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Tax Reforms Enhance Switzerland’s Attractiveness for Swiss Resident Investors
One of the significant improvements within the scope of the corporate tax reform II for Swiss individual investors is the introduction of the capital contribution principle. According to the new rules the repayment of capital contributions is exempt from Swiss income tax (if the shares constitute a private rather than a business investment) and Swiss withholding tax. The new regulations offer interesting tax planning opportunities for corporations and their shareholders.
Besides the capital contribution principle, the new rules regarding the participation relief increases the attractiveness of the Swiss tax environment for corporate investors, as the threshold for applying the participation relief on dividend income and capital gains on the disposal of qualifying participations is reduced from 20% to 10%. Taxand Switzerland reviews the introduction of the capital contribution principle and the new rules for participation relief which enhance the tax environment for individual and corporate investors in Switzerland.
Capital contribution principle
The introduction of the capital contribution principle as per 1 January 2011 brought about a system change. In the past only the nominal paid-in capital could be re-paid to the shareholders without income and Swiss withholding tax consequences, whereas now, contributions, capital surplus and subsidies made by shareholders since 1 January 1997 may be re-paid to the shareholders by means of a dividend distribution exempt from Swiss withholding tax. In addition, such repayments are no longer subject to income tax for Swiss resident investors.
The new rules apply to dividends paid from "capital contribution reserves" to individual investors resident in Switzerland after January 1, 2011 and include dividends distributed by Swiss and foreign corporations.
With regard to Swiss corporations capital contributions received from shareholders after 1 January 1997 must be identified and converted or entered into the 2011 balance sheet as "capital contribution reserves". "Capital contribution reserves" constitute a sub-account of the legal reserves account. According to the Federal Tax Administration's guidelines disclosure of the capital contributions as a part of the free reserves is not sufficient.
It is recommended to take the capital contribution principle into close consideration in special circumstances and transactions, such as a repurchase of own shares, issue of bonus shares, reorganisation, indirect partial liquidation or in transposition cases. Care must especially be taken in the drafting of tax clauses in contracts.
With regard to loss carry forwards, consideration must be given to the fact that according to the Federal Tax Administration's guidelines (FTA) the capital contribution reserves are eliminated to the extent that losses have been off-set against "capital contribution reserves". Thus, in the future losses should no longer be off-set against "capital contribution reserves".
From 1 January 2011 the "participation relief" has been extended to include participations of at least 10% (so far 20%) or participations with a market value of at least CHF 1 million (so far CHF 2 million).
The participation relief applies to dividend income and capital gains from qualifying participations. The threshold for applying the participation exemption is met if a participation of at least 10% in the nominal share capital or in the profits and the reserves of another company are held. The extension to include participations in the profits will result in companies holding only participation certificates being entitled to the participation relief.
In order that capital gains from the disposal of shares will be subject to participation relief, the qualifying participation must have been held for at least one year. If the participation quota should fall below 10% as a result of a partial sale, the relief shall be allowed provided that the participation has had a market value of at least CHF 1 million at the end of the tax year prior to the sale of the remaining participation rights.
The introduction of the capital contribution principle and the new rules regarding the participation relief reinforces Switzerland's attractiveness. However, in order to benefit from the new regulations with regard to the capital contribution principle the following immediate action is required:
- For the period 1 January 1997 to 31 December 2010, the FTA requires, as part of an initial declaration, evidence of the changes made to the "capital contribution reserves". Such evidence must be provided using an Excel spreadsheet made available by the FTA. The spreadsheet must be completed and sent to the FTA electronically and a signed hard copy within 30 days of the approval of the annual accounts of financial year ending in 2011 ready by the shareholders' general meeting. In addition, form 170 must be provided to the FTA for the purpose of notifying the amount of capital contribution reserves as per 1 January 2011. Regarding the rather tight reporting period it is recommended that a detailed analysis of the capital contributions made between 1 January 1997 to 31 December 2010 is carried out and to start the process for determining the available "capital contribution reserve" as early as possible, especially if distributions to individual investors resident in Switzerland are anticipated in 2011.
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T. +41 44 215 77 77
T. +41 44 215 77 77
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