Participation deduction on capital gains

Until now, the question was open under which circumstances the participation deduction can be claimed on capital gains when selling a participation of less than 10 %. The application of the rule has been discussed again and again in the doctrine, but has not yet been decided by the highest court.

A listed stock company B. AG located in the canton of Zug, which is a wholly-owned subsidiary of the A. AG, also held, inter alia, 3.93% of the shares in the D. AG, also located in the canton of Zug, in September 2010. In the following year, the B. AG increased its shares in the D. AG, which finally led to a shareholding quota of 11.75%. On 13 September 2011, the B. AG sold the entire package of the D. AG's shares at a profit to an independent hedge fund.

In June 2012, the A. AG absorbed the B. AG and immediately acted as legal and fiscal successor. Thereupon, the A. AG applied for the participation exemption for the 3.93% of the shares which the B. AG held for more than a year. The cantonal tax administration denied the participation exemption with the reason that not 10% of shares were held in the D. AG for at least a year. Upon the objection of the A. AG however, the participation exemption was granted nevertheless. The FTA's legal means brought against the decision on the appeal were dismissed by the administrative court Zug, because the minimum amount of holding and minimum shareholding period are not connected according to the administrative court's view.

This ruling was appealed by the FTA in front of the Federal Court. The Federal Court approved the appeal with its decision from February 22nd 2016.

The following explanations show why the Federal Court took this decision:

In the case at hand, the question is if the required conditions of a one-year shareholding period and a 10% holding quota in Art. 70 Para. 4 lit. B DBG have to be met cumulatively in order that the participation exemption can be claimed, or if the conditions have to be met individually.

Both lower authorities and the predominant teaching consider that the wording of Art. 70 Para. 4 lit. is not clear. According to this opinion, the participation exemption should be granted for the 3.93% share in the case at hand. The Federal Court considers the wording to be clear and does not follow the view of the lower authorities and the predominant teaching. According to the Federal Court, the one-year shareholding period and the shareholding quota of 10% are criteria which have to be met cumulatively. Additionally, the minimum shareholding period regarding the sold shares, which have to amount to at least 10%, has to be complied with without exception.

Therefore, a divestment gain is subject to the exemption participation when a stock corporation or a cooperative holds a minimum quota of 10% at the time t0 and sells these at the time t1, whereby at least a year lies between t0 and t1. But if the corporation holds less than 10% and buys the missing shares, so that it can sell at least 10% at the time t1, the required base is lacking and therefore it doesn't fall under Art. 70 DBG.

Critical remark

The Federal Court's justification is partly unsatisfying because it leaves the question, as to whether the shareholding period also refers - next to the shareholding quota of 10% - to the sold shares themselves, unanswered. In this respect it remains unclear if a corporation holding shares in the amount of 10%, which buys additional shares shortly before divestiture, is granted the full amount as participation exemption or not. Therefore, it would have been an advantage if the Federal Court had explained the base model in such a manner, that also differently positioned cases would have been clarified.