Acquisitions (from the buyer's perspective)
1 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?
From the buyer's perspective, assuming the buyer is a corporate taxpayer, there is no difference whether it acquires shares in a company or business assets and liabilities. In both instances, the buyer takes a cost basis in the shares or the assets and liabilities so acquired.
2 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?
As mentioned above, the buyer takes a cost basis in the acquired shares. In such instance, any goodwill paid is part of the acquisition costs and will not be shown separately on the balance sheet of the buyer. Hence, there is also no possibility to depreciate the goodwill. However, if later on the buyer can show that the real value of the shares is less than their book value, the shares' value may be written down.
In the case of an acquisition of assets and liabilities, the buyer takes again a cost basis in the assets and liabilities acquired, and to that extent gets a step-up in basis to their fair market value. The amount of the purchase price that exceeds the fair market value of these assets and liabilities is booked separately as goodwill. Such acquired goodwill may be depreciated, typically by the straight line method over five years.
3 Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
The use of an acquisition company is typically found in jurisdictions where either companies file a consolidated return so that the interest on the acquisition debt may be used to reduce part of the profit made by the target company; or the acquisition company is subsequently merged with the target company so that the acquisition debt is on the balance sheet of the merged entity and the interest payable thereon may be used to reduce the profits. In Switzerland, there are no consolidated returns so that the first option will not work. In the second scenario, the deduction of the acquisition debt interest would be disallowed. Therefore, the use of a Swiss acquisition company is, from a tax perspective, not beneficial.
The use of a foreign acquisition company is, as far as Swiss taxes are concerned, irrelevant in that it does not give rise to any beneficial Swiss tax consequences.
4 Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
By far the most common form of acquisition is a straightforward share purchase, in the overwhelming majority for cash, although in some instances consideration in both cash and shares of the acquiring company has been paid. Consideration in the form of shares rather than cash gives rise to no beneficial tax result for the seller.
5 Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
There is no tax benefit to the acquirer in issuing stock as consideration rather than cash.
6 Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
Transfer stamp duties are payable on any transfer of taxable securities for consideration, provided a securities dealer is involved either as a party to the transaction or as an intermediary. Taxable securities for these purposes are in particular shares and similar instruments. In addition to banks and financial institutions, Swiss corporations that hold taxable securities with a book value of more than 10 million Swiss francs qualify as securities dealers for stamp duty purposes. Consequently, nearly all large Swiss corporations are subject to stamp duty on the acquisition of shares. The rate of tax is 0.15 per cent for securities issued by a Swiss entity and 0.3 per cent for securities issued by a foreign entity. However, transfers of shares within the scope of a qualifying reorganisation are exempt from transfer stamp duty. As to VAT, none is levied on the acquisition of shares. In the case of an acquisition of assets and liabilities, no VAT is payable if the assets and liabilities at issue form a business; however, the transfer must be reported to the VAT authorities.
7 Net operating losses, other tax attributes and insolvency Proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
There are no change of control rules that affect the availability of net operating loss (NOL) carry forwards, absent a tax avoidance. Therefore, in the case of a share acquisition, the NOL carry forward is preserved.
Should the takeover occur as an acquisition of the assets and liabilities, the NOL carry forward will first be set off against the profits arising from the realisation of built-in gain. Any excess NOL carry forward is lost, subject to exceptions for group internal transfers of assets or spin-offs in a subsidiary where the tax attributes survive. NOLs may be carried forward seven years; there is no carry back. In the case of a financial restructuring all losses, even those going back more than seven years, may be deducted. Given that there are no consolidated tax groups, NOL carry forwards are strictly limited to the entity in which they arose.
The acquisition or reorganisation of an insolvent or bankrupt target company carrying forward a substantial NOL is likely to be scrutinised by the tax authorities. They will examine whether the transaction in question is part of a tax avoidance scheme. If in the case of a merger the merged target company: (i) maintains no true business operation; (ii) appears from an economic point of view as being liquidated; and (iii) the sole reason for the transaction was to preserve the NOL, the acquiring company will be disallowed from setting off its profits against the NOL carried forward by the merged target company.
