Thomas Wolfensberger
Marco Buchmann
Reclassification of capital gain as taxable capital income
Workshop on "Reclassification of capital gain from sale into taxable capital gain" by Thomas Wolfensberger and Marco Buchmann on the occasion of the ISIS seminar "Taxation of Shareholder and Company in Personally Owned Businesses" on September 18 - 19, 2023.
Case 1: Transposition and hidden capital contributions
1. facts of the case
Betriebs AG, which has its registered office in Zurich, has been wholly owned by A (domiciled in Zurich) since its formation.
In the course of a restructuring of his private circumstances in 2023, A invests 100% of Betriebs AG in Kauf AG, a company newly founded by A. A is also a 100% shareholder in Kauf AG. A also holds 100% of the shares in this company.
Betriebs AG is recognized at a value of CHF 1 million at the level of Kauf AG. The fair value of Betriebs AG at the time of the contribution is CHF 10 million.
Betriebs AG has a share capital of CHF 1 million. There are no confirmed capital contribution reserves. At the level of Kauf AG, capital contribution reserves of CHF 1 million are formed, which are confirmed by the FTA.
Betriebs AG subsequently develops well and generates sustainable profits. It regularly distributes dividends to Kauf AG. In 2025, Kauf AG distributes CHF 5 million to A for the first time.
Question
- What are the tax consequences for A?
Case 2: Calculation basis indirect partial liquidation
1. basic facts
Betriebs AG, which has its registered office in Zurich, has been wholly owned by A (domiciled in Zurich) since its formation.
Towards the end of 2022, A plans to sell its 100% stake in Betriebs AG. The prospective buyer is the independent Kauf AG, which is 100% held by B.
In April 2023 the signing and closing of the transaction takes place. A sells 100% of Betriebs AG for CHF 10 million to Kauf AG. The financial year of Betriebs AG corresponds to the calendar year.
2. facts variant A
The balance sheet of Betriebs AG for the financial years 2021 and 2022 is as follows:
At the time of the sale in April 2023, the 2022 financial statements of Betriebs AG with an operating loss of CHF 2 million have not yet been approved by the Annual General Meeting. The cash and cash equivalents of Betriebs AG at the time of closing are unchanged compared to the situation according to the annual financial statements 2022.
Betriebs AG develops positively and achieves a profit of CHF 3 million in 2023. According to the annual financial statements for 2023, the distributable reserves therefore now amount to CHF 7 million. Betriebs AG will distribute the profit of CHF 3 million to Kauf AG in 2024.
Question
- What are the tax consequences for A?
3. facts variant B
The balance sheet picture of Betriebs AG for the financial years 2021 and 2022 is as follows: The audit of the 2022 financial statements was performed in February 2023. The
Year 2022 was closed with an annual operating profit of CHF 2 million. In recent years, the Annual General Meeting was always held at the beginning of March. However, until the sale in April 2023, the Annual General Meeting for the financial year 2022 was not held.
The cash and cash equivalents of Betriebs AG at the time of closing are unchanged from the situation according to the 2022 financial statements.
At the Annual General Meeting in September 2023, Betriebs AG resolves to distribute a dividend of CHF 2 million to Kauf AG.
Question
- What are the tax consequences for A?
4. facts variant C
The operating assets of Betriebs AG of CHF 2 million consist of the investment in the subsidiary AG. The balance sheet of Betriebs AG for the financial year 2022 is as follows:
The Annual General Meeting took place in March 2023. The cash and cash equivalents of Betriebs AG at the time of closing are unchanged from the situation according to the annual financial statements 2022.
As of December 31, 2022, the subsidiary AG itself has distributable non-operating assets of CHF 5 million.
Question
- What is the amount of the non-operating assets of Betriebs AG that can be distributed under commercial law in terms of the indirect partial liquidation?
