The revision of Swiss company law and its effects on Swiss tax law

Good things take time? In keeping with this saying, the Swiss Federal Assembly adopted the proposed revision of the company law on 19 June 2020 - after more than twelve years since the publication of the first dispatch. It is scheduled to enter into force on 1 January 2022 at the earliest. What impact will the revision of company law have on the Swiss tax landscape?

Scope of the revision

At the center of the revision are, among other things, the introduction of important flexible rules in the area of capital; the participation and control rights of shareholders; the liability under company law; and the new provisions on business rescue. From a Swiss tax perspective, this newsletter deals with the planned innovations to the share capital; especially the tax effects of the introduction of share capital in a foreign currency and the new instrument of the so-called "capital band".

Share capital in foreign currency

In general

Under current law, the financial statements of a Swiss company can already be drawn up in the foreign currency most relevant to the company's business activities (article 958d para. 3 Swiss Code of Obligations "CO"). Until now, however, this has not applied to the share capital. According to the planned revision, the share capital may in future also be denominated in a foreign currency significant from a business activity perspective (article 621 para. 2 CO). This means that capital-related aspects such as dividends, reserves and overindebtedness will also be assessed according to the relevant foreign currency. It is envisaged that the permissible currencies will be Swiss francs, British pounds, Euros, US dollars or Yen. However, the "all or nothing" principle applies, i.e. a mix of currencies is not permitted for share capital.

Corporate tax law consequences

If the financial statement is denominated in a foreign currency, Swiss corporate tax law (article 80 para. 1bis new Direct Federal Tax Act "DFTA" and article 31 para. 3bis new Direct Tax Harmonization Act "DTHA") stipulates that the taxable net profit must be converted into Swiss francs (at the applicable average exchange rate). In the case of tax liability during the year, the average exchange rate for the duration of the tax period during the year will be decisive. With regard to capital tax, a conversion of the taxable equity capital will also be required in accordance with article 31 para. 5 new DTHA, whereby the exchange rate at the end of the tax period must be applied. Accordingly, the determination of taxable profit can thus be carried out in a foreign currency in the future. As a result, the conversion differences between the functional currency and the Swiss franc will no longer occur, as such accounting conversion differences will no longer arise. However, tax will still be levied and collected in Swiss francs (whereby the exchange rate at the end of the tax period will be determinant).

The introduction of share capital in foreign currencies will be particularly interesting for companies mainly operating in markets in which one of the recognized currencies is applicable.

The new instrument of the capital band

In general

The introduction of the capital band aims to increase the flexibility of the capital regulations of companies. For this reason, the board of directors can in future be authorized in the articles of association to increase or reduce the share capital by up to 50 %, depending on necessity. The capital band will be valid for a maximum period of five years. After this period, the basis for a new capital band would have to be created by amending the articles of association.

With the capital band, the general meeting can significantly broaden the board of directors' scope and flexibility in equity financing as required.

Income tax consequences for private shareholders?

From an income tax perspective, it is envisaged that capital contributions within the framework of a capital band shall only qualify as capital contribution reserves to the extent that they exceed the repayment of any free reserves within the capital band (article 20 para. 4 new DFTA or article 7b para. 2 new DTHA). The assessment whether new or additional capital contribution reserves exist will therefore only be made upon termination of the capital band. If, at the ending of the capital band, the capital contributions exceed the distributions, tax reserves from capital contributions (subject to withholding tax) can be formed and confirmed by the Federal Tax Administration ("FTA") with effect for income and withholding tax. The legislator has made this adjustment in order to prevent listed companies from being able to form capital contribution reserves for natural persons resident in Switzerland who hold shares as private assets without any de facto restrictions (by setting up a separate trading line at the Swiss stock exchange SIX). For individuals who hold shares in non-listed companies as private assets, however, this change in the law has negative tax consequences in the event of a capital reduction. Since the FTA only confirms new capital contribution reserves upon termination of the capital band, there may be no confirmed capital contribution reserves at the time of the capital reduction, which is why income tax consequences may not be averted for the shareholders concerned. The future practice will show, how this problem can be prevented (e.g. by buying back own shares). Otherwise, the two-way capital band for privately held companies will become dead letter.

Issuance stamp duty (Emissionsabgabe)

The planned amendments to the Federal Act on Stamp Duty provide that the issuance stamp duty on equity securities issued within the scope of a capital band will only be due at the termination of the capital band and not already with each individual capital increase. Further, stamp duty will  only be levied on the net increase in equity capital. Consequently, no issuance tax will become due if the capital inflows do not exceed the repayments within the same capital band.

Conclusion

In connection with the entry into force of the revision of company law, tax changes are evidently occurring, some of which (still) leading to ambiguities and irregularities. It will be decisive how the practice will react to these challenges, because the jury is still out.