Old Reserves Practice (Avoidance of Withholding Tax)

Preliminary Remarks

When transferring shares, the buyer must be attentive to the so-called "old reserves practice" of the Federal Tax Administration. Pursuant to this practice, accumulated, distributable earnings generated while shares of a Swiss company are in foreign possession and not distributed at all or not distributed in adequate proportion are qualified as "old reserves". 

The old reserves practice hinges on the fact that the definitive withholding tax burden on distributable reserves would generally be reduced in the event of a future change of ownership, even though such reserves were distributable and thus potentially subject to higher withholding tax before the change in ownership. 

A particular focus is on the following two events: 
  • Transfer of a company from a person resident abroad to a person resident in Switzerland 
If a foreign resident shareholder in a Swiss company transfers his or her shares to a person resident in Switzerland at a time when the Swiss company has distributable reserves, the Swiss Federal Tax Authority will apply its so-called "old reserves practice" and refuse full refund of withholding tax. 
  • Transfer of shares between persons resident abroad 
If a foreign resident shareholder sells his or her shares in a Swiss company to another foreign resident person and such transfer leads to a reduction of residual withholding tax in Switzerland, the Swiss Federal Tax Authority will generally apply the formerly applicable Income Tax Treaty when ruling on refund of withholding tax on distributions of reserves that were present at the time of the transfer of the shares.

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