Special topics in financing - bullet loans, participating loans, convertible bonds and convertible loans

Case 1: Convertible bond

Facts

A listed domestic company is hit by the pandemic and therefore takes out a convertible bond in order not to have to pay an excessively high interest rate. The convertible bond has the following terms:

• Interest rate: 2% p.a.
• Amount: CHF 100 million
• Denomination: CHF 1000
• Issue price: 100
• Redemption price: 100%
• Duration: 5 years
• Share price at the time of issue: CHF 80
• Conversion price: CHF 100

The spread of a comparable bond (i.e. comparable collateralised bond of an issuer with the same credit rating) is 5%. The CHF 5-year swap rate at the time of issue is -0.5%.

The convertible bond will be serviced with both newly created shares and treasury shares acquired on the market.

Question(s)

• What are the tax consequences if at the end of the term the share price is CHF 90 and there is a redemption of the bond?
• What are the tax consequences if the share price is CHF 130 at maturity and the bond is converted?
• Does it make a difference whether the issuer is the listed company itself or a domestic or foreign subsidiary?
• What are the tax consequences of selling a share after 3 years?

Variant 1

How would the case be assessed if the bond were serviced exclusively with newly created shares?

variant 2

What would be the case if the issuer had a rating of A- from S&P and the bond had the following terms:

• Interest rate: 0%
• Amount: USD 100 million
• Denomination: USD 1000
• Issue price: 100
• Redemption price: 100%
• Duration: 7 years
• Share price at the time of issue: USD 80
• Conversion price: USD 100

The spread of a comparable bond is 0.5%. The USD 7-year swap rate at the time of issue is 0.8%.

Variant 3

How would the case be assessed if the issuer were a start-up which took out convertible loans from 12 investors (non-banks) with the following identical conditions:

• Interest rate: 2%
• Amount: CHF 1 million
• Denomination: CHF 1000
• Issue price: 100
• Redemption price: 100%
• Duration: 5 years
• Conversion: 20% discount compared to the price of the last financing round

No information on the spread is available.

The convertible loans are serviced with both newly created shares and treasury shares.

Case 2: Mandatory convertible bond

Facts

A domestic company issues a mandatory convertible note (MCN) with the following terms:

• Coupon: 3.75% (Variant: with interest deferral until conversion)
• Amount: CHF 100 million
• Denomination: CHF 1000
• Issue price: 100
• Duration: 3 years

The MCNs will be serviced at the time of conversion with new shares of the issuer created in the course of a capital increase.

The CHF 3y swap rate at the time of pricing is -0.5%. The issuer's credit spread for an issue with a comparable maturity is 0.8%, i.e. a bond without a mandatory conversion element would bear interest at 0.3% (variant: spread of 0.45%).

Question

How is the coupon taxed?

Case 3: Loan with final maturity

Facts

A domestic company receives a loan with an interest rate of 9% p.a. from a domestic natural person. Under the loan agreement, the claims for repayment of the loan amount and the interest claim do not fall due until ten years after the loan was granted, i.e. on 1 April 2024.

On 1 April 2021, the lender sells the loan to a foreign legal entity.

Question

Is the sale of the loan receivable associated with tax consequences for the seller?

Case 4: Convertible loan

Facts

A domestic company takes out a convertible loan with one of its shareholders (domestic natural person) with the following terms and conditions, which are in line with third party comparisons:

• Interest rate: 2% p.a.
• Amount: CHF 10 million
• Issue price: 100
• Duration: 3 years
• Conversion: 20% discount compared to the price of the last financing round

Questions

• Tax consequences during the term or upon conversion?
• Tax consequences of sale after two years?

Case 5: Convertible loan with final maturity

Facts

A domestic company takes out a convertible loan with its foreign sister company with the following conditions:

• Interest: 6%, bullet  
• Amount: CHF 100 million
• Issue price: 100
• Repayment / Conversion: 100%
• Duration: 5 years

The convertible loan is serviced exclusively with newly created shares.

