The new Capital Contribution Principle

Audit.Tax.Consulting.Corporate Finance.

Contents
Nominal Value Principle vs. Capital Contribution Principle Conditions to be met Recording of Capital Contribution Reserves Opportunities Timing may be crucial Next steps 3 4 6 7 9 10

The new Capital Contribution Principle

2011 Deloitte AG

Nominal Value Principle vs. Capital Contribution Principle

Equity structure and latent tax liability

Before 1 January 2011

Nominal Value Principle

As of 1 January 2011
Capital Contribution Principle

Share Capital / Common Stock (at par value)

Any repayment to the shareholder(s) out of the paid-in nominal capital is neither subject to Swiss withholding tax nor to Swiss income tax. Any payment of a corporations equity which is not a repayment of paid-in capital is subject to Swiss withholding tax (treated as dividend for tax purposes). At the level of Swiss resident shareholders such (re-)payment qualifies as income from participations and is subject to income tax. Participation exemption applies to qualifying corporate shareholders.

No changes

Share Premiums and other Capital Contributions

Any repayment of share premiums and other contributions into the capital conducted by the shareholder(s) after 31 December 1996 is not subject to withholding tax and no income tax is due at the level of Swiss resident shareholders. No changes

Other Reserves / Retained Earnings / Profit of the Year

The new Capital Contribution Principle

2011 Deloitte AG

Conditions to be met
Qualifying capital contributions

Generally qualifying Not qualifying

Parent Company

Individual Shareholder(s)

Only (openly disclosed) contributions from direct shareholders qualify for an income and withholding tax exempt repayment.

First Level Subsidiary 1

First Level Subsidiary 2

Second Level Subsidiary 1

Second Level Subsidiary 2

The new Capital Contribution Principle

2011 Deloitte AG

Conditions to be met
Disclosure requirements

Capital contribution reserves need to be disclosed in a separate account in the balance sheet; Any changes in that account are to be reported to the Swiss Federal Tax Administration; Any undisclosed reserves as well as other reserves remain subject to withholding and income tax (e.g., hidden capital contributions, contributions made by indirect shareholders or other group companies, reserves from retained earnings).

Before 1 January 2011

Share Capital Legal Reserves Other Reserves & Retained Earnings = Total Equity 1000 1400 1600 4000

As of 1 January 2011
Share Capital Legal Reserves Capital Contribution Reserves Other Reserves & Retained Earnings = Total Equity 200 300 1000 1100 500 1400 4000

Some details relating to the correct reclassification / re-booking of capital contributions made between 1 January 1997 and 31 December 2010 are still subject to interpretation and need to be thoroughly reviewed in the individual case.

The new Capital Contribution Principle

2011 Deloitte AG

Recording of Capital Contribution Reserves

Initial disclosure in the financial statements 2011

Legal Reserves

Before 1 January 2011: Including (i) general reserves and share premiums, (ii) reserves for own shares and (iii) revaluation reserves; After 1 January 2011: Share premiums obtained between 1 January 1997 and 31 December 2010 and the part of the reserves for own shares consisting of capital contributions need to be re-booked into the capital contribution reserves;

Capital Contribution Reserves

After 1 January 2011: Consisting of share premiums and other contributions from current or prior direct shareholders obtained since 1 January 1997 (capital contribution reserves connected to own shares have to be recorded in a separate account capital contribution reserves for own shares);

Other Reserves & Retained Earning

Before 1 January 2011: Including (i) statutory reserves and (ii) free reserves, the latter comprising contributions not linked to an increase in the nominal capital and not recorded as share premiums as well as retained earnings; After 1 January 2011: Including (i) statutory reserves (ii) other capital contributions not qualifying under the capital contribution principle (e.g., grand-parent contributions, contributions prior to 1/1/1997, etc.) and retained earnings.

The new Capital Contribution Principle

2011 Deloitte AG

Opportunities
Who may benefit from the new Capital Contribution Principle?

Examples for withholding tax free distributions out of a corporation's capital contribution reserves Foreign and Swiss shareholders Foreign corporate shareholders not benefitting from a 0% reduced treaty withholding tax rate; Foreign and Swiss corporate shareholders benefitting from a 0% withholding tax rate, but nevertheless aiming at achieving flexibility for potential future restructurings or disposals; Foreign corporate or individual shareholders not benefitting from a full tax credit for a remaining WHT on dividends; Individuals residing in Switzerland. Swiss distributing corporations Swiss corporations which went public after 31 December 1996; Swiss corporations which received any contributions in cash or kind from their direct shareholder(s) after 31 December 1996.

