What is it all about?
Capital gains derived from the sale of privately held investments are not being taxed at the level of the shareholder who is subject to tax in Switzerland. Dividend distributions, on the other hand, are subject to income tax at the level of the private shareholder. From a tax perspective, a shareholder therefore has an interest not to distribute profits, but rather reinvest them in the company and realize them tax-free by subsequently selling the share certificates. If a substantial stake (>20%) in such a "full wallet" is sold into the business assets of the new owner, the latter can collect the reinvested profits tax-free, as dividends are not taxed in the case of substantial participations respectively can be neutralized by writing off the acquisition costs.
In order to stop such a practice (the so-called indirect partial liquidation), Swiss tax law provides for the requalification of a deemed tax-free capital gain of the seller as taxable investment income if the following conditions are cumulatively met:
- sale of a participation of at least 20% held in the private assets of the seller into the business assets of an individual or a legal entity;
- the buyer makes a distribution from the company's substance within 5 years of the purchase;
- the substance was already existing at the time of the purchase, distributable under commercial law and not operationally necessary.
The tax-free capital gain is re-qualified as taxable investment income by adding the distribution made by the buyer to the taxable income in the seller's tax return. If the assessment is already final, this offsetting is conducted in the course of the after-tax procedure.
What do I have to do?
The seller has no influence on whether the acquiring party will make a distribution. Therefore, the seller has an interest in protecting himself against unpleasant tax consequences by using a contract clause. From the buyer's perspective, however, there is an interest in reflecting the deferred tax burden in the purchase price negotiations and to ensure maximum flexibility for future distributions.