Indirect Partial Liquidation: Tax Treatment of Sales of Equity Interests

‍Key Points at a Glance
Capital gains from the sale of an equity interest held as part of a natural person’s private assets are generally tax-exempt under Swiss tax law. However, this benefit carries a significant risk of abuse. If a natural person sells their shares in a company and the target company subsequently distributes its accumulated reserves to the new owner so that the latter can directly or indirectly settle (part of) the purchase price, then, from an economic perspective, the seller receives a disguised dividend that would otherwise have escaped income tax. To prevent precisely this form of tax avoidance, Jurisprudence has developed Jurisprudence concept of indirect partial liquidation, which was incorporated into law as of January 1, 2007, through Art. 20a(1)(a) of the Federal Income Tax Act (DBG).

Context
: Article 20a(1)(a) of the Federal Income Tax Act (DBG) stipulates that the proceeds from the sale of a stake of at least 20 percent are also considered income from private movable assets, provided that, within five years of the sale, with the seller’s involvement, assets not necessary for business operations are distributed—assets that were already in existence at the time of the sale and were distributable under commercial law. The provision entered into force on January 1, 2007, thereby essentially codifying a practice previously developed by the Federal Supreme Court. Prior to its statutory codification, the tax administration had relied on the “economic approach,” under which proceeds from a sale were to be reclassified as taxable capital gains to the extent that they derived from the assets of the sold company. The Federal Supreme Court had confirmed this practice in various rulings but had not fully standardized the factual requirements. Article 20a(1)(a) of the Federal Income Tax Act (DBG) and the accompanying Circular No. 14 of the Federal Tax Administration (ESTV) dated November 6, 2007, conclusively regulated the requirements and legal consequences and established them as binding for the entire federal direct tax system.

The purpose of the provision can be traced back to a single fundamental distinction: proceeds that, from an economic perspective, constitute a distribution of reserves to the seller should be classified not as a tax-exempt capital gain but as taxable investment income.

These are the requirements for an indirect partial liquidation
According to Circular No. 14, the existence of an indirect partial liquidation requires the cumulative presence of seven elements.

The first element is the sale, that is, the transfer of an equity interest for consideration. In addition to a purchase, this includes an exchange as well as other forms of transfer for consideration. However, disposals that leave the seller no discretion are not covered by this provision.

The second element is the qualifying interest, which must amount to at least 20 percent of the share capital or stock capital of a corporation or cooperative. The 20 percent threshold is also met if multiple sales within a five-year period, when aggregated, reach this level (a so-called “staggered sale”), and likewise if multiple sellers jointly dispose of a corresponding stake, provided that a common intent among them can be demonstrated. In the case of a public tender offer, however, where shareholders make their decisions independently of one another, there is generally no common intent, which is why the requirement for a joint sale is not met.

The third element is the transfer of ownership: The interest must be transferred from the seller’s personal assets to the business assets of another person. This other person may be a natural person or a legal entity, with its registered office in Switzerland or abroad. This also includes so-called “voluntary business assets” under Art. 18(2) of the Federal Income Tax Act (DBG), provided that the equity interest is allocated to the business assets of a self-employed person following its acquisition.

The fourth element is compliance with the distribution deadline: The withdrawal of assets from the company must take place within five years of the sale. The period begins on the date of the binding transaction, which is generally the date the purchase agreement is signed. In the case of staggered sales, a separate deadline applies to each partial sale, which can significantly complicate the calculation.

The fifth element is the existence of a distribution or withdrawal of assets. The term is to be interpreted broadly and is not limited to formal dividends. This also includes hidden profit distributions, other benefits in kind, dividends in kind, loans from the target company to the new owner on terms not in line with market conditions, and security provided by the target company in favor of the acquirer. Under certain circumstances, corporate restructuring measures—such as a merger between the target company and the acquiring company—may also be considered withdrawals of assets if they are economically equivalent to a distribution to the acquirer.

