Changes to dividend resolutions - tax pitfalls


Background

Companies around the globe are suspending dividend payments because of the corona crisis. Little has been reported by Swiss companies in this regard, but they too will consider this measure to strengthen liquidity and solvency. From a tax point of view, there are certain pitfalls to be aware of.

Dividend resolution by AGM

At Swiss corporations (AG), the annual general meeting of shareholders (AGM) is competent for dividend resolutions in accordance with art. 698 para 2 CO. The AGM is free to resolve a dividend that differs from the proposal by the Board of Directors (BoD) in the notes to the financial statements. The audit report needs to be amended, as the case may be. No problem from a tax perspective so far.

Change to dividend resolution after AGM

However, things get tricky with regard to dividend withholding tax (WHT) and issuance stamp duty (SD) where a company wants to amend a dividend decision already made, for example because its liquidity has deteriorated following the AGM. Under company law, this is basically possible by holding another (extraordinary) AGM and revoking the dividend. Taxes, however, may not follow such cancellation.

Withholding tax

Distributions from retained earnings (as opposed to capital contribution reserves) are generally subject to WHT. According to art. 12 para 1 WHTA, the WHT liability arises at the point in time when the dividend falls due. Where the AGM does not specify a coupon date, the date of the AGM is deemed to be the due date of the dividend and the WHT liability arises immediately (art. 21 para 3 WHTO). According to art. 16 para 1 lit. c WHTA, WHT is payable within 30 days from the date where the liability occurred.

Issuance stamp duty

If a second AGM after the dividend due date revokes the first resolution WHT will still be due. According to established case law (including Supreme Court ruling 2C_115/2007 of 11/02/2008), the situation becomes even worse: for tax purposes, the revocation is considered a debt waiver which is subject to a 1% issuance stamp duty according to art. 5 para 2 lit. a SDA.

Conclusion

To avoid these tax consequences, a forward-looking, cautious resolution on the dividend is advisable. It is also advisable to clearly specify the coupon date in the dividend resolution so as not to trigger any immediate WHT liability. If it becomes necessary to revoke the dividend, the respective AGM should be held before the coupon date.