ACQUISITIONS (FROM THE BUYER'S PERSPECTIVE)
Tax treatment of different acquisitions
- What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
Both the seller and the acquirer face different tax implications depending on whether an acquisition is carried out by way of acquisition of stock (share deal) or acquisition of business assets and liabilities (asset deal).
The main differences concern the tax treatment of capital gains, respectively realised income on the transfer of assets, transfer of historic tax liabilities, step-up in basis of the target's underlying assets, transfer of the tax loss carry-forward and transaction taxes.
In an asset deal, the seller will generally be taxed on the realised income (ie, realised hidden reserves) at the applicable corporate income tax rate. An acquirer often prefers an asset deal, as in this case the tax risks transferred with the acquired business are very limited. Generally, only liabilities in respect of social security and real-estate taxes (if applicable) are inherited. Should an asset deal be followed by a liquidation or factual liquidation of the seller, the historic income, capital, VAT and customs tax liabilities of the acquired business may be transferred to the acquirer as part of tax succession. Further, a step-up in basis and tax-deductible depreciation are, in principle, possible (see question 2) and interest for acquisition debt may be more easily set off against taxable income of the acquired business. Income tax loss carryforwards of the business remain with the seller. The asset transfer is generally subject to VAT, currently at 7.7 per cent, on the transfer of taxable goods and goodwill. Alternatively, a VAT notification procedure, respectively in some cases, must be used. This means that no Swiss VAT is charged on the transaction, but the transaction is notified using a specific form. Finally, should real estate be transferred, special cantonal or communal real estate gains taxation for the seller and real estate transfer taxes may need to be considered.
Sellers typically prefer share deals because of the privileged tax treatment of capital gains in Switzerland (see question 15). The acquirer of shares in a Swiss company assumes potential historical tax risks and the tax book values of the target company, since both remain unchanged in the target company. The goodwill reflected in the share price generally cannot be written off against taxable profits. The acquirer's interest expenses on acquisition debt cannot be directly set off against taxable income of the target, but require additional structuring (see question 10). The acquisition of a partnership interest is, from an income tax perspective, generally treated like an asset deal and results in a step-up for the acquirer.
In the case of a share deal, the target company remains entitled to its tax loss carry-forward, if any, and can set it off against taxable profit during the ordinary tax loss carry-forward period of seven years (see question 7 regarding the impact on tax attributes). The acquisition of shares in a Swiss company is not subject to Swiss VAT. Furthermore, in the case of a share deal, the acquirer may inherit the latent dividends withholding tax liability (see question 13) in respect of the retained profits accumulated pre-sale ('tainted old reserves' of the target company as of the date of the share acquisition). This issue is particularly relevant in the case of foreign resident sellers, who were not entitled to a full refund of the Swiss dividends withholding tax under the relevant double tax treaty. With regard to transaction taxes, see question 6.
Step-up in basis
- In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
In cases where the purchase price in an asset deal exceeds the fair market value of the net assets of an acquired business, an acquirer may capitalise such difference as goodwill, which is typically depreciated as per Swiss tax and accounting rules at 40 per cent per annum (declining balance method; the remaining amount depreciated in the last year) or at 20 per cent per annum (straight-line method) over five years. The same depreciation generally applies to the part of the purchase price allocated to intellectual property (IP). Such depreciation expense is generally deductible from taxable income.
In the case of a share deal, the purchase price is entirely allocated to the shares acquired and the taxable basis of the target company remains unchanged (ie, no goodwill is recognised). A depreciation on the acquired shares is typically only possible for a Swiss acquirer if there is a decrease in the fair market value of the shares. Such adjustment of the share value is tax-deductible for a Swiss corporate acquirer. However, if the value of a participation of at least 10 per cent recovers in subsequent years, Swiss tax authorities may demand the reversal of the adjustment or depreciation up to the original acquisition cost basis, which is taxable.
Domicile of acquisition company
- Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
In the case of an asset deal, a Swiss acquisition company is highly preferable from a tax and legal perspective. Otherwise, the acquired business will likely constitute a permanent establishment of a foreign acquirer, creating the need to prevent international double taxation through the allocation of profits between the acquirer's foreign head office and its Swiss permanent establishment.
Even though Switzerland has no tax-consolidation rules (except for VAT), a Swiss acquisition company may be a good choice for a share deal.
First of all, Switzerland has a generally attractive tax regime. Although in the context of the Swiss tax reform (TRAF), the privileged holding company taxation (effective tax rate of 7.83 per cent (only direct federal tax; exempt from cantonal or communal taxes); prior to participation deduction) will be abolished as from 1 January 2020, Switzerland will remain an attractive location for an acquisition company, owing to low overall effective tax rates. Various cantons have already decided to lower their corporate income taxes as a replacement measure in the context of the TRAF. For example, the effective corporate income tax rate (including federal tax rate) in Basel City was reduced from 20.18 per cent to 13 per cent as of 2019, in Geneva from 24.16 per cent to 13.99 per cent as of 2020 (both already enacted), in Zurich from 21.15 per cent to 19.7 per cent as from 2021 and in Zug from 14.62 per cent to 11.91 per cent as of 2020 (subject to a potential cantonal referendum). Further, the TRAF offers additional tax benefits, such as a patent box, notional interest deduction (only in the canton of Zurich), reduction of cantonal capital tax and a tax-privileged step-up.
Switzerland has no controlled foreign corporation (CFC) regime and is not currently planning to introduce such rules.
