Tax Consequences of a Share Deal

The tax consequences of the sale of shares of a corporation are presented in a simplified form below. As each case is unique, engaging a tax expert is recommended in order to assess the tax implications of each transaction. 

 
Graphical representation of the process

Checklist - Tax Consequences of the Sale of Shares in a Corporation (Share Deal)

                               Taxes for Sold corporationSeller (shareholder) - natural person, shares held as a private asset (private investor)Seller (shareholder) - natural person, shares held as business assetsSeller (shareholder) - legal entity without a participation deductionSeller (shareholder) - legal entity qualified for participation deduction Purchaser (shareholder)
Income taxes (FITA/CCITHA)
- In principle no tax consequences

- Sale does not result in higher amortization potential 


- Interest owed from purchase cannot usually be deducted in a merger post-purchase 
- In principle capital gains are tax free, except in the following cases:
- Taxable capital gains (difference between the market value of the shares and their book value at the time of realization), at the most partial taxation pursuant to Art. 18b FITA- Taxable capital gains (difference between the market value of the shares and their book value at the time of realization)- Capital gains (difference between the earnings from the sale of shares and the cost of the investment) qualify generally for relief on capital gains (i.e. the capital gains are not subject to most corporate income tax)
- Reintroduced deductions will be taxed
- Possible restrictions on distribution under clauses of the purchase contract relating to indirect partial liquidation
Real estate capital gains tax/ Real estate transfer tax
- For real estate companies and for foreign sellers, check if due to the economic conveyance there is a possible neutral revaluation of real estate value in the tax on the real estate earnings balance on the basis of a double tax treaty. 
 
 
- Taxable sale of a real estate company?6


- To check the taxation of the sale of a real estate company
 
 
- To check the taxation of the sale of a real estate company
 
 
- To check the taxation of the sale of a real estate company
- Contractually ensure no mortgage must be registered for taxes on earnings from real estate
 
 
Withholding tax (WHTA)   - Withholding tax on payment in kind, provided the legal entity has incurred a loss by  the sale to related party (Art. 4 WHTA)8- Withholding tax on payment in kind, provided the legal entity has incurred a loss by the sale to related party  (Art. 4 WHTA)

- Application of the "old reserves" theory? 

- Withholding tax on payment in kind, provided the legal entity has incurred a loss by the purchase by related party (
Art. 4 WHTA)
Stamp tax (STA) (Stamp issuance duty / transfer duty) 
Stamp income duty: Shell trades (Art. 5 Abs. 2 lit. b STA)?

Transaction: In case of a contracting party or intermediary (e.g. investment advisor) securities broker, the transfer stamp tax is in principle 0.15% (or 0.3% for foreign shares)
 
Stamp transfer duty: In case of a contracting party or intermediary (e.g. investment advisor) securities broker, the transfer stamp tax is in principle 0.15% (or 0.3% for foreign shares)Stamp transfer duty: In case of a contracting party or intermediary (e.g. investment advisor) securities broker, the transfer stamp tax is in principle 0.15% (or 0.3% for foreign shares)Stamp transfer duty: In case of a contracting party or intermediary (e.g. investment advisor) securities broker, the transfer stamp tax is in principle 0.15% (or 0.3% for foreign shares)Stamp income duty: in principle tax-exempted (for purchaser which is a corporation and transactions involving parent company, to check if there is a hidden capital contribution Art. 5 STA)

Stamp transfer duty: In case of a contracting party or intermediary (e.g. investment advisor) securities broker, the transfer stamp tax is in principle 0.15% (or 0.3% for foreign shares)
Value added tax (VAT)  - Sale of shares as exempted transaction  (Art. 21 para. 2 VAT Act); at most a tax adjustment, except Art. 29 para. 2 VAT Act- Sale of shares as exempted transaction (Art. 21 para. 2 VAT Act); input VAT adjustment- Sale of shares as exempted transaction (Art. 21 para. 2 VAT Act); no input VAT adjustment (Art. 29 para. 2 VAT Act)

 


