Posts in "Corporate Law"

Capital Band under Swiss law

As part of the “Major Company Law Revision” Swiss limited companies, as well as corporations, have the opportunity to introduce a so-called capital band into their articles of association (art. 653s-653v CO).  

So what are the possibilities the new capital band will bring to the table?

The capital band gives authority to the Board of Directors of a limited company to gather for a general meeting in order to pass a decision to raise or decrease the ordinary capital share registered in the commercial register. This can be done for a period of five years at most, within a bandwidth of up to 50% (meaning the capital share could be raised up to 150% or decreased down to 50% from the initial amount).

Conditions and limitations of the capital band

In order to pass a decision at a Board of Directors’ general meeting about the capital band, a qualified majority is required, pursuant to article 704 paragraph 1 no. 5 of the Swiss Code of Obligations (A resolution by the general meeting requires at least two-thirds of the voting rights represented and an absolute majority of the nominal value of shares).

In all cases, the Board of Directors cannot decrease the capital share below CHF 100,000, which is the legal minimum for Ltd.

Also, the raise or decrease of capital share is allowed for a period of a maximum of five years.

If a company’s article of association provides a capital band with the option to decrease the capital share, such a company is obliged to have its annual financial statements audited on a limited basis. It is no longer possible to waiver the limited audit for purposes of creditor protection. Companies with capital bands that only allow the Board of Directors to increase the share capital, still have the right to waiver the limited audit.

Rules for combining the capital band with existing capitals

The existing share capital retains validity until expiration but can’t coexist with the capital band. However, when a capital band is in place, the existing authorized share capital has to be revoked.

Conditional share capital is a different situation. When a capital band is introduced, two options are possible, it can remain valid together with the capital band, or become an integral part of it.

In cases where the general meeting passes an ordinary increase or decrease of the capital share, or the currency of the capital share is changed for the period of the capital band’s existence, then the article of association has to be amended accordingly.

Taxation of the capital band

The tax assessment of the capital band (especially with respect to stamp duty and the repayment of capital contributions reserves) is only carried out at the end of its term after a net assessment of any increases and reductions.

A new requirement for the notes to the annual financial statements is that all capital increases and decreases made by the board of directors within the capital band should be included unless this information can already be derived from the balance sheet or income statement (article 959c paragraph 2 no. 14 Swiss Code of Obligations).

Overview of the Insurance Business in Switzerland

Foreign investors can find an attractive business environment in Switzerland. The government encourages foreign investment through economic policies and laws such as comparably lower taxes and an extensive network of trade treaties to circumvent double tax schemes with European nations and other countries globally.

Switzerland has easy access to the European market through its dynamic innovation, political and monetary stability, and central position in Europe. Switzerland has clear and straightforward regulations with a friendly regulatory and tax environment.

Swiss companies hold a dominant position in the services field, especially in private banking and insurance. Insurance is a complete and profitable market in Switzerland. The Swiss insurance system is robust, allowing for a range of products and prices. 21% of the average Swiss citizen’s budget goes to insurance- a higher percentage than in other countries.

Most noteworthy is that Swiss insurance companies make more than half their income abroad. Switzerland is the leading European exporter of insurance.

Types of Insurance Legally Required in Switzerland

Health Insurance

It is mandatory to sign health insurance (unless you are an international official, diplomat, or family member). 90% of basic medical services and hospital expenses are covered by mandatory medical insurance. Visitors spending longer than 3 months in Switzerland must arrange health insurance within their first 90 days.

There are also circumstances in which someone not living in Switzerland must get Swiss insurance. Included in this are EU and EFTA citizens who benefit exclusively from a pension in Switzerland and live in the EU, Iceland, or Norway (this applies to family members who are unemployed as well). This also applies to Swiss citizens living in Iceland, Norway, or the European Community.

Travel Insurance

Travel insurance can be basic (including illness, accidents, or sports injuries) to extensive (including loss, theft, luggage damage, abroad departure cancellation, and airline bankruptcy).

Switzerland is also part of the European health insurance equivalence program. This means if you are on a temporary journey to a member country, you get urgent treatment as if you were a local.

