The tax reform will come into force on 1 January 2020. After New Year's Eve 2019/2020, cantonal tax privileges for holding, domicile and mixed companies will be abolished. In order to mitigate the additional tax burden, companies that benefitted from privileged tax treatment until the end of 2019 will have the option of disclosing their hidden reserves in a tax-neutral manner (socalled "old step-up") and depreciating them over a period of 5-10 years. Alternatively, the affected companies can apply for an order by the competent tax administration in order to determine the amount of hidden reserves. These hidden reserves can then be taxed at a special tax rate over a period of 5 years in case of their realisation (so-called "special rate solution"). The treatment of hidden reserves is clearly regulated. Other questions remain unanswered: In particular, the handling of value recoveries on depreciated participations after the change of status.
1. Old step-up 1.1. General
If, in the context of a change of the tax status, the previously privileged taxed company (holding, domicile or mixed company) chooses the option of applying the old step-up, it can disclose its hidden reserves accumulated during the privileged tax status as well as the created goodwill in a tax-neutral manner in the tax balance sheet. The disclosed hidden reserves can then be depreciated over a specific period (5-10 years, varying from canton to canton). Depending on the canton either a dynamic depreciation or a linear depreciation may be chosen. Dynamic depreciation would be subject to cantonal tax relief restrictions. The cantons can – to a certain extent – design the regulations according to their own needs and interest. Hence, the regulations may vary greatly between the cantons (while e.g. the canton of Zug provides for an overall tax relief restriction of 70%, the canton of Basel-Stadt applies an overall tax relief restriction of 40%).
1.2. Real estate
Not all hidden reserves can be disclosed and depreciated in a tax-neutral manner by applying the old step-up. If hidden reserves relate to real estate, a tax neutral step-up is not possible, since the realisation of such hidden reserves was already ordinarily taxable under the privileged tax status. The abolishment of the privileged tax status thus has no consequences with regard to the taxation of hidden reserves on real estate.
The step-up situation is different for participations. In the case of qualified participations, the difference in value between the market value and the tax investment costs will remain exempt for reason of the participation relief granted even after the change of status. Therefore, disclosure of these hidden reserves in a tax-neutral manner is not necessary. However, recovered depreciations (i.e. the difference between the tax investment costs and the lower tax book value) will generally be subject to ordinary taxation regardless of the fact that they would have not triggered any tax consequences at cantonal level under the prior holding status. In order to avoid that a later recovery in value would lead to ordinary taxation of the recovered depreciations, the investment costs or the tax book value of the participations concerned have to be adjusted: If the market value is higher than the investment costs, an increase in the tax book value up to the investment costs is justified. If, on the other hand, the market value is lower than the investment costs, the tax book value should be increased to the market value. In this case, the investment costs should also be adjusted to the lower market value for purposes of cantonal corporate income tax. This approach ultimately leads to different tax book values and investment costs of the concerned participations for the purposes of direct federal tax and corporate income tax at the cantonal level. Only a few cantons have explicitly opined on the possibility of adjusting tax book values and investment costs. In order to obtain clarity on the future tax treatment of recovered depreciations after the change of the holding status to ordinary taxation, it is highly recommended to contact the responsible cantonal tax administrations as quickly as possible and, if possible, to request a tax ruling confirming the future handling of corporate income tax in this area.
1.4. Time of disclosure of hidden reserves
With a few exceptions, most cantons require the disclosure of hidden reserves up to and including the last tax period of privileged taxation (in principle with the tax return for the business year 2019).
2. Special rate
As an alternative to the old step-up, it is possible to have the hidden reserves determined by means of an order by the competent tax administration. These hidden reserves are then subject to a reduced taxation during the following 5 years at the time of their realisation. If the hidden reserves are only realised after the five-year period, they are subject to the higher ordinary tax rate. What applies to the old step-up also applies to the "special rate"-solution: The special rate is only applicable, if the income was not taxable under the old law. Therefore, it is not possible to apply it to real estate. In contrast to the old step-up, the taxation of hidden reserves by means of the special rate solution is not subject to the cantonal tax relief restriction. Regarding the treatment of the recovered deprecations on participations, an analogous application of the rules on the old step-up seems justified.
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.