Br & Karrer AG
Susanne Schreiber and Cyrill Diefenbacher Br & Karrer AG
Acquisitions(from the buyer's perspective)
i Tax treatmentofdifferent acquisitions
Whatare the differencesin tax treatmentbetween an acquisition ofstock in acompanyand the acquisition of
business assets and liabilities?
Whether an acquisition is carried out by way of acquisition of stock (share deal) or acquisition of business assets and liabilities (asset deal) has different tax implications for the seller and the acquirer. An acquirer often prefers an asset deal as in this case the tax risks transferred with the acquired business are very limited: tax risks of the acquired business may be inherited in the areas of VAT, customs, social security and real estate taxes. Further,astep-up in basis and tax deductible depreciation is, in principle, possible (see question z) and interest for acquisition debt may be set-off against taxable income of the acquired business.
Sellers typically prefer share deals in order to benefit from privilegedtaxtreatmentofcapitalgains(forSwisscorporate sellers),respectively tax-exemption in the case of Swiss-resident private individual sellers,exceptin cases ofan indirect partialliquidation,see below.The acquirer of shares in a Swiss company assumes potential historic tax risks and the tax book values ofthe target company,since both remain unchanged in the target company.The goodwill reflected in the share price generally cannot be written offagainsttaxable profits.The allocation ofinterest expenses on acquisition debt ofthe acquirer cannot be directly set off against taxable income ofthe target, but requires additional structuring. It should be noted that the acquisition ofa partnership interest is,from an income tax perspective, generally treated like an asset deal and results in a step-upfor the acquirer.
In case of an asset deal, potential tax loss carry-forwards of the business remain with the seller. The asset transfer is generally subject to VAT at 8 per cent on the transfer oftaxable goods and goodwill to the extent the assets are purchased by a Swiss-based company or permanentestablishment.The assettransfer between two Swiss entrepreneursfor Swiss VAT purposes may be carried out without VAT payment byway of notification procedure (eg,ifan organic unit is transferred). Should real estate be transferred, special cantonal or communal tax rules need to be considered (real estate gains taxation for the seller, real estate transfer taxes).
In case of a share deal, the target company may continue to use a potential tax loss carry-forward and can set it off against a taxable profit during the ordinary tax loss carry-forward period ofseven years. The acquisition of shares in a Swiss company is not subject to Swiss VAT, independent of the domicile of a corporate acquirer. Special considerations should be given in case the selling shareholders are Swiss-resident private individuals selling (alone or together) at least zo per cent in the share capital ofa Swiss company:under certain circumstances, this could create an indirect partial liquidation risk for the sellers. That is, re-qualification oftax-free capital gain into taxable investment income,if the target company makes a harmful distribution of previously accumulated profits to the buyer within five years after the transaction,for which the sellers typically include an indemnity clause in the sale and purchase agreements (SPA). Furthermore, in situations where the foreign resident sellers could not avail themselves ofafull refund ofSwiss withholding taxes on dividends received from the Swiss target company, buyers residing in Switzerland or in a
jurisdiction having afavourable tax treaty with Switzerland maybefacing anongoing,latentfull Swiss withholding tax exposure on undistributedprofits(`tainted old reserves'ofthe target company as ofthe date ofthe share acquisition).
With regard to transaction taxes,see question 6.
2 Step-up in basis
In whatcircumstances doesa purchaser getastep-upin basis in the business assetsofthetargetcompany?Can goodwill and otherintangibles be depreciatedfor tax purposesin the eventofthe purchase ofthose assets,and the purchase of stockin a companyowningthose assets?
Incase the purchase price in an assetdeal exceedsthe fair marketvalue of the net assets of an acquired business, an acquirer may capitalise such difference as goodwill,which is typically depreciated as per Swiss tax and accounting rules at4o per cent per annum (declining balance method;remaining amount depreciated in last year) or at zo per cent per annum (straight-line method) over five years. The same depreciation generally applies to the part of the purchase price allocated to intellectual property (IP). Such depreciation expense is generally deductible from taxable income.
In case of a share deal, the purchase price is entirely allcated to the shares acquired and the taxable basis of the target company remains unchanged (ie, no goodwill is recognised). A depreciation on the acquired shares is typically not possible for a Swiss acquirer,unless there is a decrease in the fair market value ofthe shares. Such adjustmentofthe share value istax deductiblefor a Swisscorporate acquirer; however,ifthe value ofa participation ofat least io per cent recovers in subsequent years,Swiss tax authorities may demand the reversal of the adjustment or depreciation up to the original acquisition cost basis, which is taxable.
