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Financial restructuring: Mind the tax traps

22.03.2020

The tax treatment of financial restructuring measures can significantly impact a company’s financial position.

Key takeaways

  • Restructuring measures can have tax implications – for the company subject to the measures and the shareholders that contribute financially.
  • The tax consequences of financial restructuring measures depend in many respects on how the measures were implemented.
  • In order to get maximum benefit from restructuring the company, it is important to consider the tax implications before the financial restructuring measures are implemented.
  • Options to defer or waive tax liabilities should also be explored. 

Restructuring measure

Tax implications in Switzerland

Subordination of claims

Debt capital remains intact, subordinating creditors step back behind the other creditors.

Adequate subordination of claims enables a company to avoid reporting overindebtedness to the bankruptcy courts.

Company benefiting from the measure

No tax implications.

Creditor who subordinates claims

A write-down of the receivable on the assets side of the balance sheet is a tax-deductible expense.

Contribution to reserves

(without an increase in statutory capital)

The company receives an injection of funds via contributions in cash or kind; no statutory capital increase is triggered.

Company benefiting from the measure

Corporate income tax:

No consequences from the perspective of corporate income tax.

Stamp duty on capital contributions:

Injection from direct shareholder:

Company owes stamp duty of 1%; CHF 10 million tax-exempt restructuring allowance may apply. Additional discretionary tax relief conceivable.

Injection from indirect shareholder:

No stamp duty payable (unless book entries are made at the level of an intermediary company in Switzerland).

Setting up qualifying reserves positions exempt from dividend withholding tax:

Possible, provided the capital contribution comes from a direct shareholder and is not offset against the loss shown on the statutory standalone balance sheet (gross disclosure). Company is required to offset losses if it wishes to benefit from stamp duty exemption (CHF 10 million tax-exempt allowance or discretionary tax relief).

Consequence: If the direct shareholder is not a tax resident of Switzerland and cannot receive full relief on the withholding tax for dividend distributions: Consider whether you want to apply the stamp duty exemption or whether qualifying reserves exempt from dividend withholding tax should be set up.

Shareholders:

No immediate tax implications.

The injection should be recognised on the participation in the balance sheet. In addition, for the purpose of the Swiss participation relief rules the tax values change.

If applicable, the carrying amount of the participation may be written down (tax-deductible expense). The relevant tax values for the Swiss participation relief rules are unaffected by write-downs of this kind. Should the participation recover its value subsequently, this may trigger taxable income (no participation relief).

Debt waiver

The company's liabilities are reduced.

Company benefiting from the measure

Debt waiver by independent third-parties:

Corporate income tax:

Recognised in profit and loss by the company for tax purposes, resulting in consumption of tax loss carryforwards (without any time limit on offsetting).

Debt waiver by direct shareholder:

Corporate income tax:

Generally recognised in profit and loss by the company for tax purposes, resulting in consumption of tax loss carryforwards (without any time limit on offsetting).

However, if the company increases its statutory share capital by offsetting claims, this would not result in income for tax purposes. In this case, the statutory capital is increased by the amount of the shareholder’s receivable from the company. This approach can be used also to create surplus capital in an income tax neutral way. When surplus capital is created and offset against losses, an exemption from stamp duty is possible (see above, contribution to reserves).

A debt waiver by the direct shareholder is, exceptionally, not considered income for tax purposes if the shareholder loan subject to the waiver:

  • Was treated as equity for tax purposes prior to the financial restructuring measures (so-called “hidden equity”, i.e. debt disallowed under the Swiss thin capitalisation tax rules); or
  • Was issued for the first time or additionally due to poor business development and would not have been granted in the same circumstances by an independent third party.  

Stamp duty on capital contributions:

The company is liable for stamp duty of 1% on the claim waived by a direct shareholder. According to the Swiss tax authorities, this applies even if the debt waiver has constituted income (if the amount is offset against the loss as shown on the statutory stand-alone balance sheet, potentially a restructuring allowance of CHF 10 million is exempt from the stamp duty; furthermore, discretionary stamp tax relief is conceivable).

