Swiss tax consequences of the acquisition and sale of treasury shares

Corporate income taxes

The Swiss Federal Supreme Court decided in a recent case whether the “profit” from the allocation of treasury shares to employees under an employee participation plan (ESOP) is subject to corporate income tax or not.

A company limited by shares acquired its own shares to use them for an employee participation plan (ESOP). These shares were recorded in the balance sheet as a negative item of the equity in the amount of the acquisition costs in accordance with the applicable accounting rules (not as assets). After a holding period of three to four years the shares were allocated to employees at a value above the acquisition costs. The company offset the allocation value against the negative item of the equity and created statutory reserves in the residual, positive difference.

The Zurich cantonal tax office made a correction as part of the final assessment and increased the company’s taxable profit by the amount of the difference between acquisition costs and allocation value that was not recognized in profit or loss. The matter came before the Swiss Federal Supreme Court. The main point of contention was whether the gain from the transfer of treasury shares constitutes a taxable capital gain or a tax-neutral capital contribution. The Swiss Federal Supreme Court ruled that the commercial accounting forms the basis for determining taxable profit in accordance with the principle of materiality. The point at issue was therefore whether there was a tax correction rule to deviate from the commercial law-compliant annual financial statements in the present case.

The Swiss Federal Supreme Court answered in the negative. The company did not accrue any assets through the purchase of its own shares, which is why the sale of its own shares cannot be considered a capital gain either. Rather, it is a capital contribution transaction that does not trigger any corporate income tax.

Withholding tax

The repurchase of own shares by a company generally triggers the withholding tax of 35%, if

• the shares are acquired for the implementation of a capital reduction, or
• the repurchased shares exceed 10% of the share capital (or 20%, in accordance with Art. 659 of the Swiss Code of Obligations), or
• the treasury shares are not resold after six years.

If in any of these cases the seller of the shares was an individual, resident in Switzerland, the difference between the (lower) nominal value of the shares and the (higher) sales price is also subject to individual income tax.

Exceptionally, no withholding tax or income tax is triggered if the treasury shares are booked against tax-recognized capital reserves, provided that the requirements of the Swiss Federal Tax Administration (SFTA) are met.

Capital taxes

The company must record treasury shares in the balance sheet as a negative item of the equity in the amount of the acquisition costs. The tax authorities of the canton of Zurich were of the opinion that such negative item in the equity can not be taken into account to determine the taxable capital insofar as the treasury shares were not subject to withholding taxes. The tax authorities therefore increased the taxable equity subject to capital taxes accordingly. The Swiss Federal Supreme Court did not share this view and ruled that the negative item of the equity for treasury shares should be taken into account to determine the taxable capital.

Value-added tax

In a recent decision by the Swiss Federal Supreme Court, a company subject to VAT sold its own shares and in this context claimed services. The Swiss Federal Tax Administration SFTA was of the opinion that the company could not reclaim the input taxes incurred on the services because the sale of shares is an exempted transaction.

The Swiss Federal Supreme Court ruled that the inflow of funds from the resale of treasury shares should be treated as a capital contribution, in the same way as a capital increase. According to the VAT Act, such contributions to companies are not considered to be remuneration and therefore cannot constitute an exempt transaction. Consequently, the company was allowed to reclaim the input tax incurred in connection with the resale of treasury shares.

Capital contribution reserves and stamp duties

The sale or transfer of treasury shares at a price above the acquisition costs results in the creation of statutory capital reserves. Whether such capital reserves can be qualified as tax-privileged capital contribution reserves or not must be assessed on a case by case basis.

The same applies regarding the one-time capital duty, which might be triggered if capital reserves are created upon the sale of treasury shares.

If a company is qualified as a securities dealer under the Swiss stamp tax law, the acquisition and sale of treasury shares should be subject to the securities transfer stamp duty. However, the acquisition of own shares in order to reduce the share capital is exempted from the securities transfer stamp duty.

The content of this newsletter does not constitute legal or tax advice and may not be used as such. If you have any further questions on this topic, our tax experts and lawyers will be happy to help.