3 Domicile ofacquisition company
Isit preferable for an acquisition to be executed by an acquisition companyestablished in or outofyour jurisdiction?
In case of an asset deal, a Swiss acquisition company is highly preferablefrom atax and legal perspective.Otherwise,the acquired business will likely constitute a permanent establishment ofa foreign acquirer, creating the need to prevent international double taxation through the allocation of profits between the acquirer's foreign head office and its Swiss permanentestablishment.
Even though Switzerland has notax-consolidation rules(exceptfor VAT), a Swiss acquisition company may be a good choice for a share deal.In case it fulfils the required conditions,the acquisition company may benefit from the holding company taxation (effective tax rate of 7.83 per cent due to full income tax exemption on cantonal and communallevel,participation deduction for qualifying dividends and capital gains at the federal tax level,see below);however,the cantonal and communal holding company exemption will be abolished with the corporate tax reform III(CTR III) expected to enter into force not before i January zoi9.Also after implementation ofthe CTR III, Switzerland will be an attractive location for the acquisition company due to low overall effective tax rates (eg, around ii.3 per cent in the canton of
118 Getting the Deal Through-Tax on Inbound InvestmentZoi7
Br& Karrer AG
Lucerne or around iz per cent in the canton ofSchwyz) and new tax reduction measures that shall be introduced with CTR III(eg,notional interest deduction,reduced capital tax).Switzerland has no controlled foreign corporation(CFC)regime and is currently also not planning to introduce such rules.
Any dividend income from qualifying participations ofat least io per cent(or with a fair market value ofat least i million Swiss francs) and capital gains on the sale ofqualifying participations ofat least io per cent held for atleast one year benefitfrom the participation deduction scheme under which such income is virtually tax-exempt.
Further, a Swiss acquisition company may benefit from a taxneutral reorganisation in the sense of the Mergers Act (eg, a merger with the Swiss targetcompanyifrequired bythe financing banks).Also, the Swiss targetcompanycan distribute dividends without withholding tax ifthe Swiss company holds at least zo per cent in the Swiss subsidiary and the dividend is timely notified(except where `old reserves' exist,see questioni).
It should be noted that the equity capitalisation of a Swiss acquisition company by its direct shareholder is principally subject to i per cent stamp duty(the first i million Swiss francs ofcontributed capital is exempt). However,there are ways to structure around this, such as implementing an indirect capital contribution (ie, equity funding not by the direct, but indirect shareholder). In case of adebt-financed acquisition, a Swiss acquisition company with mainly only dividend income may not benefit from tax-deductible interest expenses due to its lack of taxable income. However, there are certain debt pushdown strategies available by which interest expenses can be allocated to a Swiss target company and be set off against its taxable income. Swiss thin capitalisation rules principally need to be considered ifthe acquisition company is funded by shareholder or related party debt (including third-party debt that is secured by shareholders or related parties).Interest on such debt is only tax deductible ifcertain debt-toequityratios are complied with and the interest does notexceed arm'slength terms. Generally, the debt funding of investments (shares) is limited to 7o per cent ofthe fair market value ofsuch investment. As Switzerland has a broad treaty network, no CFC rules, an attractive income tax regime and usually offers possibilities to structure around potential tax inefficiencies, a Swiss acquisition company is often preferable.
4 Company mergers and share exchanges
Are company mergersorshare exchangescommonforms of
An immigration merger (inbound into the Swiss target) is possible based on the same provisions that apply for a Swiss domestic merger, that is one that can be carried out tax-free (ie, withouttaxable realisation ofhidden reserves)ifthe following conditions are met:continued tax liabilityin Switzerland and transfer at current(tax)book value.The main question in case ofan inbound merger is: will the foreign legislation permitsuch a merger and under whatconditions? Furthermore,if a foreign company merged with a Swiss company has hidden reserves and the mergeris made at(tax)book values,generally nostep-up ofthe income tax values for Swiss tax purposes may be possible. This, however, may change with the CTR III(see question 3). Swiss withholding tax maybe triggered ifthe nominalshare capital and qualifying capital contribution reservesin the Swiss merged entityincrease or ifreserves subject to Swiss withholding tax would be extinguished,such as ifthe merger is done with a company in a loss situation. C-onsiderations for exiting Swiss shareholders are generally taxed like ordinary purchase price proceeds except if such considerations are paid by the merged company(taxed like dividends).Swiss individual shareholders holding the shares as private assets incur taxable income ifthey benefit from higher share capital or capital contribution reserves in the merged company.