1 Indirect partial liquidation: The indirect partial liquidation arises out of Art. 20a para. 1 lit. a FITA/Art. 7a para. 1 lit. a CCITHA and includes the proceeds from the sale of participation of at least 20% of the nominal capital of a corporation representing a transfer from private to business assets of another individual or legal person. Required is that "within five years following the sale, the acquirer causes the target to distribute reserves that are not necessary to the business of the target and that were distributable within the meaning of commercial law at the time of sale; the same principle applies if within five years, several parties who own such participation sell together participation totaling at least 20%; if these conditions are met, the seller is taxed on the amount of distribution (a posteriori taxation) on the basis of recapture procedure pursuant to Art. 151 para. 1152 und 153 FITA.
2 Participation held as business assets: Whether an asset is assigned to private wealth or to business assets is decided according to an assessment of all eligible factual circumstances (to see, Decision of the Federal Supreme Court 2C_361/2011 dated 8 November 2011
Transposition: According to Art. 20a para 1 lit. b FITA/Art. 7a para. 1 lit. b CCITHA, transposition includes the proceeds from the transfer of participation of at least 5% of nominal or authorised capital of a corporation or a cooperative from private to business assets of a partnership or of a legal entity. After the transaction, the seller controls the acquiring company holding at least 50% of the capital, to the extent that the shares are contributed at a price exceeding their nominal value. This principle applies by analogy when several parties transfer their participation together.
4 Professional securities dealers: Inter alia it is the case when a taxpayer seeks to exploit, in the way of a (part-time) self-employment, the development of the securities market for profits and does not simply dynamically manage his participation (see also, Decision of the Federal Supreme Court 2C_385/2011 dated 12 September 2011)
5 Shell trades: Transfer of the majority of the equity securities to an economically liquidated company, which has suspended its business activities. From a tax perspective, the shell trade is treated as a liquidation with subsequent new establishment.
6 Real estate company: Real estate companies mainly use real estate (rental, lease, transfer). If the majority of the shares is sold in such companies, there is an economic change of ownership. Such transactions usually involve the cantonal tax on capital gains and in some cantons the property exchange tax.

Participation relief for dividends: If the receiving company holds at least 10% of the nominal or authorised capital of the distributing company or receives at least 10% of the profits and reserves of the distributing company, or holds share of a monetary value of at least CHF 1 million, the corporate income tax is reduced by reference to the ratio existing between participation income and total net profit (Art. 69 f. FITAArt. 28 para. 1 and para. 1bis CCITHA).

Participation relief for capital gains: Capital gains qualifies for participation relief when the sold shares sold equals at least 10% of the nominal or authorised capital of the other company, or provide rights to at least 10% of the earnings and reseves of the other company, and if the corporation or cooperative that undertook the sale held the shares for at least one year (Art. 69 in conjunction with Art. 70 para. 4 FITAArt. 28 para. 1 and Abs. 1bis CCITHA).


Payment in kind: Anything like payment, credits, offsetting or what otherwise benefits the shareholder from the company, which are not repayment of capital contribution (Art. 4 WHTAArt. 20 WHT Ordinance).
 


Tax objectives of the buyer and seller in a share deal

Facts


Mr. X., domiciled in Switzerland, has built a successful Business in Switzerland . He is now in the phase in which he plans the future of his company. Because he has no descendants who are interested in leadingthe business, he has sought and found a buyer. The company is not directly held by Mr. X., but indirectly operated by Y. AG in which Mr. X. holds all shares. A foreign group of companies would now like to acquire this company at an attractive price. Mr. X. and the group agreed on a share deal in which Mr. X. would sell all his shares in Y. AG to the acquiring entity. 

Advantages and disadvantages of a share deal

 Mr. X., Share capital of Y. AG in his private assets Buyer, foreign group of companies
Advantages - Possibility of realizing a non-taxable capital gain 

- Offsetting of losses subject to the condition of continuing the business operation of the indirectly purchased business in Y.-AG is in principle possible, since the losses remain preserved by the purchase of Y. AG.  


Disadvantages- The risk exists that such a non-taxable capital gain would be re-qualified as a taxable investment income due to the so-called indirect partial liquidation.1

- As part of a share deal, the group of companies takes over all tax risks of Y. AG2

- The group acquires the rights of participation of Mr. X. during a share deal. It is thus not possible
 to offset income of the company in the Y. AG with the interests on debt payable on the group level, as well as in another company. 

- No additional deduction potential, as the asset value in the Y. AG remains unchanged with the share deal.


Mr. X. can minimize the risk of such indirect partial liquidation, by requiring the group in writing in the purchase agreement to refrain from doing any harmful substance distributions within five years following the sale (for instance dividends from existing sale, distribution of reserves that are not necessary to the business and that are distributable within the meaning of commercial law at the time of sale). 

2 Therefore, in the purchase Agreement the group must ensure that the risk, which are inter alia discovered in the course of the tax due diligence, are covered in the future by Mr. X. despite the sale.   

Conclusion

Natural persons such as Mr. X. prefer a share deal structure because of the possibility of realizing non-taxable capital gains.
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