The acquisition of a company normally leads to post-acquisition reorganisation measures to simplify or optimise the structure or to integrate the acquired business into an existing structure. Such reorganisation measures may, for example, be implemented by way of merging the purchased company into an existing company of the acquiring group or by way of changing the registered seat of the acquired company. Normally such post-acquisition measures take place within one country – are ruled by one legal system and are often tax neutrally possible. More and more often, however, post-acquisition measures no longer stop at the borders of a country and are implemented on a cross-border level by, for example, moving the legal seat of the acquired company to another country (emigration) or by simplifying the group structure by a cross-border merger. Cross-border reorganisation measures can either be inbound measures into Switzerland or outbound measures out of Switzerland to another country. This article focuses on the acquisition of a Swiss company with subsequent cross-border emigration or cross-border merger as outbound measures out of Switzerland to another country.
As the emigration of a Swiss company or the cross-border merger by way of absorption of a Swiss company by a foreign company is considered as a liquidation of the Swiss company, corporate income tax consequences on its hidden reserves as well as withholding tax consequences must be considered. If such hidden reserves are attributable to a foreign permanent establishment of the Swiss company or remain attributable to a Swiss permanent establishment after the implementation of the emigration or absorption, as the case may be, then no corporate income tax consequences arise. To have certainty about the tax consequences, especially the amount of hidden reserves subject to taxation, it is recommended to obtain an advance ruling clarifying the tax issues resulting from the cross-border reorganisation.
Civil law aspect
From a Swiss civil law point of view a Swiss company can emigrate and convert into a legal entity form of another country without civil law liquidation and subsequent new establishment abroad if a call of creditors is published in the Official Gazette of Switzerland, the emigrating company continues existing under the law of the immigration country and if a specialised auditor confirms that no creditors opposed against the emigration and that all outstanding debt is covered. As the emigration under the Swiss law concept does not lead to a civil law liquidation of the company, all rights, obligations and contracts continue existing with the emigrating company after implementation of the emigration.
A Swiss company can, inter alia, merge with a foreign company by way of absorption of the Swiss company by the foreign company (emigration absorption) if the Swiss company can demonstrate that all assets and liabilities will be transferred in the course of the merger to the absorbing foreign company. The absorbed Swiss company must fulfill all requirements and implement all actions as stipulated under the Swiss merger act for an absorbed company and must publish a call of creditors in the Official Gazette. A specialised auditor must confirm that no creditors opposed against the merger and that all outstanding debt is covered. Furthermore, it must be proved that the merger is also legally binding under the laws applicable to the absorbing company and that the shareholder rights of the shareholders in the absorbed company are preserved or that compensation payments to the shareholders of the absorbed company were made or are secured.
From a Swiss civil point of view the implementation of an emigration is considerably faster and simpler than a cross-border merger and, as a consequence, more cost efficient.