A more popular alternative to an immigration merger is a quasimerger as ashare-for-share exchange between the acquiring and target companies, whereby the shareholders of the target company are compensated with (new)shares ofthe acquiring company. A taxneutral quasi-merger requires that the acquisition company obtains at least So per cent ofthe voting rights ofthe target and the shareholders obtain at least,o per cent ofthe value ofthe target in new shares ofthe acquirer (ie,the cash component may not exceed So per cent of
the value ofthe target).In case ofaquasi-merger,the target remains a separate entity(as opposed to a statutory merger resulting in just one entity).In inbound cases(and the acquisition ofaSwiss private entity), a foreign acquirer would typically set up a Swiss acquisition company which would then acquire a Swiss target via share-for-share exchange based on the conditions outlined above.In this case,the Swiss acquisitioncompanytypicailyissues new shares to the tendering shareholders of the Swiss target company with a modest nominal share value and a large share issuance premium, which together reflect the market value ofthe acquired shares. The share premium may be booked and reported for Swiss withholding tax purposes as capital contribution reserves of the Swiss acquisition company, which could later be distributed free ofSwiss dividend withholding tax. Such quasi-merger is exemptfrom the i per centSwiss stamp issuance duty.
Qualifying quasi-mergers with Swiss target companies are in general tax-neutral for the acquiring and target entities. Swiss resident individual shareholders holding the shares of the target company as private, non-business assets are considered to realise atax-exempt capital gain(orloss)upon the exchange(share and other consideration, if any). Swiss resident corporations or individuals holding the shares ofthe target company as business assets may be able to roll over their tax basis in the target company shares into the shares ofthe acquiring company provided the book values are continued.
For a public takeover, a triangular (quasi-) merger may often be a possibility, where the shareholders of an acquired company do not receive shares in the acquiring company, but shares of the top listed companyinstead.Following a publictakeover,thetargetcompany may be merged with the acquiring(Swiss)companyto squeeze out remainingshareholders(maximum io per cent).
g Tax benefitsin issuingstock
Isthere atax benefittothe acquirerinissuingstockas consideration ratherthan cash?
For a Swiss acquisition company,the issuance ofstock as consideration may be beneficial if the requirements for atax-neutral quasi-merger are met(see question 4). In particular, at least So per cent ofthe fair market value ofthe Swiss target are compensated with(newly issued) shares of the acquisition company. Such quasi-merger is preferential for the Swiss acquirer since the contribution ofthe target shares will generally not trigger stamp duty, the acquisition of remaining target shares will benefit from a Swiss securities transfer tax exemption (see question 6, which could otherwise arise in a cash acquisition in case a securities' dealer is involved in the acquisition) and the Swiss acquisitioncompanycan create capital contribution reserves that may be later distributed without Swiss dividend withholding tazc. For Swiss sellers holding the shares in the target as business assets, the stock consideration may result in a deferral ofthe capital gain or rollover ofthe tax basis in the target shares.
Are documentarytaxes payable on the acquisition ofstock or business assets and,ifso,whatare the rates and whois accountable?Are any other transaction taxes payable?
From a Swissstamp duty perspective,the securities transfer tax ofo.is
per cent (ie, 0.075 per cent per party) on Swiss securities and o.3 per
cent(ie, o.is per cent per party)on foreign securities may arise incase
ofa share dealifa qualifying`Swiss securities dealer'is involved in the transaction either as a party or an intermediary.The term `Swiss securities dealer' includes not only professional securities traders, banks, brokers,asset managers and the like, but also all Swiss resident corporate entities whose assets consist,as per the last annual balance sheet, oftaxable securities in excess ofio million Swiss francs. A securities dealer involved principally hasto pay: in case he or she acts as intermediary: halfofthe burden for each
party to the transaction which is not itself a registered securities dealer or exempt party;or in case it is a party to the transfer: halfofthe burden for itselfand halfofthe burdenfor its counter party thatis nota registered securitiesdealer orexempt party.
Br& Karrer AG
Certain restructuring exemptions apply, but rarely in case of a transaction between unrelated parties. Swiss or foreign securities, such as bonds,shares or other securities that are sold in an asset deal may also be subjectto Swiss securities transfer tax ifa Swisssecurities dealer is a party or intermediary in the transaction.
Further, most cantons or communes impose a real estate transfer tax upon a transfer ofreal estate (asset deal) and,in most cantons or communes,also in case ofa share deal ifa majority ofshares in a real estate company is sold. The liability(buyer or seller) differs per canton and does not apply in case oftax-neutral reorganisations or mergers. In addition, real estate register fees and notary fees may arise on the transfer ofreal estate.