5. facts variant D
Kauf AG is held 100% by the seller A itself. The balance sheet of Betriebs AG for the financial year 2022 is as follows:
The Annual General Meeting took place in March 2023. The cash and cash equivalents of Betriebs AG at the time of closing are unchanged from the situation according to the annual financial statements 2022.
At a subsequent Extraordinary General Meeting in September 2023, Betriebs AG will resolve to distribute a dividend of CHF 4 million.
Question
- What are the tax consequences for A?
Case 3: Repayment of liquidity via loans
1. basic facts
Betriebs AG, which has its registered office in Zurich, has been wholly owned by A (domiciled in Zurich) since its formation.
Towards the end of 2022, A plans to sell its 100% interest in Betriebs AG. The prospective buyer is the independent Kauf AG. The group structure of Kauf AG is as follows:
In April 2023 the signing and closing of the transaction takes place. A sells 100% of Betriebs AG for CHF 10 million to Kauf AG. The financial year of Betriebs AG corresponds to the calendar year.
As of December 31, 2022, Betriebs AG has CHF 4 million of non-operating assets and corresponding distributable reserves.
2. facts variant A
Kauf AG does not have any significant assets other than the investment in Betriebs AG.
Still in 2023, Betriebs AG grants Kauf AG a loan of CHF 4 million. The loan conditions agreed in writing are as follows:
- Term of the loan 10 years, no amortization payments
- Interest-free
- Unsecured
- Subordinated to existing bank financing of Kauf AG
Question
- What are the tax consequences for A?
3. facts variant B
In addition to its interest in Betriebs AG, Kauf AG has an operating business that generates sustainable profits.
Kauf AG is partly taking out a bank loan for the purchase. The remainder is financed by the company's own funds.
In the course of the purchase negotiations, seller A inquires about the earnings situation of Kauf AG. The seller's examination shows that the earnings power of Kauf AG in 2021 and 2022 is sufficient to amortize the bank loan without having to draw on the existing assets of Betriebs AG.
As Betriebs AG does not need the existing cash and cash equivalents, it will grant Kauf AG a loan in the amount of the non-operating substance of CHF 4 million at the end of 2023. Kauf AG will use this for the expansion of other business areas. The loan conditions agreed in writing are as follows:
- Term of the loan 5 years, with annual amortization
- Interest rate 1.5%, owed periodically
- Unsecured
- Subordinated to existing bank financing of Kauf AG
Due to extraordinary external circumstances, the earnings situation of Kauf AG deteriorates significantly in 2024 and 2025 and Betriebs AG must write down the value of the loan in 2025.
Question
- What are the tax consequences for A?
4. facts variant C
Kauf AG has several subsidiaries. One of them is the subsidiary AG. The Group maintains a cash pool at the level of the subsidiary AG, in which all surplus cash and cash equivalents of the Group are managed. The creditworthiness of the cash pool is given. Kauf AG finances the purchase of Betriebs AG from the cash pool.
Following the acquisition, Betriebs AG will contribute the existing non-operating funds of CHF 4 million to the Group's cash pool.
The cash pool balance earns interest in accordance with the FTA circular plus a standard market risk premium.
Betriebs AG will generate profits in subsequent years, which is why there is no need to draw on the surplus funds in the cash pool. The cash pool receivable of Betriebs AG will not change until 2028 and will only be offset in 2029 for the expansion of Betriebs AG's business activities.
Question
- What are the tax consequences for A?
Case 4: Restructuring
1. basic facts
Betriebs AG, which has its registered office in Zurich, has been wholly owned by A (domiciled in Zurich) since its formation.
Towards the end of 2022, A plans to sell its 100% interest in Betriebs AG. The prospective buyer is the independent Kauf AG. The group structure of Kauf AG is as follows:
In April 2023 the signing and closing of the transaction takes place. A sells 100% of Betriebs AG for CHF 10 million to Kauf AG. The financial year of Betriebs AG corresponds to the calendar year.