The sixth element requires that the distribution originate from reserves that are distributable under commercial law or from assets of the target company that are not necessary for its operations. The relevant date for this assessment is the date of sale. The target company’s individual financial statements serve as the basis for this assessment. However, according to the practical guidance issued by the Zurich Cantonal Tax Office on December 16, 2025, in the case of group companies under unified management, the individual financial statements of the controlled subsidiaries must also be included; the assessment is made separately for each company (individual assessment). Ordinary dividends derived from profits generated only after the year of sale do not fall under this provision.

The seventh element—and one that is often decisive in practice—is the seller’s involvement under Art. 20a(2) of the Federal Income Tax Act (DBG). This involvement may be active or passive in nature. Examples of active cooperation include: loans from the seller to the buyer’s company to finance the purchase price, offsetting transactions between the seller and the buyer, security provided by the seller, and the transfer of control over the company prior to full payment of the purchase price. Passive involvement exists, in particular, when the seller sells the equity interest to a financially weak buyer whose financing plan is clearly based on the distribution of corporate assets, or when the seller is aware of a planned merger that will result in the withdrawal of corporate assets. It is noteworthy that complicity may also exist even in the case of a financially sound buyer, provided that the other circumstantial evidence is sufficiently strong. According to the practice of the Canton of Aargau, for example, seller loans in particular are scrutinized closely. These must be structured in accordance with market conditions and, in principle, must be repayable within seven years from the target company’s operating profits. Otherwise, this may be interpreted as an indication of a harmful withdrawal of assets or an indirect partial liquidation.

These are the tax consequences
‍Ifall the required conditions arecumulatively met, a portion of the sales proceeds is classified as taxable income from movable assets within the meaning of Art. 20(1) DBG (i.e., the sale is partially taxed as a dividend). The taxable amount is calculated based on the minimum of the following four values: the proceeds from the sale, the distribution amount, the reserves distributable under commercial law, and the non-operating assets of the target company. The smallest of these four values is always used. Consequently, there is no overtaxation beyond the proceeds actually received.

The allocation of income over time is based on the realization principle. Taxable investment income is allocated to the tax year in which the qualifying sale of the equity interest takes place. In the case of staggered sales, the income is allocated proportionally to the individual tax years based on the ratio of the proceeds from each partial sale to the total proceeds. If the harmful distribution occurs only after the tax assessment has become final, taxation is retroactively applied through a supplementary assessment procedure in accordance with Art. 151 et seq. of the Federal Income Tax Act (DBG).

Case Study
‍Anindividual holds 100 percent of the shares in an operating GmbH as part of his or her personal assets. The equity capital amounts to CHF 3 million, of which CHF 2 million consists of distributable reserves. The investment is sold at a fair market value of CHF 4 million to a newly established holding company. After the sale, the seller retains approximately 30 percent of the shares in the holding company. The holding company finances the purchase price through a seller’s loan. In subsequent years, it uses dividends from the GmbH to repay the loan. The seller was involved in the formation of the holding company and has contractually agreed that he will retain control over the GmbH’s funds until the purchase price has been paid in full.

In the present case, all seven requirements for indirect partial liquidation are met. There has been a sale for consideration of a qualifying equity interest. The equity interest is transferred from the seller’s personal assets to the holding company’s business assets. Since the seller retains only about 30 percent of the buyer holding company following the transaction, there is no transfer of assets. To the extent that the distributions occur within the five-year lock-up period and originate from reserves distributable under commercial law that were already in existence at the time of the sale, there is an improper use of funds. The seller’s involvement stems both from his participation in the formation of the holding company and from the contractual right of disposal reserved to him. The taxable investment income corresponds to the smallest of the four relevant benchmarks. In this example, it amounts to a maximum of CHF 2 million.

Conclusion
‍Indirect partial liquidationis a complex legal concept that must be examined in tax advisory services when natural persons sell their equity interests. The key question is always whether, from an economic perspective, the proceeds from the sale constitute a hidden distribution of corporate assets that would otherwise be received tax-free under the relevant provision. This issue must be considered even if there is no obvious intent to abuse the system. Even passive involvement on the part of the seller can trigger a tax liability. Before major share transfers, it is therefore advisable to obtain a binding ruling (tax ruling) from the competent tax assessment authority at an early stage in order to quantify tax risks and, where possible, minimize them through appropriate structuring of the sale.