Tax consequences of share buybacks

It can be advantageous for a stock corporation to buy back shares into circulation for various reasons. It can, for example, increase the return on equity, give a positive valuation of share buybacks by the stock exchange or ward off undesirable share purchasers. There are a number of provisions to be observed in this regard, which have tax consequences for sellers of shares as well as for stock corporations. If you have any questions regarding corporate tax law, please contact one of our tax lawyers.

According to Art. 659 CO, the acquisition of one’s own shares is limited to 10% of the company’s capital. The 10% limit is determined on the basis of the share and participation capital, as it was registered in the commercial register. The share buyback limit of 10% may be extended to 20% in exceptional cases. This is the case if shares are repurchased for the purpose of warding off undesirable share purchasers. For the first 10%, there is no holding period restriction for the company, pursuant to the CO, regardless of the reason for the acquisition. For the 10% beyond that, which may only be acquired to restrict transferability, there is a two years limit. Otherwise, the capital reduction is destroyed.

TAX CONSEQUENCES

Pursuant to Art. 4a of the Swiss Withholding Tax Act (Verrechnungssteuergesetz), the repurchase of shares constitutes a partial liquidation. It is irrelevant whether a capital reduction is subsequently carried out. Accordingly, only the excess (the part of the purchase price which exceeds the nominal value of the shares) is subject to withholding tax. According to the Federal Supreme Court, a distinction is made according to the type of liquidation concerned. Differentiated within forms of partial liquidation is for example, the immediate partial liquidation in the case of a repurchase exceeding the limits of 10% or 20%. In this case, the tax consequences already arise at the time of the acquisition. By contrast, the indirect partial liquidation is concerned with the non-compliance of the holding period limit. As already mentioned, this period spans two years for the 10% after the initial 10%. According to the VStG, there is an additional restriction for the initial 10%. Thus, after six years, the illusion of a partial liquidation applies.

In accordance with the provisions for the withholding tax laws, the tax is to be passed on to the selling shareholder. The case of a share buyback is unique, however, since it is not known until the end of the holding period whether any tax is due at all. Therefore, the tax can only be passed on to the seller at this point in time.

For an individual who has held the shares as private assets, the net proceeds (the difference between the sale price and the nominal value according to the nominal value principle) generally constitute taxable capital gains. Income tax is payable on this. However, the tax does not apply if the share buyback is within the limits of the holding period restriction. In comparison, if the shares are business assets, they are only taxed on the difference between the book value and the proceeds from the sale (the book value principle). For shares held as business assets, the provisions of the holding deduction must also be observed.

In the case of any ambiguities in the area of corporate tax law or explicitly for the share buyback, our lawyers for tax law will be glad to help you.