8 Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
As mentioned in question 3, the use of an acquisition company is not beneficial from a Swiss tax perspective.
There are restrictions on the deductibility of interest among related parties, regardless of whether these are Swiss or foreign. Firstly, thin capitalisation rules apply as set forth in the Circular Letter No. 6 of the Federal Tax Administration of 6 June 1997. These regulations set forth, in a fairly detailed manner, the extent to which certain classes of assets must be equity-financed. Interest paid on debt in excess of what is allowed under these rules is disallowed as a deduction and treated as a constructive dividend. Hence, the taxable profits are adjusted and dividend withholding tax is imposed on the constructive dividend. Secondly, the Federal Tax Administration promulgates annually the maximum allowable interest rates payable to related parties. Again, any interest in excess of the rates set forth therein is disallowed as a deduction and treated as a constructive dividend whereby the taxable profits are adjusted accordingly.
Dividends are subject to withholding tax at the statutory rate of 35 per cent. Failure to withhold will lead to a gross up of the rate of tax, in that the amount of the constructive dividend is considered as the net dividend equal to 65 per cent; accordingly, the dividend amount is grossed up and the amount of withholding tax computed on said grossed-up dividend at the statutory rate. As a result, the effective rate of withholding tax in such instance is 53.8 per cent. There is no withholding tax on interest under Swiss domestic law, unless the interest is paid by a bank or financial institution. However, if a Swiss company issues bonds, notes or similar debentures, or if it engages in a 'collective procurement of funds', it will have to withhold tax on the interest paid. The statutory rate of withholding tax on interest is 35 per cent. Most tax treaties however provide for a reduction to zero.
As mentioned in question 3, interest on acquisition debt may not be used to reduce the taxable profits of the target, so a debt pushdown is not a viable option for improving the overall tax burden.
9 Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient?
Both stock purchase agreements and asset purchase agreements generally contain representations and warranties, and indemnities as well as tax covenants.
With regard to taxes, the seller typically covenants that as of the closing date all returns, notifications, computations and payments, which should be or should have been made, given or filed for direct taxation and VAT purposes, have been made, given or filed within the requisite periods and are up to date, correct and made on a proper basis. The seller further covenants that the provisions for taxes in the financial statements are sufficient to cover the payment of all unpaid taxes of the target company up to a certain date. Finally, a tax covenant usually contains the seller's covenant that no proceedings are pending with or threatened by the tax authorities.
As a general rule, payments made following a claim under a warranty or indemnity are treated as damages and qualify as taxdeductible expenses of the payer company. Such payments are not subject to withholding taxes. They are taxable in the hands of the payee company. On the other hand, as a consequence of the breach of warranty or indemnity the payee company will depreciate the assets acquired from the payer company in an amount equal to the payments received from the payer company. The depreciation will qualify as a tax-deductible expense.
Post-acquisition planning
10 Restructuring
What post-acquisition restructuring, if any, is typically carried out and why?
There is no common type of post-acquisition restructuring. The type of restructuring effected depends very much on the particular circumstances of the transaction. In the event the acquiring company already holds another Swiss company, the latter may be merged with the newly acquired target.
Such merger is tax-neutral, provided that the Swiss tax liability in respect of assets and liabilities of the legal entities involved continues and that the asset and liabilities take a carry-over basis in the books of the merged company.
11 Spin-offs
Can tax neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes? Tax neutral spin-offs of businesses can be executed in Switzerland. The net operating losses of the spun-off business may be preserved. A tax neutral spin-off is also tax-neutral for the purpose of transfer taxes.
12 Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
With regard to acquisition companies please see question 3. It is not possible to migrate the statutory seat of the target company outside Switzerland in a tax-free manner, with the exception of those cases in which the tax liability of the assets and liabilities remains attached to a Swiss permanent establishment.
Both the migration of the target company outside Switzerland and the absorption of the target company by a foreign company are subject to corporate income taxation, because the Swiss tax liability of the assets and liabilities of the target company is given up. For tax purposes, these two scenarios are treated like a liquidation of the target company.
13 Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treatydependent?