Any dividend income from qualifying participations of at least 10 per cent (or with a fair market value of at least 1 million Swiss francs) and capital gains on the sale of qualifying participations of at least 10 per cent held for at least one year benefit from the participation deduction scheme, under which such income is virtually tax-exempt. Swiss holding companies are also generally entitled to a refund of the input VAT.
Further, a Swiss acquisition company may benefit from a taxneutral reorganisation in the sense of the Mergers Act (eg, a merger with the Swiss target company if required by the financing banks).
Finally, a Swiss holding company may be beneficial in terms of the Swiss dividends withholding tax in case of a Swiss target. Dividends distributed to a Swiss acquisition company are either not subject to the withholding tax (if the acquisition company holds at least a 20 per cent stake in the Swiss target and the notification procedure is complied with) or the withholding tax is fully refundable (except where old reserves exist; see question 13). A foreign acquisition company can request the relief from the 35 per cent dividends withholding tax only if it complies with the requirements under the relevant double tax treaty; generally, residency, beneficial ownership and no abuse (treaty or rule shopping).
The equity capitalisation of a Swiss acquisition company by its direct shareholder is subject to 1 per cent stamp duty (the first 1 million Swiss francs of contributed capital is exempt), whereas an indirect capital contribution (ie, equity funding not by the direct, but indirect shareholder) would generally not be subject to stamp duty. In the case of a debt-financed acquisition, a Swiss acquisition company with mainly only dividend income may not benefit from tax-deductible interest expenses owing to its lack of taxable income. However, there are certain debt pushdown strategies available, by which interest expenses can be allocated to a Swiss target company and set off against its taxable income (see question 10). Swiss thin capitalisation rules principally need to be considered if the acquisition company is funded by shareholder or related party debt (including third-party debt that is secured by shareholders or related parties). Interest on such debt is only tax deductible if certain debt-to-equity ratios are complied with and the interest does not exceed arm's-length terms. Generally, the debt-financing of investments (shares) is limited to 70 per cent of the fair market value of such investment.
As Switzerland has a broad treaty network, no CFC rules, an attractive income tax regime and usually offers possibilities to structure around potential tax inefficiencies, a Swiss acquisition company is often preferable.
Company mergers and share exchanges
- Are company mergers or share exchanges common forms of acquisition?
An immigration merger (inbound into the Swiss target) is generally possible to the extent that the foreign legislation permits such a merger. An immigration merger could generally be performed in a tax-neutral manner (including for Swiss stamp duty, with an exception in case of abuse of law). As per the new rules introduced in the TRAF, a (taxneutral) step-up of the income tax values generally is possible in the context of the immigration and in respect of assets that become subject to tax in Switzerland, with the exception of qualifying participations. The stepped-up values subsequently need to be depreciated over time (applicable timeline depending on the assets, eg, 10 years for goodwill) and are subject to capital tax.
Swiss withholding tax may be triggered if the nominal share capital in a Swiss merged entity increases or if reserves subject to Swiss withholding tax are reduced, such as if the merger is done with a company in a loss situation. Considerations for exiting Swiss shareholders are generally taxed like ordinary capital gains except if such considerations are paid by the merged company (taxed like dividends). Swiss individual shareholders holding the shares as private assets are deemed to receive taxable income if they benefit from a higher share capital in the merged company.
A potential alternative to an immigration merger is a quasimerger as a share-for-share exchange between the acquisition and target companies, whereby the shareholders of the target company are compensated with (new) shares of the acquisition company. A taxneutral quasi-merger requires that the acquisition company obtains at least 50 per cent of the voting rights of the target and the shareholders obtain at least 50 per cent of the value of the target in new shares of the acquirer (ie, the cash component may not exceed 50 per cent of the value of the target). In the case of a quasi-merger, the target remains a separate entity (as opposed to a statutory merger resulting in just one entity). In inbound cases, a foreign acquirer would typically set up a Swiss acquisition company, which would then acquire a Swiss target via share-for-share exchange based on the conditions outlined above. In this case, the Swiss acquisition company typically issues new shares to the tendering shareholders of the Swiss target company with a modest nominal share value and a large share issuance premium, which together reflect the market value of the acquired shares. The share premium may be booked and reported for Swiss withholding tax purposes as capital contribution reserves of the Swiss acquisition company, which could later be distributed free of Swiss dividends withholding tax. Such a quasi-merger is exempt from the 1 per cent Swiss stamp issuance duty. Qualifying quasi-mergers with Swiss target companies are in general tax-neutral for the acquisition and target entities. Swiss resident individual shareholders holding the shares of the target company as private, non-business assets are considered to realise a tax-exempt capital gain (or loss) upon the exchange (share and other consideration, if any). Swiss resident corporations or individuals holding the shares of the target company as business assets may be able to roll over their tax basis in the target company shares into the shares of the acquisition company provided the book values are carried on.
Tax benefits in issuing stock
- Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
For a Swiss acquisition company, the issuance of stock as consideration may be beneficial if the requirements for a tax-neutral quasi-merger are met (see question 4). In particular, at least 50 per cent of the fair market value of the Swiss target are compensated with (newly issued) shares of the acquisition company. Such a quasi-merger is preferential for the Swiss acquirer as the contribution of the target shares will generally not trigger stamp duty, the acquisition of remaining target shares will benefit from a Swiss securities transfer tax exemption (see question 6, which could otherwise arise in a cash acquisition if a securities dealer is involved in the acquisition) and the Swiss acquisition company can create capital contribution reserves that may be later distributed without Swiss dividends withholding tax and without Swiss income tax for Swiss resident individuals holding the shares as private assets. For Swiss sellers holding the shares in the target as business assets, the stock consideration may result in a deferral of the capital gain or rollover of the tax basis in the target shares.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.