Taxation of hidden reserves upon abolition of the special status under old law


On 19 May 2019, the Swiss people adopted the Federal Act on Tax Reform and AHV Financing (TRAF) with 66.38% of votes in favour. The core of the reform was the abolition of the tax privileged special status for holding companies, mixed companies and domiciliary companies. 


In connection to the abolition of this special arrangement, it has been determined in the bill, how the hidden reserves created under the old special regime can be dissolved without affecting tax and how they can be fiscally used within the framework of a special account. The legislator has decided in favour of the so-called «special rate solution». However, until the STAF comes into force on 1 January 2020, the pre-vious «step-up» practice of the cantons can also be used to disclose the hidden reserves of special status companies. 

What does the special rate solution entail?

Until the adoption of the TRAF bill, legal entities that had a special tax status enjoyed tax privileges on the hidden reserves in accordance with Art. 28 para. 2 - 4 StHG. The TRAF would make the hidden reserves subject to a higher tax rate than before if they were disclosed under the new law. In order to avoid over-taxation, the legislator has therefore decided that the hidden reserves of the companies concerned can be disclosed successively at a privileged tax rate (special rate) for a period of five years from the entry into force of the TRAF. The special rate not only covers the hidden reserves, but also the value added or ori-ginal goodwill created by the company itself. In contrast to the step-up practice (disclosure of hidden re-serves under old law), hidden reserves are not disclosed in the tax balance sheet at the time of the change of status. Only those hidden reserves are taken into account which would have been tax-free under the special status of a privileged company. The cantons are responsible for determining the amount of the special rate, whereby the current trend ranges between 0% and 3%. At the end of the five-year period, the entire profit is subject to ordinary taxation, which means that even the portion of hidden re-serves not yet realised at this point in time lapses unused or is subject to ordinary taxation. This method is merely a shadow calculation, which does not trigger any capital taxes. 

The step-up solution as an alternative

The present practice of the cantons will only be in use until the abolition of the special regimes. Until that moment, companies with a special status can voluntarily renounce their privileged status and change to the ordinary taxation. This project implies a complete or at least partial disclosure (step-up) of the hidden reserves, but only constitutes a tax-systematic realisation. Depending on the canton, the disclosure is subject to a partial taxation or classified as a tax neutral process. Thereby, both the profit tax and the capital tax play a role. The jurisdiction of the federal court allows a step-up, as long as the concerned canton does not permit a transmission of the loss carried forward suffered beneath a tax privilege in the phase of standard taxation. However, as soon as the loss carried forward can be claimed, a step-up will no longer be possible. If the hidden reserves can be utilized within the framework of the step-up, the hidden reserves are to be disclosed in the tax balance for the purpose of cantonal taxes before the status change and can be written off within ten or five years (depending on the canton) at the expense of the taxable gain. The effects of the actual income tax charge depend on the amount of the hidden reserves, as well as on the company's general profit development. A differentiation among the hidden reserves is relevant because only the ones, which in future are subject to a fundamentally different taxation than under the privilege, can be disclosed. Hidden reserves from shares and properties are exempt from disclosure. If a loss carried forward can be claimed or not has to be clarified with the respective cantonal tax authorities, which also concludes the question if the respective canton allows the step-up method.

Conclusion

Basically, two models stand against each other regarding the taxation of hidden reserves upon abolish-ment of the special status, namely the step-up method and the special-rate solution. It has to be exa-mined case-by-case, which solution is better suited for the transition. Both solutions have their respective advantages and disadvantages. For example, the advantage of the special-rate solution is that it doesn't lead to a raise of the assessment basis for the purposes of the capital tax, because in the special-rate solution no tax balance disclosure has to be carried out. Whereas with the step-up solution, the tax utili-sation is probably possible for longer than five years and can be applied presently until the implemen-tation of the TRAF bill. The special-rate solution will only be applicable after the implementation of the TRAF bill and the adjustment of all cantonal tax laws. On the other hand, the previous-law step-up won't be possible after the adjustment of the cantonal tax laws. Depending on the case and the practice applied by the respective canton, carrying out the status change before the implementation of the special-rate so-lution or of the TRAF bill respectively, can be more profitable for a company. For that reason, as many factors as possible are to be taken into account and a very precise examination is necessary for a deci-sion towards a status change before or after the implementation of the TRAF bill.

At «Downloads» you will find a detailed presentation on the taxation of hidden reserves when giving up the special status within the STAF.