The federal withholding tax is levied on certain passive income, namely dividends (including liquidation proceeds and constructive dividends), interest on bank deposits, bonds and similar debt instruments. However, interest on ordinary loans, including inter-group loans, is not subject to withholding tax. The statutory withholding tax rate for dividends and interest is 35 per cent.
As a result of the duty to shift the withholding tax to the recipient of the dividends and interest, the Swiss company only pays out 65 per cent of the gross amount and remits the 35 per cent withholding tax to the Federal Tax Administration. Non-residents may obtain a partial or full refund of the tax withheld, depending on the applicable tax treaty, by filing a refund request with the Federal Tax Administration.
As of 1 January 2005, the tax on inter-group dividends paid from a Swiss subsidiary to a foreign parent company may be withheld at the reduced amount and reported instead of being paid in full and subsequently refunded in whole or in part. The reporting procedure is only available if the foreign parent company holds at least 20 per cent in the stated share capital of the Swiss company.
Furthermore, as a consequence of the entry into force of the Savings Tax Agreement between Switzerland and the EU on 1 July 2005 as part of the Bilateral Agreements II between Switzerland and the EU, measures equivalent to the EU Parent-Subsidiary Directive have been introduced. Article 15 (1) of the Savings Tax Agreement provides for the abolition of withholding tax on cross-border payments of dividends. It applies to all dividend payments between Switzerland and EU member states where the parent company has held a direct minimum shareholding of 25 per cent of the share capital of the subsidiary for at least two years.
Furthermore, article 15(2) of the Savings Tax Agreement provides for the abolition of the withholding tax on cross-border interest and royalty payments between associated companies.
14 Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
To extract profits from Switzerland tax-efficiently, a Swiss branch may be established. The benefit of establishing a Swiss branch is the absence of withholding tax on the remittance of profits from a Swiss branch to its foreign head office. Additionally, there is no stamp tax upon the contribution of equity to a Swiss branch of a foreign head office.
Non-resident companies are subject to Swiss corporate tax if they have a branch in Switzerland. They are taxed in Switzerland only with respect to the income generated by and attributable to the Swiss branch. As a result, profits of a Swiss branch of a nonresident company are subject to Swiss corporate taxation according to the direct method (ie, without taking into account foreign profits or losses).
Disposals (from the seller's perspective)
15 Disposals
How are disposals most commonly carried out – a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
The most common form of disposals in Switzerland is the sale of the stock in the local company. The reasons why the sale of the assets and liabilities of a business is less common are that the seller will be subject to income tax on the gain and that the NOL carried forward – once set off against the profits arising from the realisation of builtin gain – is lost, as described in question 7.
The capital gain resulting from the sale of a qualified participation by a Swiss parent company is exempt from tax. Swiss parent companies are entitled to a full dividend received deduction for capital gains resulting from the sale or transfer of all or part of a participation if, cumulatively, the participation disposed of is at least 20 per cent of the share capital, and the participation has been held for at least one year.
Finally, capital gains on movable property realised by individuals are tax-free.
16 Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real property, energy and natural resource companies?
With regard to taxation of capital gains resulting from the sale of the stock in a Swiss company please see question 15. If the company disposing of the stock in the local company is a foreign company, it will not be subject to capital gains tax in Switzerland.
With regard to the disposal of the stock in a Swiss real estate company, special tax rules apply. At the federal level and in the majority of the cantons the capital gain realised on the disposal of the stock in the local real estate company is subject to income tax, given that this kind of disposal is treated as a sale of the underlying real estate itself. There are no special rules for energy and natural resource companies.
17 Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
As mentioned in question 15, as a result of the dividend received deduction capital gains realised by a Swiss company upon the sale of a qualified participation are generally tax-free. Therefore, a rollover is not an issue. There is also no rollover in the case of the sale of a business in the form of a transfer of assets and liabilities.
A rollover is only available in the case of the transfer of an individual asset out of a business where such business is continued, provided a similar asset or an asset that has a similar function in the business as the one disposed of is acquired within a period of two years since the initial disposal.
