A new corporate law, Capital Increase and Capital Reduction in Switzerland is set to come into force on 1 January 2023.
But what does it mean for your Swiss business and how can you take advantage of the opportunities it offers?
The new legislation is designed to improve the functioning of companies, particularly with regard to capital increase and capital reduction. The main objective is to simplify the process of corporate restructuring and to help companies engage in efficient capital management.
But the new law is not just about taxes and accounting; it also affects how Swiss companies are governed, how they are managed, and how they will be taxed in the future.
This post explains everything you need to know about the new company law in Switzerland.
What is the new corporate law change all about?
An amended version of the Swiss corporate rules was adopted by the Swiss Federal Assembly on June 19, 2020, and is scheduled to come into effect on January 1, 202s.
At the heart of the changes are revised corporate finance rules. There are also important changes to shareholder participation and control, company liability, and new provisions for business rescue.
This means the planned changes come with slight implications for Swiss tax on share funds, especially with the introduction of "capital band” and rules on shares in foreign currencies.
Foreign currency-denominated share capital
The new law stipulates Swiss businesses can now prepare their financial statements in a foreign currency most relevant to the operations of the company.
Although this change is yet to apply to share capitals, it is expected to be a part of the revision in the future. Consequently, dividends, shares, and other finance-related areas will be bought and sold in a relevant foreign currency.
Not all currencies are qualified under the revisions.
The approved currencies are Swiss francs, US dollars, British pounds, Euros, or the Japanese Yen. However, it’s “all or nothing” when it comes to share funds, which means a mix of currencies is not allowed.
What the law means for corporate income tax in Switzerland
The new Switzerland corporate tax law stipulates that taxable net profits are converted into Swiss francs when the financial statement is denominated in a foreign currency (at an average exchange rate)
The year's average exchange rate will determine the tax liability for the duration of the tax period, as well as when calculating the taxable profit. What this means is that the conversion differences between the Swiss franc and the functional currency will no longer be necessary.
Nevertheless, Swiss francs will continue to be used as the currency of taxation (the exchange rate end of the tax period will determine the amount due).
Companies operating in markets where one of the recognized currencies is applicable may find the introduction of share funds in foreign currencies particularly attractive.
Introduction of the capital band
The goal of the introduction of the capital band is to make companies' financial regulations more flexible. Therefore, the articles of association may allow the board of directors to increase or decrease the share funds by up to 50%.
Capital bands will expire after five years, and the articles of association would have to be amended after this period to create the basis for a new capital band.
Capital bands enable the general meeting to significantly broaden the board of directors' options in equity financing.
How do the revisions affect private shareholders’ taxes?
According to the amendments, a financial contribution within the framework of a capital band is considered a reserve only to the extent that it exceeds the repayment of any free reserves within the band.
A new or additional contribution reserve can only be determined after the capital band has been terminated. Federal Tax Administration ("FTA") can form and confirm tax reserves (subject to withholding tax) if financial contributions exceed distributions at the end of the capital band.
A separate trading line has been established at the Swiss stock exchange - SIX so that listed companies will not be able to form financial contribution reserves for natural persons resident in Switzerland who hold shares as private assets without any de facto restrictions.
In the event of a capital reduction, however, this change in the law will have negative tax consequences for individuals who hold shares in non-listed companies as private assets.
As the FTA only confirms financial contribution reserves upon the termination of the capital band, the shareholders may not be able to avoid income tax consequences at the time of the capital reduction, since there may not be any confirmed contribution reserves at that time.
By taking steps like buying back their own shares, the new practice shows how to prevent this problem. Privately held companies will be unable to take advantage of the two-way capital band otherwise.
Issuance stamp duty on equity securities
Stamp duty on equity securities issued within the scope of a capital band will now only be due at its termination, rather than with each individual fund increase, according to amendments to the Federal Act on Stamp Duty.
Furthermore, stamp duty will only be imposed on equity capital increases. Therefore, an inflow that does not exceed a repayment within the same capital band will not be subject to issuance tax.
Final word: The new corporate provides greater flexibility to raise funds and expand operations
Overall, the new Swiss corporate law is a positive development for businesses. It provides greater flexibility in terms of the capital increase and reduction and also introduces new measures to protect shareholders' rights. This will make it easier for businesses to raise funds and expand their operations, while also ensuring that shareholders are better protected.
While capital increase and reduction guidelines are a complex and far-reaching piece of legislation that will have a significant impact on businesses in Switzerland, it is important to understand all of the provisions in order to ensure compliance.
Businesses that are not in compliance with the new Swiss code of obligations may face significant penalties, so you should seek professional advice where necessary to ensure that your business is on the right side of the law.