Life Insurance

Life insurances cover disability and death risks and can stand in as a provision for old age. There is a difference between individual insurance and collective insurance. The former is a private pension, while the latter is an occupational pension. Employers or pension funds will often provide it as a benefit.

Home Insurance

Building and fire insurance is the building owner’s responsibility and is compulsory.

Personal property insurance includes insurance against fire, flood, and other major disasters. The insured amount depends on people living together and the number of rooms. Each insurance company has its own recommendations dependent on these criteria.

Car Insurance

Basic third-party cover insurance covers damage to third parties caused by the insured vehicle. It is mandatory and regulated by law. This covers physical and material damage and loss of income after an injury. It also protects the insured’s legal interests in the event of unmeritorious claims, covering expert and legal fees. There is also the option to add full insurance, comprehensive or semi-comprehensive, to cover damage to the insured car.

Registering an Insurance Company in Switzerland

Steps to registering an insurance company in Switzerland:

  • Choose a trading name for your company
  • Choose a business structure to represent this company
  • Open a bank account and deposit a minimum capital
  • Notarize documents for setting up the company
  • Submit documents for setting up the company to the Commercial Registry
  • Register company with relevant tax authorities

Insurance is Booming in Switzerland

Switzerland has a rich and vibrant insurance business. This business is far-reaching and conducive to growth on a global scale.

New Swiss Company Law: Capital Loss, Insolvency, and Over-Indebtedness

The new Swiss Company Law is coming into force on January the 1st 2023, and it will bring several novelties regarding capital loss, insolvency, and over-indebtedness.

  • Monitoring the solvency

Monitoring the solvency is mandatory. Companies need to monitor both, the liquidity, as well as the balance sheet regarding a possible loss of capital. The board of directors must act if their company is at risk of going bankrupt. Further measures must be taken if necessary to restructure the company, or such measures must be proposed to the general meeting of shareholders if they are within their jurisdiction. 

Monitoring the liquidity continuously is important. The draft of the law, though, specifies that a liquidity plan is not required. Liquidity is not mandated to be monitored or analyzed beyond a specific timeframe in the law. There was a suggestion that a company should undergo an ordinary audit every six months or every twelve months in the case of companies that are required by law to do so. The suggested time interval should nevertheless serve as a guideline.

  • Audits on the preliminary financial statements

When a company has a capital deficit, a licensed auditor must conduct a limited audit of the last annual financial statements before the annual general meeting of shareholders approving them if there are no elected auditors in place. A board of directors needs to make sure the economic situation does not worsen than what has been presented to them. They must appoint a licensed auditor. The board of directors may waive this auditing requirement if it applies for a debt-restructuring moratorium. 

The board of directors must as before, immediately prepare preliminary financial statements at going concern values and liquidation values if there is reasonable concern that the company’s liabilities are not covered by its assets, that is if the company is over-indebted. In practice, the interim financial statements at liquidation values can be waived as long as the ongoing concern assumption is made. In addition, the consolidated financial statements carrying concerned values do not show any overindebtedness. 

A licensed auditor must be appointed by the board of directors to audit the interim financial statements unless the board elects auditors to do so.

  • Bankruptcy

The board of directors must inform the court, which will initiate bankruptcy proceedings if the company is over-indebted according to both interim financial statements.

There is no requirement for the court to be notified if creditors defer or subordinate their claims (including interest claims) to the extent of overindebtedness.

In connection with the bankruptcy process, it is now explicitly stated that the claims of creditors whose claims have been subordinated behind all other creditors are not to be included in the calculations of the company’s losses. By amending this provision, the Federal Supreme Court intends to correct its case law, which suggests that a bankrupt company’s board is responsible for subordinated claims. 

The court notification may also be omitted in cases where there is a realistic prospect that the over-indebtedness can be repaid within a reasonable time, but no later than 90 days after the audited interim financial statements are available, and if there is no additional jeopardy to the claims of the creditors. In practice, the matter of notifying the court of bankruptcy is frequently raised, and this clarification is very welcome.

Coming into Force on January 1st – What Will the New Swiss Company Law Bring?

Basically, the company law must be adapted to the current economic climate. A number of provisions found to be impracticable under the current law will be amended or repealed, as well as shareholder and minority rights.

What will be the most important changes? 

