Please find below some frequently asked questions about the Capital Contribution Principle:
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Benefits of the Capital Contribution Principle

1. Who benefits from the introduction of the capital contribution principle?
There are advantages both for companies as well as their shareholders (refer to questions 2 and 3)


2. What advantages does a shareholder have from the introduction of the capital contribution principle?
Individuals who are resident in Switzerland no longer have to pay income tax on redistributions of contributed capital (e.g. share premium). Furthermore, the company making the distribution no longer has to withhold any tax on such distributions. Refund or notification procedures are therefore dispensed with. Apart from dispensing with the refund procedures, for foreign shareholders, potentially non-refundable withholding tax liabilities are also no longer incurred.


3. What advantages does a company making a distribution have from the introduction of the capital contribution principle? 
Since 1 January 2011, qualifying reserves can be distributed to shareholders free of withholding tax (and for shareholders resident in Switzerland income tax exempt). The company can therefore obtain one of the following advantages:


  • It could for example distribute smaller dividends. As the receiving shareholder does not have to pay tax on the dividend paid out of capital reserves, if calculated correctly, he remains in the same position as before the introduction of the capital contribution principle: The company can therefore continue to meet the dividend expectations set by shareholders at the same time as obtaining additional liquidity for investments.
  • Alternatively, the company could distribute the same amount as before. Shareholders then obtain a higher dividend yield without drawing additional funds from the company. As the shareholders now receive a higher net dividend than before the introduction of the capital contribution principle, shares of the company become more attractive.

Companies that may benefit from the Capital Contribution Principle

4. The shareholders of our companies are all legal entities domiciled in Switzerland. As the participation deduction applies on dividend income and withholding tax is dealt with the notification procedure we do not have to take any action, right?
Companies domiciled in Switzerland can claim the so-called participation deduction on dividend income if they hold more than 10% of another company or if the participation has a market value of more than CHF 1. This results in dividend income virtually being tax exempt. Furthermore, as withholding tax can generally be dispensed through the so-called notification procedure (i.e. it does not actually have to be paid), at first sight, there is no need for action.


The initial analysis and disclosure of reserves from capital contributions is, however, a one-off opportunity and must be disclosed at the latest in the closing balance sheet of the business year 2011. In addition they have to be reported within 30 days after the approval of the corresponding balance sheet to the Federal Taxation Administration. Reserves which have not been disclosed to the Federal Tax Authority by this date cannot benefit from the privileged tax treatment in the future. Therefore, if the above mentioned shareholder structure would change in the future, having disclosed reserves from capital contributions could suddenly become important:


  • It is conceivable, that a shareholder sells his participation to a foreign buyer. Withholding tax on dividends may then be due subsequent to the sale if the notification procedure can no longer be applied. Depending on the applicable double tax treaty, if a refund is not possible, a final tax liability may even be incurred. In this case it has to be assumed that the buying company would take such future tax liabilities into consideration when determining the value and hence reduce the purchase price.
  • It may also be possible that the company considers getting listed on a stock exchange at some point in the future. As a large number of shareholders would then potentially be individuals, reserves from capital contributions would also gain an increased significance (refer to question 2).
  • Management Buy Out (refer to question 2)
  • Restructuring (merger, demergers, merger-like transactions, etc.)

In any case, the measures taken today are likely to have an impact for an unspecified period of time. It is therefore important that not only today's position is considered but also possible future scenarios.


5. We are a group with a large number of subsidiaries. Presumably we only have to determine the reserves from capital contributions of the ultimate parent company (holding company), right?
As set out in question 5, in most cases it cannot be said with certainty that the group structure will remain unchanged forever. Restructurings, Management Buy-Outs or takeovers may have a significant impact on the group structure. Such scenarios can suddenly significantly change the importance of having reserves out of capital contributions even for smaller subsidiaries. We therefore recommend that reserves out of capital contributions are determined for all companies domiciled in Switzerland.


Furthermore, it is conceivable that a subsidiary has significant reserves from capital injections which may be freed up for shareholders as part of a restructuring. This is another reason why we recommend considering an analysis for all group companies.

