Taxes can be a significant cost in a M&A
transaction and are subject to a review prior to the transaction, in
most cases. This review includes the tax risks acquired with the
company, the taxes triggered by the transaction, and future taxes based
on the acquisition structure.
In Switzerland, there are similar tax issues as in other
jurisdictions, such as transfer taxes, taxes related to employee
participation schemes, capital duty, related party financing and debt
push down. Then, there are certain Swiss specialties such as indirect
partial liquidation, taxation of earn out as salary, old reserves or
extended international transposition.
According to longstanding practice, taxpayers can obtain rulings
from the cantonal and federal tax authorities clarifying the tax
consequences of a transaction and the intended acquisition structure
prior to the transaction. Such rulings usually take four to six weeks
and are free of charge for the most part. In practice, rulings
concerning certain tax matters are often stipulated as conditions to
closing or are even filed before signing.
Transfer taxes
In Switzerland, securities transfer tax is levied on the sale of
shares if a securities dealer for stamp tax purposes is involved in the
transaction as a party or as a broker. A Swiss company owning securities
with a book value CHF10 million ($10.86 million) qualifies as
securities dealer and has to remit transfer stamp tax of 0.15% on the
sales price of a Swiss company and 0.30% on the sales price of a
non-Swiss company. The transfer tax can be fully or partially shifted to
the other party by contractual means. Usually, the sale and purchase
agreement (SPA) contains a clause with regard to bearing of transfer
tax. Often it is shared between seller and buyer.
If a Swiss investment bank is involved in the transaction, such
involvement is viewed as taxable brokerage by the Swiss federal tax
administration and will trigger transfer stamp tax for the bank, a
registered securities dealer by law. The bank will typically shift such
transfer stamp tax to its client (seller) who in return will try to
shift at least half of the tax to the buyer in the SPA.
Based on recent case law, transfer stamp tax will be triggered even
if neither the seller nor the buyer is a securities dealer for stamp
tax purposes but if the parent company of either party which is a
securities dealer is actively involved in the transaction (internal deal
team) and will therefore be viewed as broker to the transaction.
Unless a real estate company is acquired, a transaction does not
trigger real estate transfer tax. Under Swiss law, the value of a
company needs to be defined by its real estate in order to qualify as a
real estate company.
Employee participation schemes
Due to the fact that for Swiss resident individuals a capital gain
on shares is tax-free, the use of employee share plans is very popular
in Switzerland. However, capital gains are only tax-free if the employee
is considered an investor, i.e. the conditions under which the employee
acquired the shares were the same as for any investor. Any other
benefit received by an employee or a board member in connection with the
employment is considered taxable salary. This includes any other form
of employment participation, such as phantom stock, option plans and
restricted stock units. Income is earned when the employee receives the
cash or in certain cases, the shares, respectively an enforceable claim
for it.
By introducing a blocking period to employee share plans, the tax
value at acquisition can be reduced. If the shares are sold before the
blocking period has expired, the value of the remaining blocking period
will be taxed as salary.
In practice, there is often no market value for the shares of the
target due to a lack of third-party transactions. In that case, a
so-called formula value is used for the employee share plan. If a sale
of such shares occurs within five years of their acquisition, the excess
gain on the sale (sales price minus formula value at sale) is taxed as
salary.
If the transaction triggers taxable salary from employee
participation plans, these amounts are subject to social security
contributions and to payroll tax for certain employees (non-Swiss
resident or Swiss resident foreign national). Since there is no cap for
Swiss social security contributions, these amounts may be substantial.
The employee share of the contributions, which is somewhat less than
50%, and payroll tax has to be charged to the employees.
Capital duty
Switzerland currently levies a stamp tax of 1% on contributions to
the company equity. There is a one-time tax-free amount of CHF1 million
upon incorporation or in a capital increase. In practice, parties try to
avoid this tax cost and use (non-interest bearing) shareholder loans if
permitted for regulatory and tax purposes in the shareholder
jurisdiction.
In 2021, the Swiss parliament has approved legislation to abolish
capital duty. However, a referendum has been announced. Therefore, it is
not expected that this will come into force, if at all, starting from
2022.
Debt push down and related party financing
Switzerland provides no tax consolidation for income tax purposes
and on dividends from subsidiaries participation exemption relief
applies. In order to achieve a debt push down, the target has to be
merged with the acquisition company. However, based on the tax avoidance
doctrine, Swiss tax authorities usually deny the tax-effective
deduction of interest expense against the target’s taxable income.
Interest on third party debt is not subject to any limitations,
unless it is viewed as related party debt for tax purposes. This is the
case if the direct or indirect shareholders secure the third-party debt.
Then, the Swiss thin capitalisation rules (maximum debt) and the Swiss
safe haven interest rates (maximum interest) apply. Any excess interest
will be treated as deemed dividend and will trigger corporate income and
dividend withholding tax. Particularly with non-Swiss shareholders this
can constitute a substantial tax risk.
Indirect partial liquidation
Indirect partial liquidation is a codified anti-abuse practice
originating in the tax-exemption on capital gains for Swiss resident
individual shareholders. This rule shall prevent the tax-free financing
of the purchase price from the target if non-business assets are sold
with the target.
