Tax optimization of internal succession options: Family buy-out (FBO), management buy-out (MBO)

1. case 1 - transmission in the family / no transposition

Facts

F holds 100% of the software company S AG, which he founded and has developed into a successful company in recent years.

In addition, F holds the holding company H AG with share capital of CHF 100,000. In March 2020, he sells 50% of the shares of H AG to his sister at CHF 50,000. The purchase price is to be paid in 5 years at the latest. A trust agreement was concluded between F and his sister, according to which F should manage the shares for his sister. In July 2020, F sells a further 8% in H AG to two persons at CHF 8'000. F therefore still holds 42% in H AG.

Also in July 2020, he sells S AG to H AG for a loan at the market value of CHF 2 million.

F agrees in the purchase contract that H AG may not make any harmful distributions within 5 years of the acquisition of S AG that would lead to taxation due to indirect partial liquidation at F.

F assumes that he has achieved a tax-free capital gain from the sale. Tax Office X sees things differently.

Questions

On what basis can the tax office come to a taxation of the F?

What counterarguments do you see?

2nd case 2 - Management buy-out - preferential terms?

Facts

Franziska Müller turns 62 and is the founder and sole shareholder of Supersale GmbH.

The company provides sales services and strategic advice to other companies. The company has grown steadily over the years and employs, besides Mrs. Müller as managing director, 10 other people.

She wants to slowly withdraw from the business. Several parties are interested in the company. As an entrepreneur, she finds it difficult to sell to the competition. As an alternative, she is considering the management's proposal to take over the succession and buy it out in stages. Mrs. Müller remains employed as managing director for another 3 years, her salary remains similar and can be classified as being in line with the market. Before the sale, Mrs. Müller pours out the existing substance.

The share capital amounts to CHF 100,000, divided into 100 shares of CHF 1,000 each, and the current valuation for wealth tax purposes by the canton of domicile is CHF 42,000 per share.

Variant 1

Petra Huber, a long-standing management employee, initially acquires 50% of the shares. The parties agree on a purchase price of CHF 29,000 per share, which was determined using the following formula:

2x commercial profit (n+n-1+n-2+n-3)/4, capitalised at 8%.

+Equity under commercial law

./. 3

Mrs. Müller grants the buyer an 11% discount according to the contract.

Mrs. Huber acquires the shares directly. In order to enable her to purchase, Mrs. Müller grants her an "interest-free loan", which she repay by one third each year. She would like to use future profits (dividend payments) for this purpose. With the last installment, another CHF 50'000 is due.

At the time of her retirement, Mrs. Müller plans to sell the remaining 50%. Until then, the parties will regulate their mutual pre-emptive rights in a shareholders' agreement. The value per share is determined by the above formula.

variant 2

Karl Meier, a long-time employee, acquires 50% of the shares from Mrs. Müller at a price of 32'000 per share. To this end, he founds Meier Holding AG and acquires the share through this company.

At the time of her retirement, Mrs. Müller plans to sell the remaining 50%. Until then, the parties will regulate their mutual pre-emptive rights in a shareholders' agreement. The value per share is determined using the following formula:

Commercial profit (n+n-1+n-2+n-3)/4 capitalised at 8%.

+ Equity under commercial law

./. 2.

Variant 3

Mrs. Müller sells 10 % of the shares to Supersale GmbH at CHF 32'600 per share. The GmbH sells 10 % to Petra Huber at CHF 18'200 per share. Subsequently Mrs. Müller sells 10 % of the shares to Supersale GmbH at CHF 32'600 per share, which sells them to Karl Meier at CHF 18'200 per share.

In the following year Mrs. Müller sells another 10 % of the shares to Supersale GmbH at CHF 32'600 per share, which sells them to the two employees at a reduced price.

At the same time, Franziska Müller withdraws more and more from the daily business, but remains managing director and chairman of the board of directors. Over the next 5 years they continue in this manner until Mrs. Müller has sold all shares and Petra Huber and Karl Meier each hold 50%. Mrs. Müller will retire at the same time as the last tranche.

The purchase contracts between the company and employees contain a corresponding passage regarding an irrevocable restriction on sale and a mandatory right of first refusal for the company.

Questions

Variant 1

1. What tax consequences does the sale of Supersale GmbH have for Franziska Müller if Petra Huber acquires the shares directly?
2. What tax consequences result for the acquirer?

variant 2

1. What tax consequences does the sale of Supersale GmbH have for Franziska Müller if Karl Meier acquires the shares via an acquisition company?
2. What are the tax consequences for the purchaser and its shareholder?

Variant 3

1. What tax consequences does the sale of Supersale GmbH have for Franziska Müller if Supersale GmbH acquires the shares?
2. What tax consequences result for the company?
3. What are the tax consequences for the acquirers?

3rd case 3 - Entry into partnership companies - succession

Facts

B is the sole shareholder of C AG, a consulting company. B would like to retire slowly and take on a partner in his company. He finds a suitable candidate in A. A buys 100 shares (50%) in C AG from B at a nominal value of CHF 1,000 (net asset value of CHF 1,500; market value according to the practical method CHF 4,000), a total of CHF 100,000, and subsequently becomes an employee of C AG. A and B conclude a shareholders' agreement according to which the shares in C AG must be deposited and may not be sold or encumbered. A and B also agree on a mutual right of first refusal at the intrinsic value or net asset value of C AG.

The tax office calculates income of CHF 200,000 for A because he received a taxable pecuniary advantage through the acquisition of the C AG shares at a lower price (below the actual value).

Question

What is your opinion of the tax office?

Supplement to the facts

B wants to sell his shares in C AG after 5 years. A buys them from B at the current net asset value (CHF 1,600 / share; fair value according to the practical method (simple weighting) CHF 5,000).

Question

What are the tax consequences for A and B?

Case 4 - Succession after conversion of a partnership enterprise

Facts

A operates a medical laboratory as a sole proprietorship. His daughter T is employed by him and is to take over the company on a long-term basis, i.e. first take an interest and then take over the company completely. A would like to remain involved for the next 6 years and then retire.

The equity of the individual company currently amounts to CHF 1.5 million with a fair value of CHF 5 million.

A would like to make his succession as tax-optimized as possible.

Option 1: Participation in sole proprietorships through conversion into a partnership

Option 2: Conversion into a capital company and participation in a capital company

Questions

Variant 1

A would like to give T his company free of charge.

• What would be the tax consequences for A and T under option 1 in year 1 and year 6?
• What would be the tax consequences for A and T under option 2 in year 1 and year 6?

variant 2

A wants to sell his company to T.

• What are the tax consequences of option 1 in year 1 and year 6?
• What is the change in the tax consequences of option 2 in year 1 and year 6?
• What optimization possibilities do you see in variant 2?