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Urgent Deadline for Capital Contributions & Tightening of Dividends Procedure

Switzerland
27 Mar 2012

The capital contribution principle was introduced as of 1 January 2011. Since then contributions, share premiums (agio) and informal contributions to equity which have been paid by shareholders since 1 January 1997 or will in the future be paid, may be repaid to the shareholders free of withholding tax by means of a dividend resolution. The time limit for notifying the Federal tax administration of capital contributions made between 1.1.1997 and 31.12.2010 expires no later than 30 days after the approval of the annual financial accounts for 2011 or 2010/2011.

A radical tightening of the practice in the case of notification procedure for dividends has also been introduced by the Federal tax administration enforcing a recently published decision of the Federal Court which ruled that the 30 day time limit for applying the notification procedure is not an administrative deadline but a forfeiture deadline. Taxand Switzerland discusses the urgent deadline for existing capital contribution reserves and actions that companies need to take to ensure their tax position is within the capital contribution principle.Capital contribution principle:

When the capital contribution principle was introduced as of 1 January 2011, the system shifted from the nominal value principle to the capital contribution principle. Since then contributions, share premiums (agios) and informal contributions to equity which have been paid by shareholders since 1.1.1997 or will in the future be paid, may be repaid to the shareholders free of withholding tax by means of a dividend resolution. Such repayments are generally no longer subject to income tax for individuals who are Swiss residents.

The time limit for notifying the FTA of capital contributions made between 1.1.1997 and 31.12.2010 expires no later than 30 days after approval of the annual financial statements for 2011 or 2010/2011.

Radical tightening of practice in the case of notification procedure for dividends:

Dividends of a Swiss company are subject to 35% withholding tax. The withholding tax must be deducted from the dividend and paid to the Federal Tax Administration (FTA) within 30 days after the dividend due date. The dividend recipient entitled to a refund may claim back all or part of the withholding tax.

If the dividend recipient entitled to a refund is a corporation which holds a significant equity interest in the Swiss company that distributes the dividend, the obligation to pay the withholding tax may be met by means of notification. The notification must be made, unsolicited, by submitting Form 106 (Swiss parent company) or Form 108 (foreign parent company) together with the regular declaration form (Form 103 or 110) within 30 days of the dividend due date.

Where dividends are distributed to foreign parent companies it should be borne in mind that the notification procedure must be approved by the FTA using Form 823, 823B or 823C before the dividend due date.

In a recently published decision enacted in early 2011 the Federal Court ruled that the 30 day time limit for applying for the notification procedure is not an administrative deadline but a forfeiture deadline.

Enforcing the decision has consequently resulted in a radical tightening of practice by the FTA:

When the forms are submitted late, the FTA can refuse to implement the notification procedure. The result of the refusal to implement the notification procedure is that the 35% withholding tax on the distributed dividend is due and must be paid subsequently. In addition, interest for late payment of 5% is due on this amount 30 days after the dividend due date until the withholding tax is paid. An application can thereupon be made for a refund of the withholding tax under the regular refund procedure.

Implementation of the notification procedure in the case of hidden profit distributions is also affected by this tightening of practice. In this connection there are still some unresolved questions in practice, particularly with regard to the due date of the hidden profit distribution.


Taxand's Take


Swiss corporations which have not yet notified existing capital contribution reserves should take the following measures as a matter of urgency:

Capital contributions made after 1 January 1997 must be identified and determined using the annual financial statements and other documents.

The capital contributions must be converted or entered into the 2011 commercial balance sheet as "capital contribution reserves". Capital contribution reserves constitute a separate sub-account of the legal reserves.

The capital contribution reserves established in the period between 1.1.1997 and 31.12.2010 must be reported to the Swiss Tax Administration within the time limit, i.e. no later than 30 days after approval of the annual financial statements for 2011 or 2010/2011.

The following points must be borne in mind so as to avoid the negative consequences of the new tightening of practice regarding the notification procedure for dividends:

The request for notification instead of payment of the withholding tax (Form 106 or 108) must be submitted to the FTA along with the declaration form (103 or 110) within 30 days after the dividend due date. It is recommended to send the form by registered post.

If it is planned to distribute dividends to foreign parent companies, requests for approval of the notification procedure (Forms 823, 823B or 823C) must be submitted prior to the dividend resolution.

Your Taxand contacts for further queries are:
Roger Dall'O
T. +41 44 215 77 77
E. roger.dallo@taxpartner.ch

Oliver J?ggi
T. +41 44 215 77 77
E. oliver.jaeggi@taxpartner.ch

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