Intra-group financing and hidden equity
Workshop on the occasion of the ISIS) seminar on 20 April 2021 entitled "Tax aspects of corporate finance, including reorganisation topics".
Case 1: Consideration of goodwill in the calculation of hidden equity capital
In 2020, the international A Group acquired the Swiss X AG in a share deal. The transaction took place between two independent third parties and there is no doubt that the agreed purchase price was an independent third party price. The purchase price was CHF 1,000.
The purchase price is to be financed 100% by means of an intercompany loan in the amount of CHF 1,000. This loan is granted by the Dutch cash pool of the A Group. The interest rate on this loan is 2.5% per annum.
The Group's cash pool consists on the one hand of funds from other Group companies and on the other hand of bank loans from third-party banks.
Following the acquisition, it is planned to merge Swiss A AG with Swiss X AG.
The group structure after the purchase can be represented as follows.
In 2019, A Group engaged an investment bank to sell A AG. During this bidding process, numerous binding purchase offers were received, all in the range of CHF 1,500. However, the sale did not materialise as A Group considered the offers to be too low.
The balance sheet of Schweizer A AG after the purchase is as follows:
The balance sheet of Schweizer X AG as at 31 December 2020 is as follows:
- Can the company's own goodwill (original goodwill) be taken into account when calculating the hidden equity of A AG?
- At what value must the goodwill arising from the merger (derivative goodwill) be included in the calculation of hidden equity? How must this be taken into account in the future?
Case 2: Third-party comparison requirements taking into account the negative interest rate environment and safe haven interest rates in downstream constellations
The German M Group has a cash pool in Holland (Cash-Pool B.V.) as well as two Swiss subsidiaries (A AG, Canton of Zurich and B AG, Canton of Zug). A AG itself also holds a subsidiary (E AG, Canton Zug). The group structure can be represented as follows:
The Group has sufficient cash and cash equivalents within the Group. In addition, Cash-Pool B.V. has a standing credit limit (revolving credit facility) from a third-party bank, which it can draw on if necessary. This credit facility is guaranteed neither by M GmbH nor by other group companies of the M Group.
Due to the current interest rate environment, the M Group has to pay negative interest on various bank balances. The following scenarios must each be considered separately and are intended to show various facets of intra-group financing in connection with the calculation of hidden equity or the profit and withholding tax consequences due to the interest deductions.
Cash-Pool B.V. grants A AG a loan of CHF 1 million at an interest rate of 5.5%. This interest rate is composed of:
- 5% interest rate of the credit limit (revolving credit facility) of the third-party bank, not guaranteed;
- 0.5% Risk premium of Cash-Pool B.V.
The additional external debt does not lead to hidden equity at A AG. There are no further loans on the liabilities side.
In addition to the loan from Cash-Pool B.V., A AG will later receive a loan from its parent company in the amount of CHF 0.5 million at an interest rate of 0.25%. Due to the additional loan, A AG now reports hidden equity of CHF 0.2 million. In addition, the Group is considering subordinating this loan.
M GmbH has surplus liquid assets. Due to the negative interest rates, it grants a loan to A AG in the amount of CHF 1 million at an interest rate of 0.5%. This loan does not lead to hidden equity at A AG. A AG does not need these funds. Credit balances of A AG are not subject to any negative interest at the principal bank.
A AG is fully self-financed. It has liquid funds in its bank account which it does not wish to invest on the capital market at short notice for reasons of flexibility. Accordingly, A AG has to pay negative interest on the current account. A AG now grants a loan to B AG, as the latter does not have to pay negative interest. The loan of CHF 1 million is interest-free.
Same as scenario 3, with the variation that M GmbH has its registered office in Switzerland (Canton of Zurich).
Cash-Pool B.V. grants A AG a loan of CHF 1 million at an interest rate of 5.5% (see scenario 1). A AG passes this loan on to its subsidiary, E AG, as this company is in a poor economic situation and needs the financial resources. Due to the economic situation of E AG, the loan is granted at an interest rate of 1%. In the long term, there are signs of an economic recovery due to an upcoming large order.
What are the Swiss tax consequences of each scenario?
Case 3: Hidden equity in connection with the reduction of capital tax in the Canton of Zurich
T AG, which is domiciled in the Canton of Zurich, occupies the following position within the Group:
It acts as an intermediate holding company and is provided by M AG for its financial needs by means of a non-interest bearing loan. The balance sheet of T AG is as follows:
This regularly leads to the offsetting of hidden equity, such as in the 2019 tax period:
From the 2020 tax period onwards, the Canton of Zurich will grant a reduction on taxable equity (§ 81a StG ZH).
How does the reduction on taxable equity affect hidden equity?
Case 4: Interaction between Covid 19 loans and hidden equity capital
T AG, which is domiciled in Switzerland, is wholly owned by the German company M AG. The balance sheet of T AG is as follows:
When structuring the intercompany loan, care is taken at the end of each year to ensure that the loan from the parent company does not qualify as hidden equity and is adjusted accordingly if necessary. It was therefore assumed that there would be no hidden equity for 2019:
The Annual General Meeting for the 2019 financial year of T AG has already taken place in mid-January 2020. A dividend payment of CHF 700 was resolved, payable at the end of February 2020.
T AG operates in an industry that has been severely affected by Covid-19. This resulted in a sharp drop in sales and an operating loss. As a result, it takes out a Covid 19 loan in the amount of CHF 10 million in March 2020.
In addition, for liquidity reasons and due to concerns of impending undercapitalisation, it was decided to revoke the dividend that had been approved and was already due.
- What is the impact of taking the Covid 19 loan on the tax qualification of the parent company's loan?
- What are the tax consequences of revoking the dividend?