Tax pitfalls in corporate restructuring

1. prior year loss offset for mergers

Case 1.1: Revaluation of assets

Facts

Farb AG and Lack AG are two Swiss companies that belong to a paint industry group that is active throughout Switzerland. For operational reasons, it is decided that Lack AG will be taken over by Farb AG as of 1 January 2020 within the framework of a merger. In addition, Lack AG still has loss carryforwards from previous years that can be offset for profit tax purposes in the total amount of CHF 700,000, which corresponds to the amount of the loss that is relevant under commercial law. As part of the takeover of all assets and liabilities, the third of the goods of Lack AG will be dissolved in the amount of CHF 500,000 in the financial statements as of 31 December 2019.

Issues related to

• Can the losses carried forward be taken over by Farb AG?
• Is there economic continuity? Is there tax evasion?

Case 1.2: Merger without business operations

Facts

Based on BGer of 4 January 2012; 2C_351/2011 = ASA 81, 390 ff

Werkzeug und Maschinen AG is a Swiss company with production and trading activities in the construction sector and is part of an international construction materials trading group. Within the same group there is another group company, Senkblei AG, with production and trading activities in the construction sector. As part of the reorganisation of the Group, the production of Senkblei AG will be partially shut down and the trading division sold to a third party, while reduced activities of Senkblei AG will continue. Two years later Werkzeug und Maschinen AG takes over Senkblei AG with all assets and liabilities. At that time Senkblei AG still has intangible assets such as customer base and know-how, but not a business operation. Furthermore Senkblei AG has at the time of the take-over not yet offset losses carried forward.

Issues related to

• Can the losses carried forward be taken over by Werkzeug und Maschinen AG?
• Is there economic continuity? Is there tax evasion?

Case 1.3: Daughter absorption

Facts

Based on BGer dated 6 September 2012, 2C_85/2012

The Feintuch AG aims at the production of and trade with textiles. It has various subsidiaries. All the weaving activities of the Feintuch Group are concentrated in Weberei AG. Feintuch AG takes over Weberei AG as part of a subsidiary absorption. At the time of absorption, the assets of Weberei AG consist of approximately 95% real estate (factory properties). In the previous three years, one division was spun off, a second was discontinued and a third was newly established in a newly founded subsidiary. In the following year, Feintuch AG claims loss carryforwards from the absorbed Weberei AG. Around 84% of the loss carryforwards were attributable to the third division.

Issues related to

• Can the losses carried forward be taken over by Feintuch AG?
• Is there economic continuity? Is there tax evasion?

Case 1.4: Investment company

Facts

Based on BGer dated 24 November 2012, 2C_701/2012

Medico Investment AG is a listed investment company. It invests in companies in the field of medical technology. SQ-Holding acquired the shares of Medico Investment AG within the framework of a public takeover bid. In return, the shareholders of Medico Investment AG were offered shares in a new investment fund. After the completion of the takeover offer, the investment fund acquired all of the holdings of Medico Investment AG. As a result, Medico Investment AG only had liquid funds and a loss carryforward of approximately CHF 75 million. In the same year, Medico Investment AG was absorbed by another subsidiary of SQ-Holding, Kilimanjaro Invest AG. In the following year, Kilimanjaro Invest AG took over all shares of another listed company in the context of another public takeover bid. In order to settle the purchase price, it uses the liquid funds of the former Medico Investment AG, among other things.

Issues related to

• Can the losses carried forward be taken over by Medico Investment AG?
• Is there economic continuity? Is there tax evasion?

Case 1.5: Merger of real estate companies

Facts

Based on BGer dated 7 June 2019, 2C_1114/2018

The purpose of Immo AG is the purchase, sale and management of real estate. In the course of mergers, it takes over five sister companies (also real estate companies). Several of these companies have loss carryforwards at the time of acquisition. Four of the five properties acquired in the merger are sold in the same year. In its tax return, Immo AG claims the loss carryforwards of the acquired companies.

Issues related to

• Can the losses carried forward be taken over by Immo AG?
• Is there economic continuity? Is there tax evasion?

