Merger Loss






Preliminary Remarks

If there is a negative difference between book value of the transferred shares of the subsidiary by absorption and the fair market value of equity (share capital, open reserves) of the subsidiary, the mother company realizes a merger loss. If the subsidiary has hidden reserves, those reserves generally cover the merger loss. The mother company may either write off the merger loss from the open reserves or activate the loss to depreciate it in the future. 

Whether the depreciation of a merger loss can be recognized for tax purposes depends on whether a there is a real or unreal merger loss. There is a real merger loss when the holding in the subsidiary was overvalued before the merger. The mother company would have had to write off its holding at its intrinsic value prior to the merger, which would have been recognized for tax purposes. There is an unreal merger loss, if there is no real economic loss because the merger loss is covered by hidden reserves on the transferred holding. Art. 61 Abs. 5 DBG provides that an unreal merger loss is not recognized from a tax perspective.       


Legal Text

Art. 611 DFITA - Restructurings

Should a loss arise on the accounting books with respect to a participation in a joint-stock company or cooperative by virtue of the acquisition of its assets and liabilities and should the participation rights belong to the acquiring joint-stock company or cooperative, the loss may not be deducted for tax purposes. An accounting profit on the participation, if any, shall be taxed.

1 Amended in accordance with para. 7 of the Merger Act of 3 October 2003, in force since 1 July 2004 (AS 2004 2617BBl 2000 4337).

Tax consequences of a merger loss

Balance sheet mother company

Balance sheet subsidiary

Current assets        

        1'000

400

Debt

     Current       assets            

        400

100

Debt

Holding Subs.

          400

200

Share capital

          

       

200

Share capital

 

 

800

Reserves

 

       

100

Reserves

        Total

        1'400

1'400

Total

        Total

      400

400

Total

Hidden reserves: 0                                                                          Hidden reserves: 200



Balance sheet mother company

(after absorption of the subsidiary)

  Current assets

1'400

500

Debt

 

 

200

Share capital

 

 

700

Reserves (incl. merger loss)

Total

1'400

1'400

Total

Hidden reserves: 0


The reduction of the reserves of the mother company amounts to the difference between the value of its holding in the subsidiary (400) and the equity of the subsidiary (300). However, since the participation of the mother company is not overvalued and the subsidiary has hidden reserves which can compensate for the merger loss of 100, there is an unreal merger loss. According to art. 61 para. 5 DFITA, this loss cannot be written off for tax purposes.  

If the subsidiary has no hidden reserves, the loss would be a real merger loss, i.e. the depreciation of the real merger loss is recognized from a tax perspective.   
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