Possibilities and limits of corporate tax planning - national and international

Case 1 - Sale vs. restructuring

1.1 Initial situation and target structure

Alfred Frei has two sons, David and Mathias Frei. The three are involved in a group of companies as follows

• The three shareholders each own 33.33% of Waldegg Holding AG.
• Only his sons David and Mathias each hold a 50% stake in Kurzegg Immobilien AG.
• Waldegg Holding AG in turn owns 100% of Dreibein AG (and other active companies).

Dreibein AG is an operating company that conducts retail trade in its own properties and leases the remaining office space to third parties.

Kurzegg Immobilien AG includes all properties of the Group with the exception of those of Dreibein AG.

The properties of Dreibein AG generate rental income totalling CHF 5,000,000.

The financial years of all companies begin on 1 January and end on 31 December.

The three shareholders would like all properties of the group to be included in the balance sheet of Kurzegg Immobilien AG. The restructuring will be implemented during the first half of the year with retroactive effect from 1 January.

1.2 Basic version

The restructuring will be implemented as follows:

• The real estate of Dreibein AG will be transferred retroactively to January 1 at book or profit tax values from Dreibein AG to a new sister company, Dreibein Immo AG. The asset surplus is credited to the open reserves of Dreibein Immo AG.
• Waldegg Holding AG absorbs Dreibein Immo AG with retroactive effect from 1 January.
• Waldegg Holding AG is also transferring its entire real estate operations (ex Dreibein Immo AG) to Kurzegg Immobilien AG retroactively as of 1 January at book or profit tax values. The surplus assets are credited to the open reserves of Kurzegg Immobilien AG.

1.3 Questions

1. How are the three steps envisaged to be assessed for tax purposes?
2. What are the tax consequences for shareholders?
3. Could the procedure be made more efficient at best?

1.4 Supplement to the facts I

The business situation in the retail trade is not very good and therefore Dreibein AG has reported losses over the last five years. These losses amount to a total of CHF 8,000,000. As a result of these losses, Dreibein AG is overindebted.

There are subordinations on the loans of Waldegg Holding AG, so that an open restructuring is not considered necessary. In addition, there are demonstrable hidden reserves on the properties of Dreibein AG in the amount of at least CHF 12,000,000 (cautiously estimated). Over the years, Dreibein AG has always made the ordinary depreciations on the properties.

It is not easy to allocate these losses to the retail trade and the part of the property to be transferred.

1.5 Question

How is the tax loss of CHF 8,000,000, which can still be offset against future profits within the framework of loss offsetting, to be allocated to the companies involved?

1.6 Supplement to the facts II

The profits expected in Dreibein AG in the future will not be so high that all losses incurred in the past in the amount of CHF 8,000,000 can be offset against profits. Therefore, Dreibein AG would like to freely determine the transfer value of the properties of Dreibein AG to Kurzegg Immobilien AG. In this regard, it states that from a tax law perspective, there is no obligation to either fully or not at all make use of tax neutrality in the case of a restructuring.

Subsequently, it transfers the real estate part of Dreibein AG at a price which is CHF 8,000,000 above the reported book value of the properties. With this measure, Dreibein AG can offset all losses incurred in the past against this extraordinary gain.

The tax representative takes the view that a tax-neutral restructuring also exists if the transfer takes place below the market value but above the original book value. For income tax purposes, the difference between the book value and the transfer value of CHF 8,000,000 should be accounted for. Under civil law, however, this was a capital gain and not a revaluation gain.

1.7 Question

What is the viewpoint of the tax representative?

Case 2 - Participation deduction / cost price of participation

2.1 Basic facts

The parent company is a holding company and is taxed according to Art. 28 para. 2 StHG. The parent company holds 100% of the shares in A-AG, B-AG and C-AG. Both the A-AG and the B-AG are distribution companies. C-AG is the production company that manufactures the products distributed by B-AG. The A-AG sells manufactured products outside the Group. The structure as of 31.12.2018 can be presented as follows:

The pro-forma balance sheet 2018 of the parent company is as follows (in thousands of Swiss francs):

2.2 Questions

1. According to which principle are the investments as of 31.12.2018 to be valued from a commercial law perspective?
2. How are the values of the investments as of 31.12.2018 to be assessed from a tax perspective (direct federal tax)?
3. Does your assessment of Question 1 change if they know that the B-AG exclusively distributes only those products which were previously manufactured by the C-AG?

