As at beginning 2009 the first set of statutory changes related to the corporate tax reform II (the "Reform") will be enacted. The Reform extends the so called corporate tax reform I of 1998 which, among other things, eased the taxation of holding structures and abolished tax on equity at federal level.
The Reform is tailored to benefit SMEs, whether organised as corporations or sole traders, with a wealth of tax planning opportunities. This newsletter describes the tax related measures to be implemented and explains their relevance to everyday business needs.
Essentially, the proposed measures can be grouped in (i) mitigation of so called economic double taxation, (ii) tax relief for corporations and (iii) mitigation of certain taxes hemming restructuring.
1. Mitigation of economic double taxation
1.1. For individuals
Economic double taxation in respect of corporate profits distributed to individual shareholders by way of dividend (i.e. both by profit tax at corporate level and by income tax at shareholder's level) shall not be abolished altogether but will be reduced to an internationally competitive level.
At federal level, taxation is mitigated by way of part taxation of dividends from so called qualifying participations. Thus, dividends stemming from qualifying participations (at least 10 % or CHF 1 m market value) are included in the tax base at a reduced rate, namely 50 % if the participation is kept as part of the business assets and 60 % if the participation is kept as part of private assets (by way of example: dividends of 100 from a qualifying participation would be included in the tax base for 50 or 60 only).
Several cantonal laws (including especially Zurich and Zug) have already implemented similar mitigation measures in their legislation.
1.2. For corporations
Corporate investments are facilitated by the proposed extension of the participation exemption regime. Participation exemption will be available for revenue related to qualifying participations, meaning dividends and capital gains upon sale; here too, a qualifying participation must be at least of 10 % or a market value of CHF 1 m. Thus, dividends received from and capital gains realised upon sale of qualifying participations are essentially tax exempt.
2. Reduction of substance reducing taxes
2.1. Reimbursement of capital contribution Until now, all payments to shareholders, other than repayment of nominal capital, were deemed taxable income. This applied in particular also to shareholders' contributions booked as paid in reserves (agio").
Under the new rules, reimbursement of capital contributions from shareholders are equally tax exempt, whether made out of nominal capital or paid in reserves. The rule also applies if repayment is made to a shareholder who had not originally made the contribution.
2.2. Exemptions from capital tax
Capital tax may be imputed on profit tax (relevant at cantonal level only).
2.3. Stamp duty reductions
As a general rule, stamp duty is levied on creation or increase in value of participation rights at a rate of 1 %, whereby an amount of CHF 1 m is exempt. The Reform provides for exemptions in particular in the case of financial reorganisation where contributions up to CHF 10 m are exempt.
3. Tax relief for sole traders and partnerships
Under the existing rules many instances of reorganisation were taxed, even in the absence of actual cash flows (taxation of so-called systematic profit realisation). As a consequence, planned reorganisations were often stalled for tax reasons. The Reform provides for substantial relief in this respect. The following instances in particular are relevant:
- Replacement purchases: The concept of replacement purchase is to be extended. Until now, a so called equal function criterion applied for tax neutral transferability of hidden reserves. In the future, gains made upon the realisation of hidden reserves on non current assets will be transferable to other non current assets (until now assets needed to have the same function).
- Transfer of business property to private assets: Transfer of real property from business to private property is deemed a realisation of hidden reserves. Until now, the related gain was taxed immediately, in particular also if there was no actual cash flow. In future, the owner of the asset may request postponement of taxation until an actual sale of the asset takes place.
- Enterprises as part of an estate: Often, only a minority of heirs will continue an enterprise. Until now, renunciation of heirs to their share was often deemed a realisation of hidden reserves and taxed accordingly, regardless of cash changing hands. In the future, the heirs concerned may request that taxation be postponed until an actual realisation takes place.
- Giving up sole entrepreneurship: In the past, giving up business activities by a partnership or sole entrepreneur often lead to realisation of hidden reserves whether actual or systematic, giving rise to immediate tax consequences. In the future, taxation may be postponed until actual realisation. In addition, social security planning opportunities in this respect have been extended too.
II. Entry into force and implementation
The Reform will enter into force in two steps, the first on 1 January 2009 and the second on 1 January 2011.
From 1 January 2009 the following will be in place:
- Part taxation of dividends at federal level;
- Capital tax exemption; and
- Stamp duty exemptions (especially in the case or reorganizations).
From 1 January 2011 relief will be available in the following instances:
- Corporate participations;
- Reorganisation scenarios;
- Reimbursement of capital contribution; and
- Liquidation gains.
III. Practical relevance
Tax planning opportunities arise in particular for enterprises planning capital increases, replacement of noncurrent assets and changes in their legal status.
Also, the transfer of sole entrepreneurships or partnerships into capital corporations, especially in the case of estate planning or intended reduction in liability exposure will be more tax efficient.
Finally, sole traders and partnerships intending to give up business are likely to benefit from substantial tax and social security advantages.
In summary, the Reform offers significant opportunities for SMEs to save tax, in particular in relation to planned
- dividend distributions from and sale of participations;
- replacement of non-current assets;
- estate planning tax and estate planning of sole traders and partnerships; and
- giving up of business activity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.