Financial restructuring: Mind the tax traps

Subordination (Rangrücktritt)

The borrowed capital remains in place. The creditor subordinates its claim behind the other creditors and refrains from enforcing it until the over-indebtedness has been remedied or until further agreed conditions occur.

A sufficient subordination may render notification of the bankruptcy court unnecessary despite over-indebtedness, provided the requirements of the Swiss Code of Obligations are met.

Benefiting company

No immediate corporate income tax, withholding tax or issuance stamp tax consequences.

Creditor subordinating its claim:
A value adjustment or write-down of the claim required as a result of the subordination may, in the case of business assets, in principle be tax-deductible, provided it is commercially justified.

Debt waiver

The company's liabilities are reduced

A debt waiver is one of the most important restructuring instruments. However, the tax consequences differ considerably depending on who waives the claim and how the debt waiver is recorded for accounting purposes. The new Circular No. 32a clarifies the previous administrative practice, in particular with regard to the P&L-neutral treatment of debt waivers by equity holders and the distinction between a restructuring contribution and a capital contribution.

Benefiting company
Debt waiver by independent third parties:
Corporate income tax:
Debt waivers by independent third parties generally constitute taxable restructuring gains.

Tax loss carryforwards must be offset first. To the extent that tax loss carryforwards are available, the debt waiver can therefore regularly take place without an immediate corporate income tax burden, but it reduces the potential for offsetting losses in the future.

Stamp duty on capital contributions:
None.

Capital contribution reserves:
None.

Debt waiver by a direct shareholder:
Corporate income tax:
In principle, a distinction must be drawn between a debt waiver recorded through profit or loss (P&L-effective) and one recorded directly in equity (P&L-neutral).

If the debt waiver is recognized through the income statement (P&L-effective), a taxable restructuring gain generally arises. As with a restructuring gain from a third party (see above), this must first be offset against available tax loss carryforwards.

If the debt waiver is credited directly to equity for accounting purposes, the new Circular No. 32a treats this, in principle, as a P&L-neutral capital contribution. In this case, no taxable restructuring gain arises.

Irrespective of the accounting treatment, a debt waiver remains P&L-neutral to the extent that the loan already qualified as hidden equity for tax purposes prior to the restructuring. Restructuring loans that were granted exclusively on account of the company's economic difficulties may likewise continue to be treated as tax-neutral, provided the conditions of the circular are met.

Stamp duty on capital contributions:
A debt waiver by a direct equity holder may, in principle, be subject to issuance stamp tax. In restructurings, however, the restructuring allowance of CHF 10 million or a tax remission may in particular be available, provided the statutory requirements are met.

Creation of capital contribution reserves exempt from withholding tax:
A debt waiver by a direct equity holder that is recorded directly in equity (P&L-neutral) may, in principle, lead to the creation of capital contribution reserves.

However, where the restructuring contributions are offset directly against existing accumulated losses, the SFTA takes the position that no capital contribution reserves are created to that extent.

In practice, there is often a conflict of objectives between creating capital contribution reserves and claiming restructuring-related relief from issuance stamp tax. This conflict of objectives should be analyzed before the accounting entries are made.

Debt waiver by other related parties (other than a direct equity holder):
Corporate income tax:
Debt waivers by related individuals or companies are, in principle, recognized in the income statement (P&L-effective) for tax purposes, to the extent they are commercially justified.

If there is no commercial justification, the debt waiver may qualify for tax purposes as a hidden profit distribution from the perspective of the company making it.

Stamp duty on capital contributions:
None.

Creation of capital contribution reserves exempt from withholding tax:
Not possible.

Waiving creditors
Independent third parties:
In the case of business assets, the recorded debt waiver is a tax-deductible expense.

By contrast, the waiver of a claim held as private assets generally qualifies as a capital loss that is not relevant for tax purposes.

Direct shareholders:
In the case of business assets:
Debt waiver recognized in profit or loss (P&L-effective) = in principle tax-deductible.

Debt waiver recognized directly in equity (P&L-neutral) = to be treated for tax purposes like a capital contribution.

In the case of private assets:
Debt waiver = capital loss that is not relevant for tax purposes

Other related parties (other than a direct shareholder / partner):
Corporate income tax:
In the case of business assets, the debt waiver is a tax-deductible expense, provided the debt waiver is recognized in profit or loss (P&L-effective) for the benefiting company.

Otherwise, the debt waiver is treated as a so-called hidden profit distribution for tax purposes. In that case, it does not give rise to a deductible expense.

In the case of private assets, the debt waiver generally qualifies as a capital loss that is not relevant for tax purposes.

Withholding tax:
To the extent the debt waiver qualifies for tax purposes as a hidden profit distribution, withholding tax consequences may arise in addition to the profit tax consequences. These should be examined at an early stage, in particular in the case of intra-group debt waivers.

Practical note on debt waivers:

The new Circular No. 32a makes clear that, for debt waivers, it is not so much the structure under civil law but rather their economic function and accounting treatment that are decisive. The choice of accounting method alone can have a significant impact on profit tax, issuance stamp tax and the creation of capital contribution reserves. The tax analysis should therefore be carried out before the restructuring is implemented and closely coordinated with the financial reporting.

Restructuring merger

Merger of a company in need of restructuring with a financially sound company, whereby the losses of the company in need of restructuring are economically borne by the sound company.

Merging companies
Corporate income tax:
The tax loss carryforwards of the company in need of restructuring may, in principle, pass to the acquiring company, provided the requirements of the Merger Act and of tax law are met.

In particular, no transfer of losses takes place if the loss-making company had already ceased its business activities or if the acquired business is discontinued shortly after the merger.

Withholding tax:
In the SFTA's view, restructuring mergers – in particular between sister companies – may give rise to withholding tax consequences to the extent that reserves are extinguished which do not qualify as capital contribution reserves.

Shareholders of the merging companies
Corporate income tax:
In the case of business assets, the merger is, in principle, tax-neutral. The relevant tax values of the participation are preserved.

Income tax:
Where participations are held as private assets, using the reserves of the sound company to restructure the loss-making company may, in certain circumstances, trigger income tax consequences. The specific effects depend largely on the structure of the merger and the companies involved.