In case of an asset deal, the transfer of such assets is generally subject to 8 per cent (standard rate) or z.s per cent (reduced rate for certain assets) VAT except for assets that are not within the scope of VAT(eg,assetslocated abroad)or exemptfrom VAT(eg,receivables or real estate). VAT is generally payable by the transferor,unless the notification procedure applies or the transfer is made to a foreign acquirer (exemptionfor exportofgoods;exportofservicessuch as IP,which are taxable at the place ofthe acquirer). The transfer ofreal estate can be subjected to VAT unlessthe real estate is only used for private purposes. However,the VAT liability can in certain cases be fulfilled by applying the notification procedure,which must be applied if: both parties are subject to Swiss VAT; the VAT amount would exceed io,000 Swiss francs or the assets
are transferred intercompany;and the transfer qualifies as atax-neutral reorganisation for corporate
income tax purposes or concerns a transfer ofa totality ofassets or part thereofaccording to the Merger Act.
On a voluntary basis, the procedure may be applied if real estate is transferred or significant interest is proven (especially in case of a transfer of an organic business unit, a totality of similar assets or the assets to be transferred serving a similar business activity).This would apply in most cases between unrelated parties. As a consequence of the notification procedure, the acquirer takes over the same VATable basis and use for VAT purposes. That is, they could benefit from an additional input VAT refund or suffer from a repayment ofinput VAT refunded to the sellerifthe acquirer changesthe use during the respective period (five years orzo years for real estate).
A share deal typically is exemptfrom VAT without credit.
7 Netoperatinglosses,othertax attributes and insolvency proceedings
Are netoperatinglosses,tax credits or other types ofdeferred tax assetsubjectto anylimitations after achange ofcontrol ofthe targetorin any othercircumstances?Ifnot,are there techniquesfor preserving them?Are acquisitions or reorganisations ofbankruptorinsolventcompaniessubjectto anyspecialrules ortax regimes?
Principally, a change in ownership ofa Swiss entity in a share deal has no influence on the carry forward oftax losses,that is, losses from the pastseven tax years can be carriedforward and setoffagainstthe taxableprofits ofthe actual period.There are exceptions,for example ifthe acquired company has already been brought into liquid form and has no commercial activity anymore.In case ofa financial restructuring or recapitalisation,the tax loss carry-forward is timely unlimited. Other tax attributes are principally also not affected by a change ofcontrol.
In case of an asset deal, any tax loss carry-forwards remain with the selling company and may be set off with a gain resulting from the sale (leading to a step-up to fair market value for the acquirer). There are principally no specialrules for acquisitions ofbankrupt or insolvent companies.A change ofownership has generally no impactifthe Swiss target companies qualify for a special tax regime,like the cantonal and communal taxation regimes for holding,mixed or domiciliary companies(which will be abolished with the CTR III) or the application ofa partial tax relief(tax holiday)ofa Swiss target company.
8 Interest relief
Doesan acquisition companygetinterestrelieffor borrowings
to acquirethe target?Arethere restrictions on deductibility
where the 1enderisforeign,a related party,or both?Can
withholdingtaxesoninterest paymentsbe easily avoided?
Is debtpushdown easily achieved?In particular,arethere
capitalisation rulesthatpreventthe pushdown ofexcessive
Interest paymentsin general are tax deductible and notsubjecttoSwiss withholding tax at the level ofa Swiss acquisition company. However, since there is no tax consolidation or group taxationfor income tax purposes,the interest deduction is only tax efficientto the extentthe acquisition company has its own taxable income.Otherwise,debt pushdown structures or the creation oftaz~able income at the acquisition company level should be considered.
Interest deduction limitations may apply to related party debt,that is,debt provided byshareholders,related parties or third parties where the debt is secured by related parties. Thin capitalisation rules set a limit for maximum loan amounts by shareholders or related parties that are accepted by Swiss tax authorities. The maximum amount of accepted debtis determined by applying the safe-haven rates,(ie,a per cent amount of allowed debt per asset category,such as ioo per cent debt-financing for cash or7o per centfor participations or IP)which are set out in a circular ofthe Federal Tax Authority. The percentages are applied onto the fair market value ofthe corporation's assets. Related party debt exceeding that maximum permitted debt calculated on this basis will be treated as equity for tax purposes; accordingly, interest payments on such exceeding debt will be treated as constructive dividendsthat are subjectto35 percentSwissdividend withholdingtax and non-deductible from the taxable profit ofthe company.