2. splitting of holding structures

Case 2: Demerger holding company

Facts

Alfred Ammann and Bruno Berger founded A&B Pump Tec AG, a company in the field of pump technology, after completing their ETH studies. Over the years, this has grown into a considerable group of companies that manufactures not only special industrial pumps but also various dosing and filter systems. A few years ago, Claudio Cueni became a shareholder in the group holding company as part of a restructuring process, whereby the company was expanded to include an additional pillar with its own staff in the field of analysis technology. The company contributed by Claudio Cueni was renamed A&B Analytics AG.

The structure of the group of companies is currently as follows:

It became apparent that the ideas about the group's progress were increasingly divergent, which is why the relationship between Claudio Cueni and the two previous business partners became increasingly tense. Eventually, they found that there was no longer any basis for further joint activity, and they decided to separate again for business reasons.

Alfred Ammann and Bruno Berger intend to continue to concentrate fully on the manufacture and sale of their pump systems, although a sale of A&B Dispensing Systems AG is not ruled out. Claudio Cueni wants to focus on the analysis systems business area. However, Claudio Cueni is already 62 years old, which is why he wants to sell the company in 2-3 years.

A&B Holding AG is to be split up. The three shareholders are therefore approaching you with the question of whether the following structure could be implemented in a tax-neutral manner:

Questions

What tax consequences will be triggered by the above-mentioned demerger of A&B Holding AG at the level of the stock corporation and shareholders in the following structural variants?

1. Direct demerger: Ammann, Berger and Cueni jointly found Cueni Holding AG. The purpose of Cueni Holding AG is identical to that of A&B Holding AG. Cueni Holding AG is temporarily a sister company of A&B Holding AG. Subsequently, the participation in the active A&B Analytics will be transferred to Cueni Holding AG without consideration at book value. The shareholdings in the two holdings will not change in the process. Shortly after the transfer of A&B Analytics AG, Ammann and Berger on the one hand and Cueni on the other will adjust their shareholdings at shareholder level without affecting the two holdings in any way.
2. The investment in the active A&B Analytics AG will be distributed to the three shareholders at book value and will not be transferred to the new Cueni Holding AG. Shortly after the transfer of A&B Analytics AG, Ammann and Berger on the one hand and Cueni on the other will adjust their shareholdings at shareholder level without affecting the two holdings in any way.
3. The participation in the active A&B Analytics AG will be absorbed by A&B Holding AG and shortly thereafter spun off into Cueni Holding AG Shortly after the transfer of the adjusted Ammann and Berger on the one hand and Cueni on the other hand their shareholdings at shareholder level, without affecting the two holdings in any way.
4. Old-law demerger: The investment in the active A&B Analytics AG will be distributed by A&B Holding AG to the three shareholders at book value, then transferred to the new Cueni Holding AG and absorbed immediately. Cueni Holding will be renamed A&B Analytics AG. Shortly after the transfer of A&B Analytics AG, Ammann and Berger on the one hand and Cueni on the other will adjust their shareholdings at shareholder level without affecting the two holdings in any way.
5. A&B Holding AG is establishing a new intermediate holding company through a contribution in kind of the investment in A&B Analytics AG at its book value. Subsequently, the new holding company with the active participation in A&B Analytics AG will be spun off into Cueni Holdng AG. Shortly after the transfer of A&B Analytics AG, Ammann and Berger on the one hand and Cueni on the other will adjust their shareholdings at shareholder level without affecting the two holdings in any way.
6. Same situation as under 1; The participation in A&B Analytics AG will not be transferred 100% to the receiving Cueni Holding AG.
7. The participation in the active A&B Analytics AG will be spun off by contribution in kind at book value to a new holding company, which will then be distributed to the three shareholders together with the participation in A&B Analytics AG and subsequently contributed to the new Cueni Holding AG. Shortly after the transfer of A&B Analytics AG, Ammann and Berger on the one hand and Cueni on the other will adjust their shareholdings at shareholder level without affecting the two holdings in any way.