The 10/20 non-banking rule is complied with; there is no bond under the VStG.

Interest is accrued for each interest period in a separate account in the Company's statutory accounts and accrues interest in subsequent periods but is not payable until maturity.

The interest rate according to the third-party comparison is 4%.

Questions

• Tax consequences at the level of the domestic company during the term or upon conversion?
• Can a withholding tax charge be avoided if the part of the credit balance that arose from the excessive interest is booked as other reserves (instead of KER) in the case of a conversion?
• Who is entitled to a refund of withholding tax if the loan is transferred to a domestic sister after 4 years?
• How would the case be assessed if the loan was sold to a third party after 4 years?
• How would the case be assessed if the loan with a bullet interest rate of 4% was not sold, but the company had hidden equity for 4 years, but had no hidden equity at the time the interest was due?
• How would the case be assessed if there was hidden equity only at the time of maturity (i.e. in the 5th year)?

Case 6: Participatory loan

Facts

A domestic company (industrial company) takes out a participating loan with its majority shareholder (natural person resident in Liechtenstein) with the following conditions:

• Interest: 10% of EBIT
• Amount: CHF 10 million
• Duration: 3 years

In 2020, the company makes a loss, which is why no interest is paid. In 2021, it generates EBIT of CHF 9 million, which is why interest of CHF 900,000 is paid.

Questions

• Is the interest subject to withholding tax? How would the case be assessed if the company had a normal loan outstanding with an independent third party at an interest rate of 5% p.a.?
• Can the creditor reclaim the withholding tax on the basis of a double taxation agreement?

Case 7: Subordinated shareholder loan

Facts

A domestic company (industrial company) borrows from its majority shareholder (domestic individual) on the following terms:

• Interest rate: 9% p.a.
• Amount: CHF 10 million
• Duration: 5 years
• Status: subordinated, unsecured

The company has a bank loan of CHF 7 million, which bears interest at 7% p.a. The shareholder loan is subordinated to the bank loan. The shareholder loan is subordinated to the bank loan.

There is no hidden equity capital within the meaning of KS 6/97.

Question

Is the interest subject to withholding tax?

Variant

How would the case be assessed if there was no bank loan but only a bank offer?

Case 8: Creditor becomes shareholder

Facts

A domestic company (industrial company) borrows from an independent third party in 2018 with the following terms:

• Interest: 10% p.a.
• Amount: CHF 30 million
• Duration: 5 years

The company must be restructured in 2021. In this context, half of the loan (CHF 15 million) will be converted into an equity participation. The creditor is now also a 20% shareholder of the company.

Question

Is the interest subject to withholding tax?

Case 9: Start-up financing / assumption of a third-party loan

Facts

A bank grants an unsecured loan of 10% to a start-up company. The loan is repaid by the shareholders after two years (loan granted to the company and repayment of the loan).

Questions

• How would the case be assessed if the bank loan was secured by a pledge of the borrower's shares?
• How would the case be assessed if the bank loan was guaranteed by the shareholder?

Case 10: Loan to shareholder

Facts

A domestic company (SwissCo) grants a loan of USD 100 million to its parent company domiciled in the USA on 1.7.2020. Interest is due on 30.6.

Questions

• At what interest rate must it pay interest on this on 6/30/2021?
• At what interest rate must it pay interest on this?

Variant 1

SwissCo receives a loan of USD 80 million from its foreign sister company, which bears interest at 4% per annum.

variant 2

SwissCo receives a loan of USD 4 bn from its foreign sister company. This is passed on back-to-back to another foreign sister company. SwissCo's payment obligation is linked to SwissCo's liability loan, so that SwissCo ultimately does not bear the default risk of the asset loan.

Variant 3

What would be the case if SwissCo had entered into an 8-year term loan of USD 200m on 1 May 2017, bearing interest at 5%, and it lent USD 200m to its parent company?