Further, such deemed equity is also subject to annual capital tax. In order to avoid adverse withholding tax consequences,loans to the Swiss acquisition company may be granted interest-free,ifthis is possible from a lender's perspective.Such interest-free loan would -other than a subsequent waiver of interest -not trigger stamp duty ofi per cent on equity contributions. Where the direct shareholder provides debt in excess ofthe thin capitalisation limitations but benefitsfrom a full dividend withholding tax relief(eg,based on a double tax treaty or as Swiss resident corporation holding at least zo per cent in the Swiss target),the withholding tax cash out could be avoided by a proactive, timely notification ofthe hidden dividend distribution.
In addition,interest on related party debt mustcomply with arm'slengthterms.Circularspublished annually bythe FederalTax Authority set out the maximum safe haven interest rates that may be paid by a Swiss company on shareholder or related party loans, generally with higher rates ifthe loans are denominated in foreign(non Swiss francs) currency.Ifthe debt does not qualify as deemed equity(see above)and the safe haven interest rates are complied with, the interest is generallytax deductible. Higher interest rates may be accepted ifthe arm'slength character or a third-party test can be evidenced. This question can be addressed in a tax ruling to obtain certainty.
With respectto interest withholding tax,the Swiss`io/zo/ioo nonbank rules' need to be considered in case a bond is issued by a Swiss acquisition company or a`collective fundraising'scheme is used.In this case,withholding tax of3,S per centis levied on interest due that can be refunded based on Swiss domestic law for a Swiss 1ender or depending on the applicable double-tax treaty for a foreign 1ender. A loan facility qualifies as a collective fundraising where the aggregate number of non-bank 1enders (including sub-participations) to a Swiss company under a facility agreement exceeds io (if granted under equal conditions)orio(ifgranted under different conditions,eg,various tranches or facilities),and the total amountofsuch debtexceedsSoo,000Swiss francs. Cash pooling does not amount to collective fundraising,unless the aggregate number of non-bank 1enders exceeds ioo and the total amount ofsuch debt exceeds 5 million Swiss francs. The Swiss withholdingtax exposure under the io/2o/ioo non-bank rules maybe mitigatedunder certain conditions ifacquisition debtis granted to a foreign entity and lent on to a Swiss subsidiary(acquirer).The borrowing via a foreign subsidiary ofa Swiss parentcould,however,trigger Swissinterestwithholding tax,ifthe collective fundraising criteria are met by the foreign borrowing subsidiary,the Swiss parent guarantees the debt and
Getting the Deal Through-Tax on Inbound Investmentzoi7
Br& Karrer AG
the borrowed funds are lent on to a Swiss company. Further, federal and cantonal Swiss withholding taxes on interest may arise if a loan is directly or indirectly secured by Swiss real estate;the tax rate depends on the location ofthe real estate.However,manySwissdoubletax treatiesreduce withholding taxes on interestto zero.
The tax-efficientpushdown ofacquisition debton the targetlevelis not easy to achieve,since Switzerland has no consolidation for income tax purposes.Adebtpushdown ofacquisition debtbymergingthe acquisition company with the targetcompany generally is viewed as abusive from a tax perspective by the Swiss tax authorities if the acquisition company had no taxable income to set offthe interest expenses itself. Debt pushdown can typically per current practice be better achieved by strategic buyers (Swiss operating acquisition companies with their own taxable income)or by careful structuring.The distribution ofdebt financed dividends(leveraged dividends)whereby the targetcompany resolves a dividend thatis not directly settled in cash butleft outstanding as an interest-bearing downstream loan towardsthe shareholder or settled by the assumption ofexternal acquisition debt and the allocation ofinterestexpenses to the targetcompany may be possible,always within the limitations ofthe thin capitalisation rules. In addition,debt financed intercompany acquisitions, such as the acquisition ofshares or assetsfrom group companies bythe Swiss target against an interestbearingloan may be possible.
9 Protectionsfor acquisitions
Whatformsofprotection are generallysoughtforstock and
business assetacquisitions?How are they documented?How are any payments madefollowing a claim undera warrantyor
indemnitytreatedfrom atax perspective? Are theysubjectto
withholdingtaxesor taxablein the handsofthe recipient?
Tax risks are usually addressed in the asset purchase agreement(APA) or share purchase agreement in representations and warranties and a tax indemnity clause.
Historic tax risks remain with the targetcompanyin case ofa share deal.A tax due diligence and the requesting ofsufficientSPA protection for identified risks is thus highly recommended to an acquirer.