Action to be taken by companies

6. So what do we actually have to do?
For each company, positions within reserves from 1 January 1997 have to be analyzed in order to determine which reserves were derived from capital contributions and which were derived from other sources (e.g. earned profits). The qualifying reserves must be disclosed at the latest in the closing balance sheet of the business year 2011 and have to be disclosed within 30 days after the approval of the corresponding balance sheet to the Federal Tax Authorities for their examination and confirmation. Additionally, the guidance of the Swiss Federal Tax Authorities appears to require a disclosure of capital contribution reserves in one single account within the legal reserves (cf. Question 14).


7. The determination of reserves appears to be a long-winded process as for each company more than 10 years of history have to be considered.
Depending on the situation, it is true that the analysis may be time consuming. However, KPMG already has experience in performing such projects and has developed a step-by-step methodology which enables the work to be done efficiently. Furthermore, there is a direct benefit derived from the time and effort spent identifying capital contributions, which should be reflected in the advantages discussed in questions 2 and 3.


8. We do not have the resources internally to do this analysis. What costs do we have to expect if we get specialists at KPMG to do this for us?
Depending on the quality of available information and the complexity of transactions, outsourcing can result in different levels of costs. Our specialists are, however, well aware of the concepts and have already supported a number of companies with their analysis. The determination of reserves from capital contributions has to be considered as an investment as it can result in significant financial advantages in the future.


9. We understand that reserves from capital contributions which were injected after 1 January 1997 are privileged. However, according to the Swiss Code of Obligations we only have to keep records for 10 years. How can we still provide sufficient documentation?
KPMG specialists can also help where documentation is not complete. Although it is clearly more complex to determine reserves from capital contributions without all the records, it is not impossible in all cases.


10. Currently, due to our shareholder structure, this topic is not relevant to us. Could we just declare all reserves as reserves from capital contributions and then reconsider the topic when it actually becomes relevant?
An initial declaration has to be submitted to the Federal Tax Authorities 30 days after the approval of the corresponding balance sheet to the Federal Taxation Administration at the latest. A subsequent declaration if dividends are eventually distributed is not possible. As the tax payer is responsible to provide the evidence on the amount of capital contribution reserves, we recommend that the initial declaration is done correctly in every case.


11. Our company has had no capital increases or capital contributions since its incorporation. This means that this topic is not relevant to us, right?
Not only capital increases involving an issuance of new shares qualify as capital contributions under the new law. Rather all increases in reserves e.g. through loan waivers should be analysed carefully. Furthermore, past restructurings such as mergers or demergers could have had a significant impact on the amount of reserves from capital contributions without clearly appearing as such. It would therefore be recommendable that even companies which do not appear to be complex perform an initial analysis to establish whether a need for action exists.


12. Has the practice already been definitely confirmed?
Yes the Federal Taxation Administration has ruled out the procedure in the circular letter 29. In practice a number of questions still remain.

Technical questions related to the Capital Contribution Principle

13. Does the term share premium ("agio”) as defined in commercial law automatically equate to the term "reserves from capital contributions”?
No, the term "reserves from capital contributions” is solely a tax technical term which does not necessarily equate to the term share premium ("agio”) as set out in commercial law.


14. How do reserves from capital contributions have to be disclosed in the balance sheet of the financial statements?
Companies should differentiate between capital contribution reserves and other reserves in the balance sheet of their financial statements. Furthermore, according to an announcement, the Swiss Federal Tax Authorities appear to demand the disclosure of reserves from capital contributions in a single account, which has to be maintained within legal reserves. 

Hence, there might be need for action already today with regard to the upcoming general meeting for the business year 2010, such that a transfer from free reserves to legal reserves can be completed if needed and the disclosure requirement in the balance sheet 2011 can be fulfilled as mentioned above.


Do you have any further questions?
Do you have any further questions about the capital contribution principle and its impact on your company and shareholders? Please do not hesitate to contact KPMG's specialists. We are happy to discuss the next steps with you to achieve maximum benefit from the introduction of the capital contribution principle.


Peter Uebelhart

Peter Uebelhart

Head of Tax

+41 58 249 42 24