A part of the sales proceeds is taxed as dividend income in the hands of the Swiss resident individuals if:
- A capital quota of at least 20% of a share company is sold;
- The shares were a private asset of the selling shareholders;
- The shares qualify as business asset of the buyer;
- The target has distributable reserves (retained earnings) based on the last financial statements; and
- Within five years of the acquisition, the target distributes
these retained earnings and the distributed assets are not necessary for
the business activity of the target.
In order to protect themselves against such taxation, sellers
usually ask for a clause in the SPA that disallows the buyer any
distribution of pre-existing distributable reserves and that provides
for an indemnification by the buyer in case of breach. Depending on the
financial situation of the target, this may put undue restrictions on
the buyer. As part of the commercial negotiations, pre-closing dividends
are usually discussed in order to reduce the exposure from indirect
partial liquidation transferred to the buyer by the SPA.
Earn out
Any earn out tied to the continued employment of a seller will
usually be viewed as employment income of that seller, even if the earn
out does not stem from the target. Such employment income is subject to
social security contributions and to payroll tax for certain employees
(non-Swiss resident or Swiss resident foreign national). As mentioned,
there is no cap for Swiss social security contributions and these
amounts may be substantial.
Particularly for owner managed targets, such clauses are of
commercial importance to the buyer. Therefore, a compromise on the
employment related part of the earn out is often sought, in practice.
Old reserves
Switzerland levies a dividend withholding tax of 35% that can be
reclaimed by Swiss resident shareholders and by non-Swiss shareholders
based on a tax treaty. The standard residual withholding tax for treaty
countries is 15%. Qualifying parent companies typically suffer a
residual withholding tax of 0% to 5%. Shareholders in other jurisdiction
cannot claim a withholding tax refund.
The practice of the Swiss federal tax administration in charge of
the international withholding tax refunds is rather strict with regard
to the beneficial ownership of the shares and required substance in the
treaty country.
If a non-Swiss shareholder sells a target to a Swiss shareholder or
a shareholder with a better treaty rate on dividends, the federal tax
administration applies the treaty rate of the seller on the distribution
of pre-existing distributable reserves in the target (old reserves),
provided the distributed assets were not necessary for the business
activity. By acquiring the target, the buyer inherits the deferred
withholding tax of the seller. There is no expiration with regard to the
deferred withholding tax. The federal tax administration applies a
‘first in, first out’ approach. This means that residual withholding tax
of the seller will be charged until all old reserves have been
distributed.
As part of the commercial negotiations, pre-closing dividends are
usually discussed in order to reduce the exposure from old reserves or
the corresponding tax amount is taken into account as purchase price
reduction.
The old reserves practice does not apply to the goodwill of the
target. However, if the target is liquidated shortly after acquisition,
the federal tax administration applies the residual withholding tax rate
of the seller on the total liquidation proceeds up to the amount of the
purchase price. The assumption is that the transaction is abusive
because the seller intends to liquidate the target but in order to avoid
or reduce withholding tax, the target is sold to a buyer with a better
residual withholding tax rate.
Extended international transposition
The Swiss federal tax administration has expanded its anti-abuse
doctrine to include the acquisition of a Swiss target by a Swiss
acquisition company held by non-Swiss investors who cannot claim treaty
benefits.
The fact that the equity financing of the Swiss acquisition company
or the shareholder loans granted to the Swiss acquisition company can
be refunded to the non-Swiss investors without any withholding tax is
considered abusive, because the funds used for the repayment stem from
dividends of the Swiss target that would be subject to dividend
withholding tax of 35% would the target be held directly by the foreign
investors. Because of this, the federal tax administration will refuse
withholding tax relief on the dividends from the Swiss target to the
Swiss acquisition company in the amount of the contributed equity or
shareholder loans exceeding the contributed equity of the target and
shareholder loans granted to the target.
The Swiss federal tax administration will not apply this practice
if other parties entitled to a withholding tax refund participate in the
transaction. Based on public statements made by representatives of the
federal tax administration, this practice will not be applied, as a
general rule, if more than 50% of the purchase price is bank financed
(typically by a Swiss bank).
The fact that (typically Swiss resident) sellers will reinvest part
of the sales proceeds or the managers of the target will purchase
shares in the acquisition company is also considered a sign of a
qualifying third-party investment. However, so far, no general statement
has been made with regard to that and parties are required to present
each case to the federal tax administration upfront in order to obtain
certainty about the application of such extended international
transposition.
Until today, there are no court decisions with regard to this
matter. Amongst tax practitioners, this new practice is heavily
criticised due the lack of coherent legal justification.
| Stephanie Eichenberger | |
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Partner Stephanie Eichenberger is an attorney-at-law and certified tax Stephanie’s transaction practice focuses on structuring, pre- and Stephanie holds a LLM degree from the University of Zurich. She Tax Partner AG is focused on Swiss and international tax law and is |
| Monika Bieri | |
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Senior advisor Monika Bieri is a senior advisor at Tax Partner AG, Taxand Monika’s experience includes advising national and international Monika holds a master’s degree in business administration from the |
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