As of December 31, 2022, Betriebs AG has CHF 4 million of non-operating assets and corresponding distributable reserves.
2. facts variant A
The business areas of Betriebs AG and Kauf AG are congruent. Kauf AG decides to merge Betriebs AG into Kauf AG in order to benefit from synergy effects. According to the entry in the Commercial Register of May 30, 2024, the merger shall take place retroactively as of January 1, 2024.
Question
- What are the tax consequences for A?
3. facts variant B
The business areas of Betriebs AG and Tochter AG are congruent. Kauf AG decides to merge Betriebs AG into Tochter AG in order to benefit from synergy effects. According to the entry in the Commercial Register of May 30, 2024, the merger will take place retroactively as of January 1, 2024.
Question
- What are the tax consequences for A?
4. facts variant C
According to the annual financial statement 2023, Enkel AG is overindebted. For the sustainable restructuring of Enkel AG, Kauf AG decides to merge Betriebs AG into Enkel AG. According to the entry in the commercial register on May 30, 2024, the merger takes place retroactively as of January 1, 2024.
Question
- What are the tax consequences for A?
5. facts variant D
At the time of the sale, Betriebs AG still holds a 100% interest in Cash AG. In 2024, Betriebs AG transfers its interest in Cash AG to Kauf AG as part of a tax-neutral transfer of assets within the Group.
The transfer value corresponds to the profit tax value of Cash AG at the level of Betriebs AG. The distributable reserves of Betriebs AG are reduced to the corresponding extent
Question
- What are the tax consequences for A?
Case 5: Participation of the seller in the distribution
1. basic facts
Betriebs AG, which has its registered office in Zurich, has been wholly owned by A (domiciled in Zurich) since its formation.
Towards the end of 2022, A plans to sell its 100% interest in Betriebs AG. The prospective buyer is the independent Kauf AG. Kauf AG was established specifically for the purchase and does not have any significant financial resources to finance the acquisition, which is why the purchase is being financed in full by a bank loan. A is not aware of the earning power of Kauf AG.
As of December 31, 2022, Betriebs AG has CHF 4 million of non-operating assets and corresponding distributable reserves.
The SPA includes a clause regarding indirect partial liquidation which prohibits all distributions of assets. In the event of a breach of this clause, the sellers are to be held harmless by the buyer.
The audit of Kauf AG shows that the sustainable expected profits of Betriebs AG on the basis of the annual financial statements 2021 and 2022 are sufficient for the amortization of the bank loan. Consequently, it plans with corresponding distributions of current profits in the periods after the purchase.
In April 2023 the signing and closing of the transaction takes place. A sells 100% of Betriebs AG for CHF 10 million to Kauf AG. The financial year of Betriebs AG corresponds to the calendar year.
2. facts variant A
The fiscal year 2023 of Betriebs AG does not develop as expected and the current profit is reduced to a minimum. A distribution of the current profit of the financial year 2023 would consequently not be sufficient to make the amortization payment to the bank. In 2024, Betriebs AG therefore distributes existing substance of CHF 1 million at the time of sale.
Question
- What are the tax consequences for A?
3. facts variant B
In contrast to the basic facts, Kauf AG has an operating business that has generated sustainable profits in the past.
The purchase of Betriebs AG is partly financed by a bank loan.
In the course of the purchase negotiations, the intended financing structure is roughly explained to A upon request and the annual financial statements for 2021 and 2022 are disclosed. The examination of the seller A shows that the earning power of Kauf AG according to the annual financial statements 2021 and 2022 (without extraordinary results) should be sufficient to amortize the bank loan.
In the years 2023 and 2024, Kauf AG has to accept unexpected sales losses. The current profit of Kauf AG is no longer sufficient to make the amortization payments to the bank. In the short term, a deferral can be agreed with the bank. In 2025, however, it will be necessary to distribute part of the existing assets of Betriebs AG in the amount of CHF 1 million.
Question
- What are the tax consequences for A?