Typically, an acquirer asks for tax representations and warranties to be granted by the seller in the SPA for pre-closing periods in order to obtain general protection relating to tax compliance status,tax registrations,tax filings and tax payments as well as certain tax attributes and the absence of blocking periods, old reserves for withholding tax purposes,foreign permanentestablishments or reversals ofpast depreciation ofparticipationsorloans.Taxindemnities are eithergranted for the pre-closing period or until a locked box date(depending on the purchase price mechanism)and either broadly for all taxes payable which are not already reflected in the purchase price(as debt)or onlyfor specific risks identified.The goal ofthose clauses is to shift the liability for tax obligations originating from pre-closing periods back to the seller. Claimsunder a warranty orindemnityshould principally be considered asa purchase price reduction between acquirer and seller and would be income tax neutral and as such not subject to withholding tax. Direct claims by the target against the seller could result in taxable income. Even if the payment would be structured as contribution via the purchaser, aper cent stamp duty on the contribution into the Swiss target could be triggered.Thus,both should be avoided and the indemnification should be made between acquirer and seller.
An acquirerin an assetdealcan be liable for certain taxes,like VAT, customs and social security contributions and potentially payroll taxes and should seek protection in the APA. Claims from acquirer against seller would usually be a purchase price reduction and may reduce the capital gain for the seller and step up (depreciation basis) for the acquirer. No withholding taxes should arise on such payments, but transfer taxes and VAT may need to be adjusted accordingly.
Whatpost-acquisition restructuring,ifany,istypically carried outand why?
Apost-acquisition merger of the (Swiss) acquisition vehicle and the acquired company is often contemplated and can generally be done on atax-neutral basis. The benefit is the integration of the acquired business by combination with the existing business ofthe acquirer in Switzerland,the reduction oflegalentities and thefasteraccessto operating cashflow inthe targetentityirrespective ofdistributable reserves. The latter is often requested from financing banks,since the bank debt is then on the level ofthe target company and directly secured by the target's assets.
From a tax perspective, such merger can have the benefit of offsetting taxable profits of the operative target business with interest expenses from the acquisition financing. However, if the acquisition company does not have its own taxable income,such offsetting is usuallynot permitted bythe Swiss tax authorities but seen as abusive after a merger(debt pushdown).Even ifthis tax benefit is not achieved,the merger can be done for the abovementioned reasons.
IftheSwisstargetentityhas been acquiredfrom Swissresidentindividuals and the indirect partial liquidation rules apply, a merger with the acquisition company within five years after the transaction would trigger the income taxation for the sellers as ifthe target entity had distributed its reserves to the sellers. Depending on the amount oftaxes triggered and whetherthe acquirer would beliable accordingtotheSPA for such taxes towards the sellers,no merger with the acquisition company should be performed during five years after the transaction;sidestream mergers or mergers within the target group,in contrast,should generally not trigger the indirect partial liquidation taxation.
A merger of the Swiss acquirer with a Swiss target that had been held by non-Swiss shareholders or shareholders not being entitled to a full withholding tax reductions on dividends from the Swiss target should be carefully analysed since they could trigger non-refundable Swiss withholding taxes on the amount ofthe purchase price less share capital and potential capital contribution reserves (so-called `liquidation by proxy').
Additionally,intragroup transactions in the acquired target group may be used in certain cases to generate distributable reserves(eg,an intragroup transfer ofa participation to another group company at fair market value with the potential capital gain being subject to the participationdeduction ifthe required conditions are fulfilled), which may then be used to upstream cash to the acquisition company and further.
Can tax neutralspin-offs ofbusinesses be executed and, ifso,canthe netoperatinglossesofthe spun-offbusiness be preserved?Isit possible toachieve aspin-offwithout triggering transfer taxes?
Atax-neutral demerger ofa Swiss company may be carried out in the form ofsplit-up or spin-offand is principally tax-neutral(ie, no taxable realisation oftransferred hidden reserves)under the following cumulative conditions: the tax liability ofthe companiescontinuesin Switzerland; one or more business or business units are transferred; the transferisdone at(tax)book value,againstsufficientequity;and both Swiss entities continue their businesses after the demerger.
Underthese conditions,a demergerdoesnotfurthertriggeranytransfer taxes,like securities transfer tax or real estate transfer tax.Registration fees or notaryfees upon the transfer ofreal estate may still apply.
Since the demerger is notsubject to any blocking period,it is often used by sellers as a pre-deal structure opportunityin order to transfer a business unit to a new entity and sell it through a share deal.
