Reichlin Hess Attorneys at Law, Tax Advisors, Notaries, Zug, Switzerland

Swiss tax consequences of the liquidation of companies and partnerships

Legal entities and partnerships ceasing their business activities should be formally liquidated sooner or later. The required proceedings and tax consequences in Switzerland are summarised below.

Liquidation of a Swiss Corporation or Limited Liability Company

The voluntary liquidation of a company (corporation or limited liability company) is initiated by a respective resolution of the shareholders’ meeting or the general meeting of the quota-holders. The resolution of the liquidation and the election of a liquidator should be notified to the commercial registry. The name of the company in the registry will be amended with the suffix “in liquidation”. Thereafter, three calls to creditors to request a notification of their claims against the company should be published in the official gazette.

The liquidators have the duty to terminate the ongoing business activities and to liquidate the assets of the company. With the remaining assets and liquidation proceeds the company should settle its liabilities. In case of an over-indebtedness despite potential re-financing measures the liquidators should file for bankruptcy.

After completion of the liquidation activities the company should prepare the final balance sheet. A very last shareholders meeting is arranged that should approve the closing balance sheet and profit and loss statement and that should resolve on the distribution of a liquidation dividend (if any).

The distribution of a liquidation dividend can be made after at least one year has passed since the last call to the creditors was published in the official gazette. An earlier distribution (already after three months) is only possible if a confirmation from an auditor is obtained that such early distribution should not harm any interests of third parties.

After distribution of the final liquidation dividend the liquidators can apply for the de-registration or deletion of the company from the commercial register.

Tax consequences of the liquidation of a company

A company remains subject to taxation after the initiation of the liquidation proceedings (i.e. after the registration of the liquidation with the commercial register). If the company generates profits during the liquidation period by way of business activities or by the realisation of hidden reserves, such profits are subject to ordinary income taxation.

After approval of the final liquidation balance sheet by the shareholders’ meeting, a liquidation dividend can be distributed. The distribution of a liquidation dividend is subject to Swiss withholding tax, as it is also the case with ordinary dividends. If a company is entitled to apply the notification procedure this procedure can also be applied with respect to the liquidation dividend. The repayment of paid-in capital and reserves from capital contributions, however, is not subject to withholding tax.

The competent cantonal tax authority and the Swiss federal tax authority will be notified of the application for de-registration or deletion in the commercial register. The company then receives the final tax declaration forms and questionnaires from the Swiss federal tax authorities regarding withholding taxes and value added taxes (VAT). The liquidators of the company should ensure that all outstanding taxes are paid as they can become personally liable for the payment of such taxes. A personal liability exists also with respect to unpaid social security contributions.

VAT-declarations should be submitted to the tax authorities until the company is finally de-registered from the VAT-register. The de-registration from the VAT-register usually takes place per end of a quarter year.

The company will only be de-registered from the commercial register when the competent tax authorities (federal and cantonal tax authorities) have confirmed that there are no outstanding tax liabilities.

Liquidation of sole proprietorships and business partnerships

Sole proprietorships (“Einzelunternehmen”), simple partnerships (“Einfache Gesellschaften”), general partnerships (“Kollektivgesellschaften”) and limited partnerships (“Kommanditgesellschaften”) have to be liquidated if they cease their business activities. If there remains an excess amount after the settlement of the liabilities and the repayment of the contributions, such excess amount can be distributed to the partners. If the partnership is registered in the commercial register, the company has to be de-registered.

Tax consequences of the liquidation of sole proprietorships and business partnerships

The activities of sole proprietorships and business partnerships are self-employed activities. Income from self-employment is subject to the individual income tax of the partners or owner. If a gain is realised in connection with the termination of a self-employment, for instance due to the realisation of hidden reserves, such gain is subject to ordinary income tax and social security contributions.

If the self-employment is terminated after reaching the age of 55 years or due to a physical invalidity, the owner is entitled to a privileged taxation of the liquidation gain. However, social security contributions remain also payable in these cases.

For a self-employed person who considers to sell his/her business – instead of the liquidation – it might be an interesting option to convert the business into a legal entity. Such conversion can be implemented without triggering taxes. The gain from the later sale of the shares in such legal entity is usually tax-free, i.e. not subject to income tax. However, an important condition is that the conversion into the legal entity is carried out at least five years prior to the sale of the shares.

The content of this newsletter does not constitute legal or tax advice and may not be used as such. If you need advice with regard to personal circumstances, please reach out to your contact person at Reichlin Hess AG or to the authors of this newsletter.

Our tax advisors and lawyers would be happy to support with any further questions you may have regarding this topic.