·               Capital regulations will be more flexible

The share capital can be denominated in the following currencies: USD, EUR, GBP, or JPY if it is essential for the business activities of the company in that currency. It is acceptable for a share to have a nominal value less than 1 cent as long as it is greater than zero. In place of the authorized capital increase, the board of directors can increase or decrease the share capital within a range using a statutory instrument called the capital band, which is valid for a maximum of five years.   

·               Simplified general meeting process

The general meeting will be able to be held virtually or abroad. During the Corona pandemic, the COVID 19 Ordinance 2 introduced the possibility of holding virtual general meetings, while COVID 19 Ordinance 3 extended it until the new company law entered into force. Under the new company law, if a virtual general meeting is to remain possible, however, a statutory basis must be established and, in principle, an independent representative must be elected.

 The Board of Directors may also vote electronically. Moreover, the list of resolutions that require a qualified majority by law for approval at a general meeting will be extended.    

·               New rules for treating insolvency and over-indebtedness

The law specifically requires the board of directors to monitor solvency and initiate restructuring measures in the event of imminent insolvency. If a company is over-indebted or has a corresponding concern, the board of directors must act. Now, it is clear under which circumstances the bankruptcy court notification can be omitted when the company is over-indebted. 

Amending the Articles of Association 

If the Federal Council has approved the proposed revision to the Commercial Register Ordinance, the articles of association can be amended in advance with the commercial register office. There must, however, be a clear statement in the articles of association that the new provisions will only apply when the new company law takes effect.

All other amendments required to comply with the revised constitution can also be passed this year, however, it can only be registered with the commercial register office once the revised constitution has taken effect. This amendment to the articles of association must be passed by the general meeting under the condition precedent that the new company law will enter into force. The amendment to articles of association can be registered with the commercial register office as soon as the new company law becomes effective. 

Nevertheless, there is no requirement to amend the articles of association before the new company law enters into force. A period of two years will be given to companies to amend any provision of their articles of association that isn’t consistent with the new law.

Swiss Bookkeeping Regulations

It is mandatory for all legal entities-partnerships and corporations alike to keep books. Nevertheless, this principle is not without exceptions and special cases.

As of January 2015, every legal entity and sole proprietor in Switzerland is obliged to keep accounts, even the ones that are not registered. Sole proprietors who generate more than CHF 100,000 annual turnover are obliged to get registered in the commercial register. However, the ones that generate less than CHF 100,000 annual turnover are not released from the obligation to maintain records and accounts. 

Simplified bookkeeping 

Partnerships and sole proprietors who generate less than CHF 500,000 annual turnover are allowed to do simplified bookkeeping. This also includes those associations and foundations that are not required to register in the commercial register. Simplified bookkeeping means that the proprietor has to keep track of records of income and expenses in a way that makes it easy to read the net worth.

Types of companies who must do bookkeeping pursuant to the Swiss Code of Obligations 

These are the types of companies that are obliged to keep in compliance with the rules of the Swiss Code of Obligations: 

  • Legal entities (GmbH, limited partnerships, associations, AG, and foundations);
  • Partnerships and sole proprietors that generate more than CHF 500,000 annual turnover;
  • Partnerships and sole proprietors that generate less than CHF 500,000 annual turnover – as previously mentioned, these proprietors have to maintain a simplified bookkeeping system. 

In order to maintain accounts, it is necessary to prepare an inventory, a comprehensive balance sheet, and a profit and loss account with the necessary supporting documents.

It is mandatory for companies to keep bookkeeping records and reports for a minimum of ten years, and special provisions apply to documents stored electronically.

Closing the financial year 

A financial year in most laws, including in Swiss law, lasts from the 1st of January to the 31st of December. Sometimes, companies and proprietors are allowed to select different dates. 

Newfound companies are allowed two options on how to end the financial year. One is to go for a short year ending, which means if the company was established on the 01st of July, the annual accounting closes on the 31st of December the same year. Another option is the long year-end which means that the company can choose to close the financial year at the end of next year. This means that the first financial year can last up to 18 months. However, the rules may vary in different canton laws. 

Taking into account that the first financial year brings many expenses, most newfound companies and proprietors opt for the long year-end. This way, the high expenses that come with starting a company can be offset against the profits that will accumulate later on. 