The demerger can be structured in different ways,for example as direct demerger(split ofa legal entity)under the Merger Actor as contribution ofthe business unit into a new subsidiary and distribution of the sharesin the new subsidiarytothe shareholders.
Br& Karrer AG
Update and trends
The final CTR III package has been approved bythe Swiss Parliamentin June zoi,with which certain types ofprivileged taxation(holding or mixed or domiciliary company taxation, finance branches,taxation asprincipalcompany)shall be abolished. However,the abolished talc regimesshall be replaced with other measuresthatfurthercontribute to an attractive tax environment in Switzerland,for example the introduction ofa patent box,superdeduction forresearch and developmentexpenses,notionalinterestdeduction,the separate,privileged taxation ofbuilt-in gainsthat have arisen under a cantonaltax privilege thatis abolished,and improvementon withholdingtax refund for Swiss branches.Since the CTR III is subjected to a referendum,it is not expected thatthe reform package will enterinto force before iJanuaryzoi9.
or the percentage required under the applicable tax treaty and meeting all further conditionsfor treaty benefits) maybe applicable.It requires the previous filing of a specific application form with the Federal Tax Authority and the demonstration that the foreign beneficiary fulfils all conditions for the requested tax treaty benefits.
On interest payments,there is generally no withholding tax levied in Switzerland, with the exception ofinterest payments on qualifying bonds or collective fundraisings (see question 8 regarding io/2o/ioo non-bank rules) and on interest paid on bank deposits(with the Swiss entity qualifying as a bank under the Swiss withholding tax provisions) exceeding a defined minimum amount. Further,withholding tax may applyiftheloanissecured bySwissrealestate(seequestion8).Dividend withholding tax may applyonintercompanyinterestifthe interest qualifies as hidden dividend distribution (in case the Swiss entity is thinly capitalised or the interest exceedsthe arm's-length terms).
In order to be also neutralfor stamp duty purposes,certain restrictionsregarding the maximum amountofnewly created share capital at the level ofthe new entity need to be considered.
Other waysto achieve,under certain conditions,atax-neutral spinoff include the transfer of(partial) business or operating fixed assets to a Swiss subsidiary, Swiss parent or sister company,however always subject to a five-year blocking period. The transfer ofparticipations to a Swiss or foreign subsidiary can generally be done tax neutrally and is notsubject to a blocking period.
Usually, a tax loss carry-forward can be transferred with the taxneutral transfer ofa (partial) business unit ifand insofar as the loss is related to the business activity ofthe transferred unit. Otherwise,the tax loss carry-forward remains with the transferor. Thus, it is recommended to confirm the allocation ofthe tax loss carry-forwards in a tax ruling with the competent tax authorities.
i4 Tax-efficientextraction ofprofits
Whatothertax-efficient meansare adoptedfor extracting profitsfrom yourjurisdiction?
In addition to dividends and interest, other intercompany payments could be considered to extract profit from the Swiss entity. Such payments need to comply with arm's-length terms in order to be accepted from a tax perspective.Switzerland usually follows the OECD transfer pricing guidelinesin this respect.
There is no Swiss withholding tax on royalties or managementfees. Accordingly, it would be possible to extract profits by such payments provided they are at arm'slength.
Disposals(from the seller's perspective)
iz Migration ofresidence
Isitpossibleto migrate theresidence ofthe acquisition companyortargetcompanyfrom yourjurisdiction without tax consequences?
In general, a migration of a company from Switzerland is considered a deemed liquidation, triggering the same tax consequences as a statutory liquidation process. In particular, hidden reserves (fair market value less tax book values of business of the company) would be subject to income tax at the applicable tax rate ofthe Swiss company. Furthermore,the `liquidation surplus'(net assets at fair market value, minus nominal share capital and recognised capital contribution reserves) would be subject to 35 per cent dividend withholding tax: depending on the domicile of the shareholders of the former Swiss entity and the applicable double tax treaties,the withholding tax may be notified instead of paid or partially or fully refunded. No income tax will generally be due,ifthe business activity ofthe Swiss entity is continued upon the migration through a permanent establishment in Switzerland and the book values are carried on and remain subject to taxation based on the international allocation between foreign headquarterand Swiss permanentestablishment.However,withholdingtax on the liquidation surplus will still be due(see above).
i3 Interestand dividend payments
Areinterestand dividend payments made outofyour
jurisdiction subjectto withholdingtaxesand,ifso,at whatrates? Are there domesticexemptionsfrom these withholdingsor arethey treaty-dependent?
