Succession planning and tax optimisation: what’s new?

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1. Partnerships (sole proprietorship, general or limited partnership)
1.1. What happened before?

For sole proprietorships, succession is usually established by selling the company’s assets and liabilities (known as an “asset deal”). In terms of civil law this means that the seller’s company is liquidated.

The difference between the sales price and the taxable value of the sold assets qualifies as taxable liquidation surplus and is subject to income tax as well as social insurance contributions. Often the release of hidden reserves exponentially increases the tax burden as it puts the taxpayer into a higher tax bracket. Depending on the canton, the tax burden (including social insurance contributions) could until now amount to as much as 50%.

Because of this high fiscal burden, efforts in the past mostly focused on converting the partnership into a joint stock company in good time and, in a best case scenario, selling this company at the earliest five years after the conversion without any tax consequences.

1.2 What’s new?

Material relief for taxpayers organising the succession of partnerships was introduced on 1 January 2011. The two most important measures are discussed briefly below:

A. Withdrawal of real estate

A tax deferral effective from 1 January 2011 can be requested for the private withdrawal of real estate. Until 31 December 2010, the Confederation and the cantons that apply the dualistic system (which taxes real estate gains on business assets with the profit tax, not with the real estate gain tax) decreed that the difference between the fair market value and book value of the property was subject to income tax when the property was transferred from the business assets to the private assets (including social insurance contributions). A private withdrawal was classified as an unrecognised gain deemed to be realised for tax purposes. Although there was no sale to a third party and the taxpayer did not receive any sales proceeds, the tax and social insurance contributions were still due.

The new tax deferral that can be applied for now means that tax only falls due on the reversed depreciation (instead of the difference between the fair market value and the book value). If the property is sold at a later date, the deferred capital gains will be subject to income tax and social insurance contributions. The deferral is a taxpayer’s right and must be granted by the tax authorities on request. To benefit from the tax deferral, the property must be part of the non-current assets (i.e. a property trader cannot apply for the deferral, as his business properties are deemed to be current assets).

In cantons using the monistic system (i.e. regardless of whether the real estate is held in the business assets or the private assets, gains from the sale of a property are always subject to real estate gain tax), current practice will not change. In these cantons only the reversed depreciation was taxed in the past when a property was transferred to the private assets, as ownership is not considered to be transferred under civil law and therefore does not trigger real estate gain tax. In these cantons real estate gain tax is only levied when the property is actually sold.

B. Tax relief for liquidation surplus

Since 2011 taxpayers also benefit from a lower tax rate on the liquidation surplus if they finally give up self-employment after the age of 55 or because a disability makes it impossible to continue their activities.

The sum of the hidden reserves realised in the last two financial years is taxed separately from the other income. Amounts used to purchase additional benefits from a pension fund can be deducted. Regardless of whether the taxpayer is affiliated with an employee pension fund, the self-employed individual can even submit an application for the taxation of a fictitious buy-in. If no buy-in is made, the tax on the realised hidden reserves for which the taxpayer can prove admissibility of a buy-in is calculated at one-fifth of the normal rate. An amount equal to only one-fifth of the remaining hidden reserves is used to determine the rate that applies to the remaining amount of realised hidden reserves, but the rate for direct Federal tax is at least 2%. This also applies for the surviving spouse, the other heirs and the legatees if they do not continue the inherited business. The cantons are free to set their own (reduced) tax rates.

2. Joint stock companies
2.1. What happened before?

A. Overview

Corporate succession by way of a sale of the shares in a joint stock company is possibly the most common form of succession. The possibility of a tax-free capital gain when the shares are held in the shareholder’s private assets is a clear tax advantage. In the past, however, the tax authorities have developed a wide range of arguments for reclassifying the presumed tax-free capital gain as taxable income. Keywords in this regard include:

  • Indirect partial liquidation
  • Conversion
  • Qualification of the seller as a professional securities trader
  • Transfer of a majority interest to a real estate company
  • Sale of a shell company

B. Indirect partial liquidation

Indirect partial liquidation is often compared to selling a full wallet. Instead of the shareholder paying himself taxable dividends in the past, the profits remained with the company, so that the sale concerns a “fat” company with non-operationally required assets and distributable funds. If the buyer uses these non-operationally required and distributable funds to finance the purchase price (e.g. by distributing a dividend or merging the target company with the buyer immediately after the execution of the purchase contract), the tax authorities qualify the transaction as an indirect partial liquidation which has income tax consequences for the seller.

To qualify as an indirect partial liquidation, the following must apply:
The shareholder rights are transferred by way of a sale.

  • The sale concerns an interest of at least 20% of the target company’s share capital.
  • The sale transfers assets from the private assets to the business assets. There is a change from the par value principle to the book value principle.
  • Distributions are made within five years of the sale.
  • The distributions qualify as withdrawals of assets.
  • At the time of the sale the distributed assets were already available, distributable under commercial law and not required for operational reasons.
  • The seller knows or should know that assets that will not be replaced are withdrawn from the company to finance the purchase price.

When planning a tax-optimised succession process, the question of “emptying” the company to be sold with as small a tax burden as possible often arises. In the recent past the following measures have become fiscally attractive and should be considered in good time:

2.2 What’s new?
A. Repayment or share capital or repayment of contributions

When it comes to private assets, equity or share capital can be repaid free of tax. The capital contribution principle was introduced on 1 January 2011. As a result, repayments of capital contributions, share premiums and cash payments made by shareholders after 31 December 1996 are treated for tax purposes in the same manner as repayments of equity or share capital. Reserves from capital contributions received directly from shareholders can therefore be repaid without triggering any income tax, provided that the capital contributions are booked within a separate account in the 2011 financial statements (!) and the company has complied with all disclosure obligations pursuant to Circular No. 29 of the Swiss Federal Tax Administration. If the capital contributions are not reported in a separate account in the 2011 financial statements, this optimisation option lapses irrevocably.

B. Benefiting from the partial taxation regime

The Confederation and almost all cantonal laws also make provision for the partial taxation of dividends in private assets. Depending on the canton, only part of the dividend (in most cantons only 50%) is subject to income tax for minimum stakes of 10%.
Although the distribution of non-operationally required liquid assets is more attractive in fiscal terms these days than previously, the tax-free capital gain option nevertheless remains the best tax solution.

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