The X AG, located in the canton of Zug, conducted an adjustment at fair value through profit and loss of the book value of its shares in the Y AG in the total amount of CHF 45 Mio. in the fiscal years 1993 and 1995.
In the fiscal years 2007 and 2009, the tax administration of the canton of Zug has set off the value adjustment of 1993 and 1995 with an effect on profit and loss. Thereupon, the X AG appealed the offset of this adjustment, but the appeal was dismissed by the competent authority. The X AG then filed a complaint against the decision on the appeal with the administrative court Zug, which approved the complaint. The decision of the administrative court Zug was appealed by the FTA in front of the Federal Court. The Federal Court has approved the FTA's appeal with the ruling from September 29th 2016 with the following explanation.
The administrative court of the canton of Zug has taken the view, that the conducted corrections represent recognised depreciations according to Art. 62 Para. 1 DBG and therefore constitute definitive corrections and not provisional value adjustments. According to the administrative court Zug, these corrections have been legally accepted as value adjustments according to Art. 62 Para. 1 DBG in 1993 and 1995 by the competent tax authority, whereupon the investment decision of 1993/1995 may not be revisited in the relevant tax periods of 2007-2009. Because the value adjustment was conducted before the implementation of the CTR II, the tax authorities could not call upon Art. 62 Para. 1 DBG in the case at hand. The Federal Court does not share this view.
According to the Federal Court, the tax authorities are not readily competent to legally qualify value adjustments in the commercial balance sheet. This especially applies at the point in time when the adjustment is conducted. At the time of the adjustment, it is not necessary to examine whether it is definitive or provisional. A qualification has only to take place in the period, in which the qualification has legal effects. According to the Federal Court, this applies especially where a recovery in value can identified or the reasons for the adjustments have been eliminated.
Regarding the legal issue of whether a depreciation or a value adjustment takes place on the Y AG's shares, the Federal Court has determined the following:
The X AG has conducted the value adjustment indirectly, which can be interpreted as a mere value adjustment item. The X AG justifies the then conducted value adjustment with the tense economic situation which, as a result of a bad economic cycle, is typically of a temporary nature. According to Art. 62 Para.1 DBG, such accruals can be attributed to the taxable gain, as far as they are no longer justified. The cantonal tax authority has demonstrated this convincingly according to the Federal court and the X AG didn't present any proof to the contrary.
The unilateral offset of value adjustments recognised for tax against financial assets has rarely been come across in the tax assessment policy. But the decision shows, that this instrument isn't a mere paper tiger and that corporations should keep an eye on the risk of offsets. This especially applies in connection to adjustments on shares.
Because the value adjustment has declined in the years 1993 and 1995 in the case at hand, the regulations in Art. 62 Para. 1 DBG could not be called upon. But this didn't protect the taxpayer from an offset, because the Federal Court invests the tax authorities with a big flexibility regarding the qualification of a value adjustment as a depreciation according to Art. 62 Para. 1 DBG or as a accrual according to Art. 63. Para. 2 DBG.
Attention should be paid to the fact that for value adjustments on shares, which have been conducted after the implementation of the CTR II, the tax authority no longer has to examine if the offset happens according to Art. 62 Para. 4 or Art. 63. Para. 4. It only has to be proven, that the value of the share has recovered.