Liquidation of a Swiss Limited Liability Company or Corporation

Corporations and limited liability companies may be liquidated at the shareholders’ meeting or the general meeting of shareholders, respectively. In the event of a liquidation, the commercial register should be informed of the decision and the appointment of the liquidator. The suffix “in liquidation” will be added to the company name in the registry. After then, the official gazette shall issue three notices to creditors asking for notification of their claims against the corporation.

Liquidators must end the company’s continuing operations and liquidate its assets. After liquidation, the firm should pay its debts using its remaining assets and cash. A bankruptcy filing is necessary when a company’s debt exceeds its ability to refinance.

Final balance sheets should be prepared after the end of the liquidation process. A final shareholders’ meeting will determine the payment of a liquidation dividend if the financial statements are approved (if any).

Liquidation dividends may only be paid out if the final call to the creditors was published in the official gazette for at least one year. Even after three months, distribution may only begin if an auditor certifies that doing so would not prejudice the interests of third parties.

A corporation may be de-registered or deleted from the commercial register when its last liquidation dividends have been paid out to its creditors.

The tax consequences of a company’s liquidation

After the liquidation process has begun, a company is still liable for taxes (i.e., after the registration of the liquidation with the commercial register). A liquidation firm can make profits during this period, either via commercial activity or the discovery of hidden reserves.

After the shareholders’ meeting has approved the final liquidation balance sheet, a liquidation dividend may be paid. As with regular dividends, Swiss withholding tax applies to the distribution of liquidation dividends. Liquidation dividends may be paid through the notification method if the firm is allowed. Withholding tax does not apply to the return of capital and reserves from capital contributions, on the other hand.

The de-registration or deletion request in the business register will be sent to the appropriate cantonal tax authority and the Swiss federal tax authority. Afterward, the federal tax authorities in Switzerland provide the final tax declaration forms and questionnaires to the business (VAT). The firm’s liquidators must pay all overdue taxes since they may be personally accountable for the payment of these taxes. Unpaid social security payments are also a source of personal responsibility.

Until the company is ultimately de-registered from the VAT register, VAT declarations should be made to the tax authorities. After each financial quarter, a business will de-register from the VAT register.

Only once the federal and cantonal tax authorities have certified that there are no outstanding tax obligations can the company be de-registered from the commercial register.

Liquidation of sole proprietorships and business partnerships

If a sole proprietorship (“Einzelunternehmen”), a simple partnership (“Einfache Gesellschaften”), a general partnership (“Kollektivgesellschaften”), or a limited partnership (“Kommanditgesellschaften”) ceases to do business, it must be dissolved. If any are leftover, excess funds may be awarded to partners after all obligations and contributions have been repaid. The firm must be de-registered if the partnership is included in the commercial register.

Liquidation of sole proprietorships and business partnerships has tax ramifications.

Single proprietorships and company partnerships carry out these self-employed operations. Self-employment income is taxed at the individual level by the partners or owners of the business. Ordinary income tax and social security payments apply to any gain realized in connection with the cessation of self-employment, such as discovering concealed reserves.

Liquidation profits from a sole proprietorship may be taxed more favorably if the proprietor retires at age 55 or becomes physically incapable of working. These circumstances, however, also need the payment of social security payments.

Instead of going through with a liquidation, a self-employed individual considering selling their company could choose to explore incorporating their company. It is possible to carry out such a change without incurring taxes. As a rule, the profit from the sale of shares in such a legal organization is not taxed, meaning it is not taxable income. However, the conversion into a legal company must be completed at least five years before the sale of the shares, which is a significant criterion.

Tax Incentives and Reductions of Corporate Taxes in Switzerland

The following article discusses tax incentives for Swiss holding companies, Swiss management companies, and Swiss subsidiary companies.

  1. Holding companies in Switzerland

Corporate tax reliefs are offered to Swiss holding companies to avoid double taxation. The cantons have the responsibility to determine the criteria for obtaining the status of a Swiss holding company.