Dividends paid by a Swiss company are principally subject to a withholding tax at a rate of35 per cent. However,this withholding tax may be fully reclaimed by a Swiss tax resident shareholder or may also be notified by a Swiss corporate shareholder holding atleastzo per centin the Swisscompanyto the Swiss Federal Tax Authority(in order to avoid a temporary cash out) within a certain timeline. While dividend withholding tax is meant to be a final burden to non-Swiss resident beneficiaries,full or partial reliefmay be available under an applicable Swiss double taxation treaty. Also in the cross-border context, the notificationprocedure for dividends paid to a qualifying corporate shareholder (owning atleastio per centofthe equity ofthe distributing Swiss entity
How are disposals mostcommonlycarried out-adisposalof
the business assets,the stockin the localcompanyorstockin
Usually the seller has an interest to carry out the disposal by selling the stock ofthe company or ofthe foreign top company:a Swiss resident individual holding the shares as private assets can benefit from a taxexempt capital gain when selling these shares (see questioni regarding indirect partial liquidation risk). In contrast, the sale on a lower level or an asset deal would require the repatriation, which is subject to dividend taxation (fully taxable income or privileged taxation in case ofa shareholding of minimum io per cent), a Swiss company holding at least io per cent in the Swiss target for at least iz months will also prefer a share deal to benefitfrom the participation deduction (virtual tax exemption).
To the extenttheforeign holding companyisin ajurisdiction with a favourable double-tax treaty with Switzerland,the sale ofshares bythe foreign holding company followed by a dividend distribution to Swiss corporate shareholders can also be a tax efficient structure. Provided the dividends are not subject to foreign withholding tax, the Swiss shareholder can benefitfrom the participation deduction on dividends ifits shareholding in the foreign holding is either atleastio per cent or has a fair market value ofat least i million Swiss francs(no minimum holding period applies to dividends).
An asset dealis generally less beneficialfor a seller since it triggers a taxable gain for the seller. It may be considered ifthe seller has a tax loss carry-forward that would otherwise forfeit, the seller can make use of a deferral (re-investment relief for certain operating assets) or if the seller benefits from a low or privileged taxation and receives a higher purchase price by the acquirer due to the buyer's step up and depreciation.
Where the disposalis ofstockin the localcompany bya nonresidentcompany,willgainson disposalbeexemptfrom tax? Are there specialrules dealing with the disposalofstock in real property,energyand naturalresource companies?
Based on Swiss unilateral law, irrespective of a double tax treaty, Switzerland does not impose tax on the gains of the disposal of stock in a local company by anon-resident seller (ie, a foreign seller
122 Getting the Deal Through-Tax on Inbound Investment2o7
Br& Karrer AG
without permanent establishment and without place of management in Switzerland).
Oneimportantexception applies atthe cantonal orcommunallevel where the share deal equals an indirect transfer of local real estate, such as the direct or indirect sale ofa majority interest in a real estate company,(ie,a companythat predominantly owns Swiss real estatefor investment purposes). The exact qualification criteria for a real estate company vary between the cantons.Further,depending on the application ofadoubletax treaty between Switzerland and the residency ofthe seller,the taxation right ofSwitzerland may be restricted,for example currently under the double tax treaties with Luxembourg,Denmark or Germany. However,the majority of the Swiss tax treaties reserve the right ofthe contracting state in which the real property islocated to tax indirect gains upon the sale ofcompanyshares,ifmore thanSo per cent ofthe company's assets are comprised oflocal real property.
With regard toenergy and natural resource companies,there areno
special tax rulesin Switzerland.
i7 Avoiding and deferringtax
Ifagain istaxable onthe disposaleither ofthesharesinthe localcompanyor ofthe business assets bythe localcompany, are there any methodsfor deferring or avoiding the tax?
As outlined above,a sale of all shares in the local company would be either tax exempt(Swiss individual holding the shares as private assets and not qualifying as securities trader) or virtually exempt,subject to the requirements ofthe participation deduction,at the level ofa Swiss tax residentcompany.
Business required long-term assets can qualify for a deferral or rollover relief to the extent that the proceeds are re-invested within a certain timeframe in the acquisition of other long-term assets. The sale proceeds of real estate cannot be rolled over to moveable longterm assets.
BR & KARRER
Susanne Schreiber Cyrill Diefenbacher Brandschenkestrasse 90 8oz7 Zrich Switzerland
Tel:+4i58 zi So 00 Fax:+4i58ziSo of www.baerkarrer.ch