assessment decision was not taken into account when calculating the tax provision as of December 31, 2023.
• The tax provision is calculated at a tax rate of 19%.

The calculation of the tax provision obtained showed the following picture:

Question

What does X. AB have to consider as a buyer?

‍

Case 5: Tax Items in Valuation-Relevant Financial Statements
Deferred taxes

1. facts of the case

The consolidated Swiss GAAP FER financial statements as of December 31, 2023 show the following deferred tax items (assumption: A. GmbH has no deferred tax positions):

Question

What does X. AB have to consider as a buyer?