Tax law aspects
Never ending aspect of indirect partial liquidation
If the Swiss target company is acquired by a corporate shareholder from a Swiss individual holding the shares of the target company as private assets, the acquirer must consider the Swiss theory on partial liquidation: When selling privately held shares in a company a Swiss individual normally realises a tax free capital gain. According to Swiss tax law and the theory of indirect partial liquidation, however, a tax free capital gain is re-qualified into taxable income of the individual if (i) the individual sells 20% or more of the capital in a company to a corporate buyer, a partnership or entrepreneur and (ii) within five years following the sale distributable equity of the target company existing at the moment of the sale, which was at this moment not required for the running of business activity, will be distributed as a dividend. Thus, if the Swiss target company disposes of distributable substance not required for the running of the business activity (for example cash, security investments or shareholder loans) and if the buyer will use within five years following the acquisition such substance to finance the purchase price, then the tax free capital gain of the seller will be re-qualified into taxable income of the individual. The Swiss tax administration applies a wide interpretation when it comes to the question if a measure qualifies as financing of the purchase price. Examples hereto are: (i) The distribution of distributable profits as shown in the last financial statements before the sale; (ii) the granting of loans up to the amount of distributable profits as shown in the last financial statements before the sale by the target company to affiliated companies; (iii) an absorption of the target company by the buyer; or (iv) in the case of debt financing of the purchase price the granting of guarantees or securities by the target company to secure the granted loan. Due to the theory on indirect partial liquidation an individual as seller is exposed for a period of five years to possible actions of the buyer, which could infringe the theory of indirect partial liquidation. Therefore the seller will normally ask for indemnifications in the share purchase agreement for the case taxes will be levied on him due to a breach of the theory on indirect liquidation by the buyer. Further explanations to the theory on indirect partial liquidation can be found in Circular Letter No. 14 of the Swiss federal tax administration of November 2 2007. The rules of the indirect partial liquidation lead to the following consequences:
- Either a seller distributes as a dividend all substance not required for the running of the business activity before the sale of the shares takes place. Such dividend will, however, lead to income tax consequences for the seller. By distributing all not required substance the risk of a future indirect partial liquidation can be eliminated; or
- The buyer of the shares will – to the extend agreed on in the share purchase agreement – be bound for a period of five years to respect the rules under the theory of indirect partial liquidation, in that the distributable substance not required for the running of the business activity as shown in the last financial statements before the purchase can neither be distributed as a dividend nor be used otherwise to secure or finance the purchase price. Furthermore, under the theory of indirect partial liquidation a merger between the buyer and the target company by absorption of the target company through the buyer will not be possible for a five years period without infringing the theory of indirect partial liquidation as such merger would be considered as liquidation under the theory of indirect partial liquidation.
General considerations to a cross-border merger or an emigration
In either case, an emigration or an outbound cross-border merger, the tax liability of a company will end in Switzerland, unless a Swiss permanent establishment of the foreign company will exists in Switzerland after the reorganisation. If no permanent establishment will exist after the implementation of the emigration or the cross-border merger, then the reorganisation will be considered as a liquidation of the Swiss company. As for both alternatives, the emigration and the cross-border merger, a liquidation will be considered, the tax consequences are the same for the emigration and the cross border merger and the following described tax consequences arise to both reorganisation alternatives.
The liquidation of a Swiss company leads to corporate income tax consequences on the level of the liquidated company as well as to dividend withholding tax consequences.
Should the seller be an individual and should the rules on the indirect partial liquidation apply, then a cross-border merger will also individual trigger income tax consequences of the seller if such merger takes place within five years following the acquisition of the absorbed Swiss company. A seller will therefore protect himself in the share purchase agreement against the tax consequences of a (cross-border) merger, which will make a cross-border merger (parent/subsidiary merger) impossible for the buyer for a period of five years without triggering indemnification payments to the seller due to the Swiss income taxes due by the seller.
Corporate income taxes
In the course of the liquidation (emigration or cross border-merger) of a Swiss company all assets and liabilities must be valuated at fair market value. A possible gain resulting from this revaluation will be subject to corporate income tax on the level of the company. Not subject to taxation are hidden reserves which can be allocated to possible existing foreign permanent establishments of the Swiss company. The valuation of the company should be discussed with the tax administration and an advance ruling should be obtained on the relevant values.
Thus, in the case of an emigration as well as a cross-border merger hidden reserves of a company will, in principle, be subject to corporate income tax in Switzerland.
However, if the emigrated or the absorbing foreign company, as the case may be, will maintain after the reorganisation a Swiss permanent establishment, then no realisation of the hidden reserves is deemed and no corporate income tax consequences will arise as long as after the reorganisation the assets and liabilities (including the hidden reserves) of the former Swiss company will still be allotted to the new Swiss permanent establishment in the course of the international allocation of assets and liabilities between the head office and its permanent establishment.