3. the content of the functional concept of realisation outside of the standardised restructuring circumstances

Case 3: Cross-border structuring

Facts

The structure of the Mountain Save Group (hereinafter MS Group), which is active in the development and production of instruments and equipment for high mountain sports, was originally as follows:

MS GmbH is owned 50% each by Alois Strobl and Meinrad Zindel, who moved into two of their own apartment buildings with holiday flats in the Engadin more than 10 years ago. These are held via Immo AG Samedan.

To cope with the strong growth, MS GmbH acquired several years ago the two production companies TO 1 AG, based in Huttwil BE, where the high-quality instruments are manufactured, and TO 2 Poland, which produces the textile goods and other equipment, and transferred the previous production from Schladming to the two companies. Both companies enjoy generous tax breaks and are directly owned by MS GmbH. Further subsidiaries in the Alpine states of Germany, France, Italy, Austria and Canada5 are held via MS HO Den Haag.

MS GmbH is the parent company of the Group. After the spin-off of production, only the group management functions and the research and development activities are carried out in Schladming. The main remaining valuable assets are the investment in MS HO Den Haag, the two production companies in Poland and Huttwil BE and Immo AG, as well as a new patent for an avalanche search device Savor Max, which is about to be launched on the market. The values of these assets for tax purposes are

Relocation of headquarters and planned structural adjustment:

• The two shareholders of the MS Group were able to move into new offices in Landquart GR in February 2020 and decide to relocate MS GmbH from A-Schladming completely to CH-Landquart.

In the course of an organisational shake-out and optimisation, the following transactions are carried out following the transfer of the registered office:

• The participation in TO 2 Poland held by the parent company MS AG Landquart due to the acquisition (possible need for value adjustment) is to be transferred to the intermediate holding MS HO Den Haag (cost = profit tax value TCHF 7,000; market value TCHF 7,000) as of 1 November 2020 at the current book value as of the transaction date of TCHF 6,000 (corresponds to the profit tax value; cost price TCHF 6,000; market value as of 1 November 2020: TCHF 10,000).
• The patent for the avalanche beacon Savor Max (book value = profit tax value TCHF 5'000; market value TCHF 10'000) is to be transferred by MS AG Landquart to MS HO Den Haag (book value = profit tax value = production costs TCHF 7'000), also as of 1 November 2020, at a book value of TCHF 5'000.
• The investment in Immo AG Samedan (book value = income tax value = production costs TCHF 7,000; market value TCHF 15,000) is also to be transferred to MS HO Den Haag at book value on 1 November 2020.

The Savor Max avalanche transceiver was developed between 2015 and 2018 and patented in December 2018. All internal and external development costs have been capitalized. The market launch took place in the 2019 financial year. Following a publication in the trade press by an independent research institute, the actual breakthrough occurred, which required the creation of additional production capacities and the expansion of the sales organisation. Currently, sales are expected to double annually until the financial year 2025. The fair value as of 1.9.2020 is estimated at TCHF 7,000.

On the other hand, the investment in TO 2 Poland had to be written down by TCH 1,000 to TCHF 5,000 immediately after the transfer of the registered office due to an extraordinary event. However, its value will recover to TCHF 10,000 by 1 November 2020 due to the foreseeable strong growth.

Questions

1. Do these transactions have tax consequences? If so, what are they?
2. Assess the facts
   of the case - firstly based on the realisation concept in general that is decisive in corporate tax law
   - then based on the legal principles in the DBG and StHG.

Variant 1

The patent for the avalanche search device Savor Max is sold to MS Den Haag, which is not a subsidiary of MS AG Landquart, but a permanent establishment of MS AG Landquart.

variant 2

TO 2 relocates its headquarters from Poland to Bulle FR and, as a newly opened company, receives extensive but not complete tax relief from the Government Council of the Canton of Fribourg for the year of foundation and the nine following years. The patent for the avalanche transceiver Savor Max is not sold to MS HO Den Haag, but to TO 2 with its new headquarters in Bulle FR at book value.