The Capital Contribution Principle

The Capital Contribution Principle is a new regulation in Swiss tax law that came into force on 1 January 2011. It replaced the Nominal Value Principle. Under the Nominal Value Principle, only nominal share capital can be repaid to the shareholders tax-free, i.e. without triggering withholding tax or, for Swiss resident shareholders holding the shares as private assets, income taxes. The Capital Contribution Principle exempts not only the repayment of nominal share capital, but also the repayment of additional paid in capital, share premiums and other contributions into the reserves made by shareholders since 1 January 1997 ("Capital Contributions") from Swiss income taxation and withholding tax. The distribution of retained earnings, hidden capital contributions or open capital contributions that have not been made directly by shareholders remain subject to withholding tax and, for Swiss resident shareholders holding the shares as private assets, income taxation.

Reporting requirements and time limitations

Capital Contributions made after 31 December 1996 are subject to and benefit from the Capital Contribution Principle, even though the Capital Contribution Principle entered into force only on 1 January 2011. The Swiss Federal Tax Administration ("SFTA") published circular letter no. 29 on 9 December 2010 with details regarding the implementation of the new regulations ("Circular Letter"). The Circular Letter provides for strict formal requirements and deadlines which have to be observed in order to benefit from the Capital Contribution Principle, whereby non-compliance with the Circular Letter could lead to a forfeiture of potential tax benefits or exemptions, respectively.

A company needs to comply with the following formal requirements in order to benefit from the Capital Contribution Principle:

- Declaration in the financial statements

The most important formal requirement is the correct declaration of Capital Contributions in the company's statutory financial statements. Capital Contributions must be shown in a separate equity account of the balance sheet. According to the Circular Letter, Capital Contributions made between 1 January 1997 and 31 December 2010 must be shown in a separate account at the latest in the balance sheet for the business year ending in the calendar year 2011.

- Reporting to the SFTA

Capital Contributions made have to be reported to the SFTA annually within 30 days after the approval of the respective statutory financial statements by the shareholders' meeting. For that purpose, new form 170 has to be filed with the SFTA together with a copy of the statutory financial statements. The distribution of Capital Contributions also has to be reported to the SFTA by filing the same form 170 within 30 days after the due date of the distribution.

The reporting of Capital Contributions made between 1 January 1997 and 31 December 2010 has to take place at the latest 30 days after the approval of the statutory financial statements for the business year ending in the calendar year 2011 by filing form 170 together with an Excel spreadsheet prepared by the SFTA for this purpose. Since 1 January 2011, such existing Capital Contributions can be reported to the SFTA and we recommend taking advantage of an early reporting.

Measures to be undertaken as soon as possible

- Preparatory measures in order to fulfil the declaration and reporting requirements

As mentioned above, Capital Contributions made between 1 January 1997 and 31 December 2010 have to be shown in the statutory financial statements of the business year ending in the calendar year 2011 at the latest. Considering this deadline and the fact that a thorough analysis of the corporate history might be a time consuming process (in particular with regard to the effects of corporate reorganisations on Capital Contributions), we strongly advise starting with this task in due course and to show Capital Contributions on a separate account already in the statutory financial statements for the business year ending in the calendar year 2010.

Additionally, sufficient documentation of Capital Contributions made since 1 January 1997 has to be prepared and is necessary, since the burden of proof rests with the companies. In particular, any documents which might serve as evidence (e.g. the forms 3 concerning Swiss stamp duty paid or documents regarding past corporate reorganisations) have to be collected and retained.

- Careful planning of future Capital Contributions

Careful planning of future Capital Contributions is important in addition to the correct declaration of Capital Contributions which have already been made. New tax planning opportunities, but also new pitfalls have to be taken into account in case of reorganisations, restructurings and distributions, but also if the company incurs losses. Furthermore, the effect of the Capital Contribution Principle should be analysed in detail for Swiss or foreign companies held by Swiss private individuals, publicly listed companies or foreign-owned Swiss companies since these companies or their shareholders potentially benefit the most from the new regulations. Considering the above, we recommend deferring dividend payments or corporate reorganisations until an appropriate and in-depth tax analysis has been done.

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.