What is it about?

In 2012, the appellant company received real estate as a bequest from the estate of its deceased shareholder. In the 2012 annual financial statements, the company recognised the gross value of the bequest of CHF 50,001,998 as extraordinary income. It also recognised a provision for inheritance tax as an expense.

In separate proceedings before the Federal Supreme Court, it was initially disputed whether the gross amount of CHF 50,001,998 or only the inflow after deduction of inheritance tax should be excluded from the taxable profit. According to the ruling of 30 November 2017, only the net increase from inheritance is profit tax-neutral (BGE 143 II 674; see Art. 60 lit. c DBG).

In the balance sheet as at 31 December 2016, the company showed a “reserve from capital contributions” of CHF 50,001,998 for the first time. On 21 April 2017, the company’s Annual General Meeting approved a distribution of CHF 1,080,000 from the capital contribution reserves for 2016. In the notes to the 2017 annual financial statements, the company explained that the capital contribution reserves had been reduced by the total inheritance tax paid (CHF 18,096,669) to CHF 30,825,329 as a result of the Federal Supreme Court decision of 30 November 2017. This closing balance as at 31.12.2017 was reported to the FTA using form 170 dated 8 February 2018. In addition, the share issuance tax of CHF 319,053 was declared and paid on the capital contribution.

In a decision dated 24 August 2018, the FTA refused to recognise the capital contribution reserves, which was confirmed by the Federal Administrative Court in its ruling dated 3 October 2023. The Federal Supreme Court has now overturned the judgement of the lower court and has partially upheld the appeal.

Time of disclosure in a separate account

In contrast to the income tax provisions on the capital contribution principle (see Art. 20 para. 3 DBG; Art. 7b StHG), Art. 5 para. 1^bis VStG also requires that the contributions are “recognised in a separate account in the commercial balance sheet” (“disclosure requirement”) and that the company “reports any changes to this account to the FTA” (“reporting obligation”).

The Federal Administrative Court was of the opinion that the disclosure in a separate account in the commercial balance sheet had to be made at the time of contribution or close to the time of contribution and that a subsequent reclassification of a contribution initially booked in the income statement was not permitted. Only permissible balance sheet corrections were to be reserved, according to the lower court.

Decision of the Federal Supreme Court

The Federal Supreme Court firstly states that the bequest is not only a capital increase from inheritance, but also a capital contribution. Furthermore, the transfer to the reserves from capital contributions complied with commercial law and the disclosure in the 2017 commercial balance sheet was not objectionable.

The reporting obligation and the disclosure requirement are – contrary to doctrinal opinions to the contrary – not merely regulatory provisions that serve a control purpose, but additional constitutive requirements on which the withholding tax-free distribution depends. Contrary to the lower court, however, no convincing reasons are apparent as to why open capital contributions, which are not initially recognised separately, should not be eligible for the exemption under Art. 5 para. 1^bis VStG following a transfer to a separate account in the commercial balance sheet in accordance with commercial law. The view of the lower court that the entry in a separate account in the commercial balance sheet must always be made at the time the capital contribution is made or shortly thereafter cannot be accepted.

The purpose of the reporting obligation in the case of open capital contributions is also already fulfilled if the company has reported all changes to the separate account to the FTA at the time the repayment is due. In the present case, the capital contribution as at 31 December 2017 was reported in a separate account in the commercial balance sheet. However, the reporting obligation had not been fulfilled at the time the dividend was due in April 2017, which is why the withholding tax was rightly levied on the 2017 distribution. However, the appeal is well-founded and upheld by the Federal Supreme Court insofar as the appellant is demanding the determination of capital contribution reserves as at 31 December 2017 in the amount of CHF 30,825,329.

Conclusion

The fact that the disclosure in the commercial balance sheet can also be made at a later date than the date of contribution and that the reporting obligation must be fulfilled at the latest at the time of repayment are important clarifications. The FTA’s long-standing administrative practice, which in part contradicts the judgement of the Federal Supreme Court, will therefore have to be adjusted. In practice, there are various constellations in which capital contributions are not initially disclosed or reported as such, or it is only established at a later date that they exist.

The court has explicitly left open the question of whether hidden capital contributions can also be disclosed at a later date under commercial law and whether the amount disclosed still qualifies as a capital contribution reserve within the meaning of Art. 5 para. 1^bis VStG. However, the Federal Supreme Court has already confirmed the income tax question of whether hidden capital contributions can be repaid at a later date free of income tax on the basis of Art. 20 para. 3 DBG (Federal Supreme Court, 17 March 2023, 9C_678/2021, BGE 149 II 158). In the present leading decision, the Federal Supreme Court once again confirms that withholding tax and income tax pursue different purposes and that their taxing objectives are not identical. Therefore, the connection between withholding tax and income tax does not preclude the same payment from being subject to the two taxes differently, particularly in the case of capital contributions that are not recognised separately or are only recognised separately at a later date, which is the case in this instance due to the breach of the reporting obligation.

According to the FTA’s practice up to now, capital contributions are only recognised as capital contributions within the meaning of Art. 5 para. 1^bis VStG less the associated capital increase costs, which also includes the share issuance tax. This controversial practice is also not explicitly addressed by the Federal Supreme Court in its judgement. Nevertheless, it should be noted that the share issuance tax mentioned in the facts of the case was not deducted from the amount of reserves from capital contributions determined by the Federal Supreme Court.

ADB Altorfer Duss & Beilstein AG

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