Here are some of the basic criteria that Swiss holding companies have to meet:

  • Companies must have holding activities, which means operating through affiliates. Such activity must be stated in the corporate mission statement and must be registered in the Swiss trade register.
  • In the long run, two-thirds of the assets on the balance sheet must be from affiliates, or two-thirds of the revenues must be generated from affiliates.
  • Trading and manufacturing activities cannot be part of the company’s operations in Switzerland.
  • For a company to own status as a “Holding” it has to own at least 20 percent of the affiliate’s capital or when the capital exceeds the value of at least 2 million CHF.

What are the tax incentives for holding companies in Switzerland?

Swiss holding companies are not obliged to pay income taxes to the Cantons and have reduced rates on the capital. Federal taxes are usually at a rate of 7.83 percent, however, the activities of holding companies are not subject to such taxation.

  • Management companies in Switzerland

 Here are some of the basic criteria that Swiss management companies have to meet:

  • Commercial activities are prohibited to Swiss management companies;
  • Management companies can only perform management activities.

In general, management activities involve management services such as financial or administration services, consulting, or technical assistance. Officially, management activities haven’t been defined on a federal level, and the task of defining them is left to the cantons.

What are the tax incentives for management companies in Switzerland?

Domestic income has a normal tax rate, but foreign income is taxed and evaluated based on the importance of the services performed in Switzerland. The level of importance is evaluated case by case by the canton’s administration. Foreign income is usually taxed from five to fifteen percent, and the rate of 7.83 percent of the total revenue is added to it.

  • Subsidiary companies in Switzerland

 Here are some of the basic criteria that Swiss subsidiary companies have to meet:

  • Swiss subsidiary companies only perform services abroad and rarely do any domestic activities. Up to a minimum of 80 percent of the business’ revenues and expenses must be carried out outside of Switzerland.
  •  Every canton has different conditions for obtaining status as a subsidiary company.
  • In general, it focuses on the “place of the market” (the country in which the merchandise or service is sold or purchased) rather than the “place of origin” (the country in which the infrastructure and employees are located). The definition of service differs in every canton.

What are the tax incentives for subsidiary companies in Switzerland?

Domestic income has a normal tax rate, but foreign income is taxed and evaluated based on the importance of the services performed in Switzerland. The level of importance is evaluated case by case by the canton’s administration. Foreign income is usually taxed from five to twelve percent, and the rate of 7.83 percent of the total revenue is added to it.

Overview of Swiss Corporate Taxation

Companies are subject to a variety of federal and cantonal taxes, such as the capital gains tax, income tax, withholding tax, issue stamp tax, securities transfer tax, and the value-added tax (VAT). Please see below for an in-depth breakdown of Switzerland’s corporate tax structure.

Territorial jurisdiction or competent authority

The federal tax law (FTL) and 26 cantonal tax laws govern Swiss income taxes in general. The tax rates are up to the individual cantons, although they must adhere to the broad principles laid forth in the Federal Tax Harmonization Law (THL). When it comes to tax laws, cantonal and community rules are almost the same or extremely comparable to those in place at the federal level.

Administratively, cantonal/communal authorities enforce federal, cantonal, and communal corporate income taxes from enterprises that are either residents of Switzerland or have a permanent presence in the country and conduct their business.

Residency for Tax Purposes

Limited liability companies (“GmBH”), partnerships with a limited number of shareholders (a “KolG”), co-operatives (“Genossenschaft”), foundations (“Stiftung”), associations (“Verein”), and investment trusts (“Anlagefonds mit direktem Grundbesitz”) all fall under the umbrella of Swiss tax-paying entities (exceptions may apply for certain organizations).

Legal entities that have their headquarters in Switzerland are considered to be residents of the country. As a result, if a company does not dwell in Switzerland but has a permanent establishment or property there, it is considered a Swiss resident for tax reasons.

There are no tax groups or tax consolidation options in Switzerland, which means that every firm is taxed as an independent organization.

Calculation of Taxable Earnings.

Unless revenue is linked to foreign permanent establishments or foreign immovable property, Swiss resident enterprises are taxed on their global profits.

Income from non-resident corporations’ Swiss permanent premises is taxed in accordance with Swiss law. For non-Swiss companies that own property in Switzerland, they are exclusively liable to Swiss income tax.

