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Tax and Legal
David Merz | Founding Partner
Zurich, September 17, 2023
Since 1 January 2020, the tax privilege for Swiss holding companies has ceased to apply. The following blog explains how this came about, when we speak of a holding company at all and the range of advantages and disadvantages that holding companies continue to offer.
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A holding company is not a form of company such as the AG or the GmbH. Rather, it is a form of organisation whose requirements had to be met in order to receive tax advantages, i.e. the so-called holding privilege. This is written in the past tense because the holding privilege no longer exists in Swiss tax law.
In many countries, the said tax relief was not welcomed and was therefore described as “no longer accepted internationally”. With the adoption of the bill on tax reform and AHV financing (also called “horse-trading” due to the unpopularity of the amendment), the tax privilege was abolished as of 1 January 2020. An explanation of these past regulations is consequently unnecessary.
From a company law perspective, the existence of a holding company is relevant with regard to the statutory capital and profit reserve: According to Article 671 CO f., the legal capital reserve may already be paid back to the shareholders if the legal capital and profit reserves exceed 20 per cent of the share capital entered in the commercial register.
The holding company in Switzerland is a so-called umbrella company. According to the classic definition, the holding company must hold substantial interests in corporations or cooperatives, while interests in partnerships are excluded. Short-term or minor holdings do not fulfil the conditions of a holding company. In the long term, about two-thirds of the balance sheet assets must consist of participations or two-thirds of the income must come from the participations.
Secondary activities such as asset management, business or group management functions and foreign operations are permitted. However, the holding company may not engage in commercial or industrial activities as a manufacturer or supplier of products, intellectual property rights or services.
Since, as already mentioned, the tax privilege has ceased to exist, this classic definition for maintaining the holding status is probably only relevant with regard to the also mentioned regulations concerning capital and profit reserves. It will have to be examined in each individual case to what extent these requirements are still relevant at all.
The holding company is not precisely regulated in Swiss company law, as already mentioned, which makes it flexible in terms of its legal form. In most cases, a holding company is a corporation (AG, GmbH, etc.) or a cooperative. In practice, a distinction is made between pure holding companies, which buy, sell and manage participations, and mixed holding companies, in which participations form the main part of the company’s purpose.
Holding companies come in many different sizes. Both international companies that unite a large number of subsidiaries under one roof and an entrepreneur who wants to keep the holdings and their earnings in only two operating companies “under one roof” can set up a holding company.
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The elimination of the largest and probably most relevant part of the tax advantages of a holding company in Switzerland does not affect the other, mostly practical advantages. These can vary depending on the purpose pursued with a holding company:
By establishing a holding company, shareholders can distribute income to the holding company. The dividends do not go to private individuals at this time and therefore do not trigger higher income and wealth taxes.
To a certain extent, the profits are temporarily stored in the holding company. The holding company can thus be used to supplement income at a later date by distributing dividends, which can then be used to supplement a retirement pension, for example.
It should be noted that these distributions are then subject to ordinary dividend taxation at the time of distribution. It is also important to note that since January 1, 2020, full capital tax has been payable on the assets held in interim storage.
Cash and cash equivalents that are not required for operating companies and do not fall under the legally prescribed reserves can be pooled at the holding company.
Depending on requirements, they can then be used by another operating company. In the event of the bankruptcy of an operating company, these funds are not part of its liquidation assets.
Depending on the situation, owners of an operating company may pursue the goal of keeping the company and its assets lean. This may be with a view to a sale or to minimize business risks. In such cases, a so-called sister company can be founded, which takes over certain assets. The sister companies are in turn combined under the holding umbrella.
Furthermore, the establishment of a holding company also retains the advantage of being able to use the additional name of the holding company in external dealings, for example. The frequently cited advantage that employees of the subsidiaries may act more efficiently and responsibly, as their work has a more direct influence on the results of the subsidiary, also remains unaffected.
With regard to holding companies in Switzerland, disadvantages must be considered with regard to administration as well as in connection with taxation.
It seems obvious that the administration of a holding company means additional work for the owner. Even a company with pure holding activities is subject to the same legal requirements as a company that is actually operationally active in Switzerland. It should therefore be noted that in addition to the companies’ business activities per se, a large number of other tasks will arise.
The decision to acquire or manage shareholdings in companies through a holding company should also depend on whether the shareholding is to be sold later. A sale by the holding company may have tax disadvantages. The proceeds obtained from the sale of the shares are only tax-free if they go to a natural person. In the case of a sale by the holding company, both a capital tax and a profit tax are incurred since the reform. Furthermore, the purchase price flows into the holding company, from where it can only flow to the shareholders as a taxable dividend. Once a subsidiary is owned by a holding company, a tax-free capital gain can only be realised if the holding company itself is sold.
Even since the tax reform has been in force, setting up a holding company can be attractive in terms of the advantages listed. However, there are a number of considerations to be made, particularly with regard to the tax burden. The amount of tax payable on a holding company is likely to have changed since the reform and the answer to the question of whether a holding company is the optimal solution may be different since then. For the inexperienced, it may be beneficial to consult a tax advisor, as tax law in Switzerland is very complex.
The establishment of a holding company in Switzerland needs to be considered…
We are your partner with regard to the possible establishment of a holding company. With our experience, we can assess whether the advantages or disadvantages outweigh the disadvantages, taking into account tax law and other factors. We analyse all the peculiarities of your company and work out the best solution.
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