Tax-free repayment of hidden capital contributions

According to Art. 20 para. 3 of the Federal Direct Tax Act (FDTA) or the corresponding provisions in the cantonal tax laws, the repayment of contributions, premiums as well as grants to shareholders is to be treated in the same way as the repayment of share capital or nominal capital from an income tax perspective. This means that the repayment is income tax-free for the individual as shareholder and recipient of the payment. In practice, it has long been disputed whether the provision only covers the repayment of openly disclosed so-called capital contribution reserves confirmed by the Swiss Federal Tax Administration for withholding tax purposes by means of Form 170, or whether the provision also applies to so-called hidden capital contributions. In this regard, the Federal Supreme Court has provided clarity in a ruling dated March 17, 2023.

‍Subject matter

In the case to be decided by the Federal Supreme Court, the domestic B AG, whose sole shareholder was A, acquired a hotel property in Germany at a price equivalent to Fr. 6,851,382. Further costs were subsequently added to the acquisition price, resulting in a total acquisition price of Fr. 7,136,927. Notwithstanding this, the hotel property was only recognized in the accounts of B AG at the amount of Fr. 1,865,995. In the following years, the book value of the property was continuously adjusted and finally amounted to Fr. 3,426,930 at the time of the liquidation of B AG in 2015. Based on the income statement of B AG, gross proceeds in the amount of Fr. 5,546,357 were generated from the sale of the property in 2015.

For income tax purposes, the Cantonal Tax Office Nidwalden added an additional amount of approximately Fr. 2.2 million to A's private income tax for the tax year 2015 as income, arguing that the difference between the book value and the market value (sale price) of the property of B AG, which was apparently transferred back to A, did not constitute a capital repayment but qualified as a hidden profit distribution. A objected to this and argued that the amount qualified as a hidden profit distribution represented the liquidation profit resulting from the liquidation of B AG and was composed of hidden capital contributions. Within the scope of a private debt assumption, A had, parallel to the purchase of the property by B AG, redeemed certain mortgages on the property of B AG personally and free of charge vis-à-vis B AG, which allowed for the significantly lower book value compared to the purchase price, and thus made hidden capital contributions to B AG in relation to B AG.


The Swiss Federal Tax Administration (SFTA) is of the opinion that a formal accounting requirement is associated with the income tax exemption of the payment of capital contributions. Only capital contributions that are shown in a separate account, i.e. open capital contributions, can be repatriated tax-free, which is of interest in particular with regard to the security purpose of the WHT. In the literature, on the other hand, it is predominantly argued that, based on the wording of the law, the legal system and the history of Art. 20 (3) FDTA, both open and hidden capital contributions are covered by the corresponding provision.

This is also the conclusion of the Federal Supreme Court. According to its wording, Art. 20 para. 3 DBG does not require that the capital contributions be booked in a separate account at the distributing company. Due to the strict principle of legality in tax law, restraint is required in this respect, insofar as a taxable fact is to be enriched by requirements to the detriment of the taxpayer, which are not explicitly mentioned in the wording.

The SFTA, on the other hand, justifies its position in particular by Art. 5 para. 1bis of the Federal Law on the Withholding Tax (WHTA), which, similar to Art. 20 para. 3 FDTA, provides for an exception from the WHT for the repayment of reserves from capital contributions, but requires a separate accounting of corresponding contributions. Such an accounting requirement was also included in an original Federal Council draft of Art. 20 para. 3 FDTA. In this case, an exemption from income tax under Art. 20 para. 3 FDTA would also have been subject to the requirement that deposits of assets be shown separately in the commercial balance sheet and that the SFTA be notified of any changes.

The fact that in the course of the parliamentary deliberations it was ultimately decided to dispense with these additional requirements can be interpreted as an indication that the intention was not to trigger income tax for the shareholder even if the company had not correctly recorded the capital contribution. According to the Federal Supreme Court, this implies that the legislator did not want to link the legal consequences of Art. 20 para. 3 FDTA to the accounting requirement.


Based on the Federal Supreme Court's interpretation and assessment in this new decision, the tax exemption of the repayment of contributions, premiums as well as grants according to Art. 20 para. 3 DBG is not linked to the condition of a separate accounting of the contribution or there are no convincing reasons for such a condition. Contrary to the view of the FTA, Art. 20 para. 3 DBG can thus also be claimed with respect to hidden capital contributions that are not separately accounted for.

According to the SFTA, the new Jurisprudence applies solely for income tax purposes and not also for the WHT, as the wording of Art. 20 para. 3 FDTA differs from that of Art. 5 para. 1bisWHTA. The Withholding Tax Act explicitly requires that the capital contribution is openly disclosed and accounted for as such.

In this respect, at the time of repayment of hidden capital contributions, a WHT of 35% of the repayment amount must still be declared to the FTA and delivered or reported to the FTA. According to reports, a later refund of the WHT for repayments of hidden capital contributions is guaranteed for natural persons, provided that the general requirements such as the right of use and the declaration obligation are fulfilled. How the requirement of the regular declaration can be fulfilled in the future is currently still being clarified internally at the FTA and the cantonal tax administrations.


The Federal Supreme Court's ruling is to be welcomed in its thrust. However, in our opinion, it only provides superficial clarity. It remains unclear how the ruling relates to other provisions in income tax law and to the practice of the tax authorities in the case of repayment of capital contributions. For example, the relationship between the new Jurisprudence and the transposition of Art. 20a (1) (b) FDTA should be considered.

Furthermore, the effective benefit of Jurisprudence for taxpayers remains vague at present due to the continuing practice of the SFTA at WHT . In our opinion, tax planning opportunities could arise from the decision, especially in the case of underpriced transfers of real estate in cantons with a dualistic system, in which "hidden reserves" are usually transferred to a corporation.

Bucher Tax AG, tax consultancy, tax advisor, Lucerne
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