Switzerland Abroad

Corporate Shareholders

Corporate Shareholders

no income tax

no need to credit or claim for a refund of WHT

distribution of capital contribution reserves is exempt from WHT

Swiss Corporation

no need to withhold tax on distributions out of capital contribution reserves

The new Capital Contribution Principle

2011 Deloitte AG

Opportunities
Former transactions to be analyzed in detail

Group restructurings IPOs Capital increases Quasi-Mergers Incorporations Financial restructurings Migrations to Switzerland from abroad Share buy-backs followed by a later re-issuance Openly disclosed vs. hidden capital contributions Direct vs. indirect contributions

The new Capital Contribution Principle

2011 Deloitte AG

Timing may be crucial

Due dates to be met
Assumption: business years end at 31 December
early repayment from capital contribution reserves correct declaration of capital contribution reserves required in the financial statements for the business year ending on 31.12.2011

accumulation of capital contribution reserves 1.1.1997 31.12.2010

latest date of ordinary initial declaration is 30 days after AGM

31.12.2012

1.1.2011 earliest date of declaration

latest date of declaration is 30 days after early repayment

period of ordinary initial declaration (OID)

annual general shareholders meeting (AGM)

declaration in the tax return 2011

Capital contribution reserves accumulated between 1.1.1997 and 31.12.2010 need to be separately recorded in the financial statements prepared for the business year ending during the calendar year 2011 (i.e., financial statements 2010/2011 or 2011); The ordinary initial declaration (OID) with the Swiss Federal Tax Administration (SFTA) has to take place within 30 days after the financial statements were approved by the annual general shareholders meeting (AGM) ; For the OID the detailed disclosure of the entire equity as included in the Swiss GAAP financial statements is to be based on Form 170 including all relevant enclosures as well as on the Excel-Sheet Capital Contribution Principle; Any repayment prior to the OID must be based on a shareholders resolution, and any change in the capital contribution reserves since 1 January 2011 must be declared with the SFTA latest within 30 after the early repayment. For corporations closing their business year 2010/2011 already in in the first half of 2011 timing is crucial!
9 The new Capital Contribution Principle
2011 Deloitte AG

Next Steps
How we can support your company

high-level analysis

detailed analysis and determination of exact amount

correct recording of capital contribution reserve

declaration with the Federal Tax Administration

In a first phase, we would recommend performing a high-level analysis of all relevant transactions and to roughly determine potential capital contribution reserves for all group companies concerned.

In this second phase, we would suggest to assist you with the identification of all capital contributions made between 1 January 1997 and 31 December 2010 and determine their exact amount for all group companies concerned.

During the process of the preparation of your annual financial statements we may also support you together with our colleagues from the audit advisory team to correctly record and disclose the capital contribution reserves as requested by the Federal Tax Administration.

Finally, we would be pleased to assist you with the timely ordinary initial declaration of the capital contribution reserves including also a potential prior declaration of an early repayment as well as the subsequent declaration of changes to the reserves in future years based on Form 170 and the electronic filing of the Excel-sheet Capital Contribution Reserves including all enclosures.

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The new Capital Contribution Principle

2011 Deloitte AG

Your team to contact

International Corporate Tax

Reto Savoia
Partner | International Corporate Tax Tel/Direct: Email: +41 (0)44 421 63 57 rsavoia@deloitte.ch

Audit & Advisory

Philippe Rechsteiner
Partner | Audit & Advisory Tel/Direct: Email: +41 (0)44 421 62 42 prechsteiner@deloitte.ch

Kerstin Heidrich

Andreas Steiner

Senior Manager | International Corporate Tax

Tel/Direct: Email: +41 (0)44 421 63 01 kheidrich@deloitte.ch

Senior Manager | Audit & Advisory

Tel/Direct: Email: +41 (0)61 285 12 77 ansteiner@deloitte.ch

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The new Capital Contribution Principle

2011 Deloitte AG

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Deloitte AG is a subsidiary of Deloitte LLP, the United Kingdom member firm of DTTL.
Deloitte AG is recognised as auditor by the Federal Audit Oversight Authority and the Swiss Financial Market Supervisory Authority. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte AG would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte AG accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. 2011 Deloitte AG. All rights reserved.
2011 Deloitte AG