Emigration and outbound merger are also for Swiss withholding tax purposes considered as a liquidation of a company. The liquidation proceeds (simplified assets at fair market value minus debt, formal capital and a possible reserve from contributed capital) are subject to withholding tax of 35%. The Swiss withholding tax is a final tax, unless it is reduced under an applicable tax treaty or under the Agreement between the European Community and the Swiss Confederation of October 26, 2004 providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (Savings Agreement). Under the tax treaties concluded by Switzerland the withholding tax for qualifying corporate shareholders is normally reduced to 0% or 5%. Under the Savings Agreement a reduction of the Swiss withholding tax on dividends to 0% is granted if the following requirements are met:
- the foreign parent company has a direct minimum holding of 25% of the capital of the Swiss subsidiary for at least two years, and
- the parent company is resident for tax purposes in a EU Member State and the Swiss company is resident for tax purposes in Switzerland, and
- under any double tax agreements with any third States neither company is resident for tax purposes in that third State, and
- both companies are subject to corporation tax without being exempted and both adopt the form of a limited company.
Thus, in case a tax treaty or the Savings Agreement can be applied between the Swiss subsidiary and the foreign parent company, no or reduced Swiss withholding tax will be levied in case of an emigration or a cross-border absorption.
In order to be allowed to directly apply the reduced dividend withholding tax under a tax treaty or the Savings Agreement it is required that the Swiss company files a request (Form. 823, 823B or 823C) to apply the so-called reporting procedure. Such request must be filed with the federal tax administration before the dividend is due. In the case of emigration or cross-border merger such request must be filed before the emigration or merger, as the case may be, is implemented. As the preparation of the Forms. 823, 823B and 823C involve also the tax authorities of the other country and/or the parent company of the Swiss company, the finalisation of these forms normally requires some weeks of preparation time. It is therefore advisable to start preparing the basic request for application of the reporting procedure at an early stage. The Swiss federal tax administration will then either approve or deny the request to apply the reporting procedure. An approval is granted for a three years period, meaning that during the three years period Swiss company can directly apply the reduced withholding tax under a tax treaty or the Savings Agreement. After the three years period a new request for application of the reporting procedure must be submitted. It should be noted, however, that this basic approval by the federal tax administration to apply the reporting procedure under a tax treaty or under the Savings Agreement does not release a company from its obligation to report within 30 days of its maturity every payment of dividend or liquidation proceeds. Will the reporting obligation not be fulfilled within the 30 days period, then the Swiss federal tax administration will, even with an existing approval to apply the reporting procedure, not allow the reporting procedure. As a consequence, the Swiss company will have to pay withholding tax of 35% to the Swiss federal tax administration, plus 5% interest for late payment of the withholding tax. If a tax treaty is applicable, a foreign shareholder can then ask for a partial) refund of the deducted withholding tax. However, the interest for late payment of the withholding tax will be a final burden.
Summarised the emigration of a Swiss company or a cross-border merger by way of an absorption of a Swiss company by a foreign company is possible from a civil point of view, but will be considered for tax purposes as a liquidation. Such a reorganisation will trigger corporate income tax on the hidden reserves of the company, unless the hidden reserves are attributable to a foreign permanent establishment of the Swiss company or remain attributable to a Swiss permanent establishment after the implementation of the emigration or absorption, as the case may be. Also for withholding tax purposes, the emigration and absorption will be considered to be a liquidation and will trigger Swiss withholding tax on 35% of the liquidation proceeds (without formal capital and reserve from contributed capital). The 35% withholding tax may be reduced for qualifying corporate shareholders under a tax treaty or the Savings Agreement to 0% or another reduced rate, as the case may be.
Rolf is an international tax lawyer focusing his areas of expertise on national and international tax planning, inbound and outbound transactions, especially between the USA and Switzerland, corporate restructuring and acquisitions as well as general corporate secretarial services.
burckhardt provides its clients and their businesses with comprehensive, tailored advice on national and international tax planning issues and structuring, offers corporate secretarial and notary service, supports clients with professional expertise and broad international experience on restructurings, mergers and joint ventures, advises on inbound and outbound investments and in all matters related to compliance, employment, trade and transport law.