Setting up qualifying reserves positions exempt from dividend withholding tax:

Possible (only) if the debt waiver is income tax neutral and no offsetting takes place against the loss as shown on the statutory stand-alone balance sheet.

Debt waiver by other related parties (other than direct shareholder):

Corporate income tax:

In principle, for tax purposes the waiver constitutes income of the company benefiting from the measure (with no time limit on offsetting against prior-year losses), provided from the perspective of the waiving related party to waive the debt is in line with the arm's length principle (e.g., no deemed / hidden distribution by a sister company, etc.). Otherwise the debt waiver is income tax neutral for the company benefiting from the measure.

Stamp duty on capital contributions:

None.

Setting up qualifying reserves positions exempt from dividend withholding tax:

Not possible.

Creditor agreeing to waive claims

Independent third party:

The waiver recorded on the assets side of the balance sheet is a tax-deductible expense.

Direct shareholder:

The claims waiver recorded on the assets side of the balance sheet is a tax-deductible expense provided that for the company benefiting from the waiver the measure results in taxable income. Otherwise the tax implications of the debt waiver are the same for the direct shareholder as in the case of a contribution to reserves.

Other related parties (other than a direct shareholder):

Corporate income tax:

The debt waiver recorded on the balance sheet is a tax-deductible expense provided that for the company benefiting from the waiver the measure results in taxable income.

Otherwise, the company may be deemed to have made a so-called “hidden dividend distribution”. In this case, the debt waiver does not constitute a deductible expense.

Dividend withholding tax:

If the debt waiver qualifies as a “hidden dividend distribution” of the waiving company for tax purposes (and is not disclosed as a dividend distribution in the statutory balance sheet as a withdrawal from reserves exempt from dividend withholding tax), the debt waiver is subject to withholding tax (of 35%, or grossed-up to 53.85% if not charged to the beneficiary).

Merger for financial restructuring purposes

Merger of a company requiring financial restructuring with a healthy company; the company requiring restructuring is restructured using the healthy company’s reserves.

Merging companies:

Corporate income tax:

It is possible for the surviving company to continue the tax loss carryforwards of the company requiring restructuring (exceptions: the company being absorbed had already discontinued business operations; or transferred business operations were discontinued shortly after the merger).

Dividend withholding tax:

According to the Swiss tax authorities, dividend withholding tax may be triggered on the reserves (other than reserves exempt from dividend withholding tax) used up in the derecognition of losses in the course of the merger for restructuring purposes (especially if the merger is between sister companies).

Shareholders of the merging companies:

Corporate income tax:

Not recognised through profit and loss, therefore income tax neutral. The value of the merged participation does not change overall for corporate income tax purposes.

Private income tax:

If the shares in the merger companies are held as an individual's private assets (as opposed to business assets), the shareholder is liable to pay income tax on the reserves (other than reserves exempt from dividend withholding tax) of the healthy company used to restructure, the unhealthy company.

Accounting write-ups

Reduction of the loss carryforward due to accounting treatment

(does not improve the actual equity or liquidity of the company)

Company benefiting from the measure:

Corporate income tax:

This approach triggers income for tax purposes in the amount of the total write-up.

Tax loss carryforwards are reduced accordingly; tax loss carryforwards can only be offset if they were created in the past seven fiscal years.

Shareholders:

No tax implications.

Need for action?

Financial restructuring measures can have tax implications. These tax implications need to be considered carefully before restructuring is carried out. Only so can the restructuring measures have the maximum impact for the company. Options to defer or waive tax liabilities should also be explored.

For further information, please contact us:

No legal or tax advice

This legal update provides a high-level overview and does not claim to be comprehensive. It does not represent legal or tax advice. If you have any questions relating to this legal update or would like to have advice concerning your particular circumstances, please get in touch with your contact at Pestalozzi Attorneys at Law Ltd. or one of the contact persons mentioned in this Legal Update.

© 2020 Pestalozzi Attorneys at Law Ltd. All rights reserved.

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