2.3 Supplement to the facts I

The parent company acquired the A-AG in 2017 at a price of 400. The A-AG is the only competitor with an identical product in the same market as the B-AG. However, the market is oversaturated, which is why the parent company is successively reducing the activities of the A-AG. In 2018, the investment in A-AG must be written down by 100 to 300. In 2019, the A-AG will be liquidated (book value: 300; liquidation proceeds: 300). Shortly afterwards, B-AG is sold at a price of 600.

2.4 Question

What are the tax consequences (direct federal tax) for the parent company resulting from the sale of the stake in B-AG?

2.5 Supplement to the facts II

Irrespective of Supplement I, the parent company decides to give up its holding status as of 31 December 2018.

2.6 Question

What are the tax consequences for the parent company resulting from the change of status in general, but in particular also with regard to the shareholdings in the A-AG and the B-AG?

Case 3 - Establishing, rebuilding and dismantling an international structure

3.1 Basic facts

The SynFi Group is active in the development, production and distribution of industrially used synthetic fibers. In the medium term, the SynFi Group wants to establish a second mainstay in the textile fashion industry. It intends to do this via SynFi AG in Switzerland.

To this end, SynFi AG is building up an infrastructure in Italy in 2011 by renting office space (office costs CHF 10,000 p.a.) and hiring two part-time employees (personnel costs CHF 40,000 p.a.). The employees are assigned to explore the market potential for synthetic fibres in the fashion industry in Italy, to establish and develop contact with potential customers, to promote the products of the SynFi Group and to serve as a first point of contact for Italian customers. The products are then distributed from Switzerland (contract negotiations and conclusion, logistics, technical support, customer service, etc.)

3.2 Questions

1. What are the tax risks of SynFi AG in Italy?
2. Do the costs for offices and personnel in Italy in the years 2011 to 2013 represent tax deductible expenses for SynFi AG in Switzerland?

3.3 Supplement to the facts I

As a result, the market in Italy was successfully developed and a customer base built up (gross profit margin CHF 500,000 p.a.). As it has become increasingly difficult to support them from Switzerland, the number of employees was increased to two and a half full-time positions in Sales & Technical Support in 2014 (new personnel costs: CHF 150,000). The customer contracts are negotiated by the employees in Italy, but signed in Switzerland. It was not necessary to expand the office infrastructure because the sales and technical staff worked mainly from home and were supported from Switzerland (costs for technical and administrative support from Switzerland CHF 190,000).

3.4 Questions

1. Will the profit from business with Italian customers be taxable in Switzerland in 2014?
2. Is there anything to be considered regarding the cost of offices and staff in Italy in 2011-2013?

3.5 Supplement to the facts II

After a profit (before taxes) of CHF 200,000 in 2015, SynFi AG has lost an important customer due to difficult market conditions in the textile industry and has achieved a loss of CHF 100,000 each in 2016 and 2017 in the Italian business.

3.6 Question

How are the losses treated for tax purposes in Switzerland?

3.7 Supplement to the facts III

For various reasons, the SynFi group is considering the idea of cleaning up the structure. The following variants are under discussion:

• Transfer of the substance in Italy to an Italian subsidiary of SynFi AG
• Transfer of the substance in Italy to a foreign sister company of SynFi AG
• Termination of activities/presence in Italy

3.8 Question

How should these variants be assessed from the point of view of Swiss taxes? What should be noted with regard to the previous year's losses from the Italian business?

4th case 4 - "rehabilitation"

4.1 Facts of the case

Marc Rohner is the sole shareholder of MaRo Immobilien AG and MaRo Produktions AG, which are held as private assets. MaRo Produktions AG operates a business that is in the process of being established and whose entrepreneurial future is uncertain.

The current situation is as follows:

Against this background, the following steps are planned:

• To secure liquidity, MaRo Immobilien AG grants MaRo Produktions AG an interest-free and unsecured loan of CHF 500,000.
• Marc Rohner brings MaRo Produktions AG into MaRo Immobilien AG for CHF 1.
• MaRo Immobilien AG then derecognizes the loan receivable from MaRo Produktions AG. In MaRo Produktions AG, this results in an extraordinary profit of CHF 500,000.

4.2 Questions

1. How is the granting of a loan by MaRo Immobilien AG to MaRo Produktions AG to be assessed from a tax perspective? What are the tax consequences?
2. How is the subsequent definitive derecognition of the loan from MaRo Immobilien AG to MaRo Produktions AG to be assessed from a tax perspective?