Income tax and treasury shares
Since the revised accounting law came into force in 2013, repurchases of treasury shares are economically equivalent to a capital reduction or distribution to shareholders. The Board of the Swiss Tax Conference ("SSK") previously took the view that treasury shares are assets regardless of their treatment under commercial law and that book gains or losses must therefore be recognized for tax purposes. In a recent ruling (BGer 9C_135/2023 dated June 6, 2024), the Federal Supreme Court has now clarified how treasury shares must be treated for profit tax purposes.
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Initial situation in the Federal Supreme Court ruling of June 6, 2024
A.AG is a listed holding company in the canton of Zurich and has acquired treasury shares. After a holding period of three years, A.AG sold the treasury shares to its employees and recognized the positive difference between the acquisition cost and the allocation value in the statutory capital reserves with no effect on income and declared this accordingly in the tax return.
The Zurich cantonal tax office objected to this procedure and added the positive difference to the taxable profit. After the objection of A.AG. and the appeal to the Tax Appeal Court were unsuccessful, the Zurich Administrative Court ultimately followed the view represented by A.AG. The Federal Tax Administration ("FTA") lodged an appeal against this with the Federal Supreme Court.
Dispute and considerations of the Federal Supreme Court
Under commercial law, repurchased treasury shares are recognized as a negative item in equity. This negative item is reversed when the shares are reissued to employees. The difference between the acquisition cost and the allocation value is recognized directly in equity in accordance with the new statutory regulations.
In its appeal, the FTA demanded a deviation from the provisions of commercial law and thus a breach of the principle of authoritativeness. In its grounds, the FTA referred to the SSK analysis and put forward Art. 58 para. 1 let. c) DBG as a correction standard, according to which income not recognized in profit or loss must also be included in the taxable net profit. In addition, the FTA pointed out a systematic tax connection between profit tax and income tax and WHT (Art. 58 para. 1 lit. c DBG, Art. 4a para. 2 VStG and Art. 20 para. 1 lit. c DBG).
The central question was therefore whether the proceeds from the reissue of repurchased treasury shares as part of the employee participation program constituted taxable capital gains or whether they should be treated as a tax-neutral capital contribution.
The Federal Supreme Court is of the opinion that Art. 58 para. 1 let. c) DBG does not apply, as no "income" arises from the reissue of treasury shares. Furthermore, there is no asset under commercial law, which is why the reissue of treasury shares cannot be considered a capital gain. Finally, it also considered the link between WHT or income tax on the one hand and profit tax on the other to be too weak to break the authoritative principle for this reason. Rather, the reissue of treasury shares was a tax-neutral capital contribution transaction pursuant to Art. 60 lit. a DBG.
Conclusion
This decision has now clarified an important fundamental issue. Nevertheless, there are still unresolved issues in connection with the tax treatment of treasury shares, in particular the application of the so-called capital contribution principle.
