Federal Supreme Court on the tax admissibility of fluctuation reserves

In a recent ruling (9C_625/2023), the Federal Supreme Court dealt with the question of whether fluctuation reserves formed as part of the market value accounting of securities can also be recognized for tax purposes. This ruling provides legal clarity, but has met with considerable criticism in practice.

Initial situation: fluctuation reserve neutralizes price gain

In this specific case, A. AG recognized its securities at market value in the 2019 annual financial statements - as in previous years. This valuation resulted in a price gain of around CHF 560,000. At the same time, the company increased the existing fluctuation reserve by the same amount, which neutralized the price gain in the income statement.

However, the tax office of the Canton of Zurich not only offset this increase against tax, but also the entire fluctuation reserve of over CHF 1.6 million. A. AG objected to this complete offsetting. The Zurich Administrative Court ruled that only the additional reserve formed in 2019 was not permissible for tax purposes. A. AG appealed against this ruling to the Federal Supreme Court. AG appealed to the Federal Supreme Court, which confirmed the decision of the lower court.

Tax recognition only if there is a specific risk

The Federal Supreme Court states in principle that the risk of losses on securities may be reflected in provisions or fluctuation reserves under commercial accounting law. However, such reserves are only permissible for tax purposes if they are based on a specific and measurable risk.

General market risks or the usual volatility of securities are not sufficient for a tax-effective provision. An exception may apply if a short-term sale of the securities is not possible for legal or economic reasons. A provision may also be justified under certain circumstances if price fluctuations have already occurred during the financial year. The decisive factor is always that a specific risk can be named and comprehensibly justified.

As A. AG merely argued with general market changes, the Federal Supreme Court found that there was no such concrete justification. The increase in the fluctuation reserve in 2019 was therefore not permissible for tax purposes.

Permissible under commercial law, but not recognized for tax purposes

The approach taken by A. AG is permissible under applicable commercial law. Anyone who reports their securities at market value in accordance with Article 960b paragraph 1 of the Swiss Code of Obligations (CO) may form a so-called fluctuation reserve to cushion price fluctuations. This is a lump-sum value adjustment, comparable to a generally accepted third of goods for tax purposes (for inventories) or a del credere (for trade receivables). This reserve is not a classic correction of an overvaluation, but serves in particular to smooth results.

The Swiss Code of Obligations does not stipulate a fixed amount for the fluctuation reserve. A. AG was allowed to neutralize the entire capital gain with a corresponding reserve under commercial law. This conformity was also not questioned by the Federal Supreme Court. Nevertheless, the Federal Supreme Court states that tax recognition is independent of this. Only if a securities portfolio is reported in the balance sheet at acquisition cost do unrealized price gains have no tax consequences. Anyone using market values, on the other hand, must expect an immediate tax burden unless there is a justified, i.e. measurable, fluctuation reserve.

Criticism of the Federal Supreme Court's Jurisprudence

The ruling of the Federal Supreme Court has been received critically by the majority of experts. According to scholars, it seems particularly contradictory that a valuation option provided for under commercial law can lead to a tax disadvantage. This is particularly the case when tax practice and the Federal Supreme Court continue to permit general value adjustments to inventories or receivables, even though there is no explicit basis in commercial law in this regard. The creation of an equalization reserve in accordance with Article 960b para. 2 CO should also actually create transparency. If this reserve is not recognized for tax purposes, tax law to a certain extent undermines the purpose of this provision.

Federalism is also causing displeasure. While some cantons recognize lump-sum provisions for fluctuations in value and these lump sums are apparently still protected by the Federal Supreme Court, the Federal Supreme Court now refuses to allow the tax assertion of a statutory fluctuation reserve in the canton of Zurich, which does not permit such a lump-sum solution. This does not appear consistent, as there is no cantonal autonomy with regard to this issue.