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Thomas Nabholz
The economic growth over the last years allowed most Swiss companies to generate considerable profits in 2019 still. Accordingly, companies had to expect high income taxes for that year. In many cantons, 2019 was also the last year in which the higher pre-tax reform income tax rates applied. With the corona crisis, many companies now face losses that put their existence at risk. The question arises as to how far the impact of this crisis should already be taken into account in the 2019 statutory financial statements – which would somewhat smooth out fluctuations in earnings and reduce the tax burden.
Principles of proper accounting
A key rule of proper accounting under Swiss law is the principle of prudence according to art. 958c CO. The so-called imparity principle is derived from this: profits may only be reported when they materialize; losses, in contrast, must be accounted for as soon as their cause occurs. According to art. 960e para 2 CO, provisions need to be formed for past events that are likely to result in losses in the future. On the other hand, according to art. 959c para 2 CO, material events whose cause only occurs after the balance sheet date (but before the annual financial statements are approved by the competent body) do not need to be disclosed in the balance sheet but in the notes.
Cause of corona pandemic already before 31/12/2019
According to current knowledge, the spread of the coronavirus began in November 2019 in Wuhan, China. By the end of 2019, at least 266 people were already infected there. There is no doubt about the natural causal link between the local epidemic in Wuhan at the time and the current global pandemic and economic crisis. In a legal sense, we are of the opinion that an adequate causality can be established as well. The rapid spread of the virus that already occurred in Wuhan was much more than the well-known flap of a butterfly’s wings. In our opinion, Swiss companies can therefore argue validly that the inexorable spread of the virus in Wuhan was the cause, according to the usual course of events, of the current losses.
Conclusion for the formation and tax deductibility of provisions
Due to this causality, we believe that there are good reasons for Swiss companies to form provisions for losses in connection with the corona crisis in the financial statements as of 31/12/2019. In a 20/03/2020 update, EXPERTsuisse take a different view and consider the coronavirus from the perspective of the 2019 financial statements as an event that does not necessarily have to be accounted for. However, in view of the extraordinary situation with a presumably massive financial impact for many companies, we believe that such treatment falls short of the requirements.
Swiss corporate tax law is based on the principle of the authoritative nature of the statutory accounts. Accordingly, the profit determined in accordance with the Code of Obligations is also decisive for tax purposes, unless specific tax adjustments apply. Since in the case at hand the accruals charged to the 2019 financial statements can be justified on commercial grounds, we believe that the adjustments stipulated in art. 58 para 1 lit. b in conjunction with art. 63 DTA are not applicable. The tax burden for FY 2019 of the companies concerned would thus be reduced.