Update and trends
The Nidwalden licence box rule
The canton of Nidwalden has introduced as of 1 January 2011 a so-called licence box rule. This is a unique piece of legislation in Switzerland and demonstrates the high degree of autonomy of Swiss cantons when drafting tax laws. The Nidwalden licence box rule further boosts the attractiveness of Switzerland, and Nidwalden respectively, as a highly attractive business and research location.
With this new rule at the cantonal level, net licensing income resulting from the right to use intellectual property rights (IP) is taxed separately at 20 per cent of the ordinary income tax rate. Taking into consideration that the canton of Nidwalden has a statutory flat income tax rate of 6 per cent for ordinary income, net licensing income is taxed at a flat rate of only 1.2 per cent. At the federal level the net licensing income is taxed together with the ordinary income at the statutory rate of 8.5 per cent (pre-tax), 7.8 per cent respectively (after tax). Hence, the total income tax burden on qualifying licensing income amounts to 9.7 per cent (pre-tax). Given that corporate taxes are a tax-deductible item, the effective income tax rate on qualifying licensing income is 8.8 per cent (after tax).
Legal basis
The licence box rule is set forth in article 85, paragraph 3 of the Tax Act of the Canton of Nidwalden of 22 March 2000, as amended, as well as in article 57a of the Ordinance to the Tax Act of the Canton of Nidwalden of 12 December 2000, as amended (the Ordinance). On 17 January 2011 the Cantonal Tax Administration of Nidwalden issued administrative guidelines to the licence box rule (the Guidelines).
Definition of qualifying licensing income
The definition of the term 'licensing income' is set forth in the Ordinance and is in conformity with the definition of royalties described in article 12, paragraph 2 of the OECD Model Tax Convention. In comparison to the legislation of other countries, the Nidwalden definition of 'licensing income' is very wide. Accordingly, 'licensing income' is any kind of payment received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. This clearly includes royalties paid with respect to software-related IP.
According to the Ordinance, capital gains on the disposal of IP as well as licensing income derived from the use of or the right to use IP within affiliated companies also represents qualifying licensing income.
Pursuant to the Guidelines, payments for so-called milestones also represent qualifying licensing income, provided that these payments can later be linked to a utilisable intellectual property right. However, the 'self-use' of IP does not fall within the scope of the licence box rule. By 'self-use' of IP the Nidwalden tax authorities mean that proceeds derived from the distribution of products in which IP has been integrated do not qualify as licensing income under the licence box rule.
Calculation of net licensing income
The assessment basis for the application of the reduced flat rate of 1.2 per cent is the net licensing income. Hence, any costs directly linked to the IP such as debt financing costs, R&D expenses, administrative costs, taxes, depreciation and sub-licence payments, are tax-deductible items. The reduced tax rate applies to both Swiss and foreign-source net licensing income. It also applies to net licensing income derived from IP held prior to 1 January 2011 (acquired or self-developed) and IP acquired or self-developed after 1 January 2011. The IP may be acquired from third parties or group companies.
Conditions for the application of the licence box rule
The Guidelines set forth the conditions for the application of the licence box rule.
The licence box rule is only applicable to corporations and permanent establishments having their registered office in the canton of Nidwalden. The tax relief is granted upon request. The applicant is required to prove the existence of qualifying licensing income by submitting to the Nidwalden tax authorities the respective licensing agreement(s).
The corporation or permanent establishment benefiting from the licence box rule cannot qualify at the same time as a holding company or an administrative company. Hence, the cantonal privileged tax regimes are not compatible with the licence box rule.
It is important to note that the Guidelines expressly require that the corporation or the permanent establishment requesting the application of the licence box rule has a certain substance at the place of its registered office in the canton of Nidwalden, such as its own office space, qualifying personnel, management functions, etc.
Conclusion
With a total effective income tax burden on qualifying licensing income of 8.8 per cent as a result of the introduction of the licence box rule, Switzerland, and respectively the canton of Nidwalden, becomes a highly attractive location for the exploitation of IP. The innovative piece of legislation of the canton of Nidwalden is likely to attract international intellectual property owners in particular.
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.