In order to calculate taxable income, a firm’s statutory accounts (for a Swiss company or a foreign business’s branch accounts) are used. According to the Swiss Code of Obligations, companies in Switzerland pay income tax on their net profit after tax (i.e., tax costs are deductible here), which is indicated in their statutory financial accounts (OR).

It is not necessary to prepare separate tax accounts because the tax treatment must generally adhere to the accounting treatment (“Massgeblichkeitsprinzip”), and there are generally only a few tax adjustments to be considered in the tax return (for example, use of existing tax losses carried forward, application of participation exemption, consideration of thin capitalization rules).

If a corporation has a minimum 10% participation quota or minimum MCHF 1 fair market value for dividends, and a minimum 10% participation quota and a minimum 12 month holding term for capital gains, then a tax relief for dividends and capital gains is available. Participation income is exempt up to 100% under the regime of participation exemption. For the purposes of calculating taxable income, there are no regulations or limits for passive income.

Taxes on capital gains derived from the sale of real estate might be either income taxes or capital gains taxes, depending on where the property is located in a canton or municipality. A real estate company’s majority share sale may trigger real estate capital gains tax, depending on the canton/community in which the real estate is situated.

Real estate transfer taxes may also need to be taken into account when selling or exchanging real estate assets, such as a home or a company’s majority stake. Real estate transfer taxes are also cantonal/community taxes, therefore the location of the property is once again important.

Costs are tax deductible to the degree they are justified by the business and adhere to the arm’s length principle. Safe haven rates are published by the Swiss tax authorities in regard to depreciation, interest expenditures, and bad debt and inventory reserves.

For loans between related parties, the Swiss thin capitalization requirements apply. Interest rates and maximum debt levels for each asset class are outlined in the rules. There are no restrictions on borrowing money from other parties to pay off debt. For tax reasons, the extra debt owed to related parties will be considered as taxable equity (“”hidden equity””). There is a withholding tax on interest payments made on the corresponding share of concealed equity (“”deemed dividend distribution””).

Tax losses may be carried forward for a maximum of seven years, but they cannot be reclaimed. It is also possible to compensate for the loss of foreign permanent establishments with Swiss revenue, provided that no foreign gains are made. Certain claw-back rules apply if earnings are achieved at the overseas permanent establishment during the next seven years. Finally, in the event of a change of ownership, there is no forfeiture of tax losses that have been carried forward.

Taxable Equity Determination

The statutory financial accounts produced in compliance with legislative regulations reveal that Swiss firms are subject to tax on net equity. Only at the cantonal/communal level is capital tax collected.

Net equity is often represented by the nominal share capital, the share premium account (extra paid-in capital), legal and other reserves, as well as the company’s accumulated profits.

The so-called “hidden equity” tax is also a kind of equity tax (pls. refer to our comments above regarding thin capitalization).

It is possible in certain jurisdictions to deduct the cantonal corporate income tax from capital tax.

Inflation Rates

Rates of Taxation in the Regular World

Companies’ normal effective tax rates on profit before tax range from 11.5% to 24.4%, depending on canton and community of residence (covering federal income tax as well as cantonal/communal tax deductions).

Capital gains tax ranges from 0.01% to 0.50%, depending on the canton/community of residence (no capital tax levied on federal level).

It is possible to minimize the effective income tax rate via base erosion planning (e.g. through depreciation of IP, foreign branch allocation, etc).

Status as a Non-Resident Alien

In addition, a particular tax status may be relevant based on the content and tasks performed. The following statuses are usually recognized in Switzerland. [1]

Since a holding corporation is free from federal income tax at the cantonal and community levels, the effective federal income tax rate is just 7.8 percent. The cantonal and local level capital tax is also cut. A number of requirements must be satisfied before a person is eligible for the holding privilege:

The corporation must have at least two thirds of its total assets in the form of qualifying shareholdings or, alternatively, at least two thirds of its gross revenue from dividends paid by qualifying companies in order to qualify as a long-term investor.

[2]Mixed Corporation: A mixed company’s operations must be primarily conducted outside of Switzerland, which means that at least 80% of its revenue and 80% of its costs must originate outside of Switzerland. Thus, only a limited amount of foreign income is liable to cantonal/communal taxation (leading to an overall effective income tax rate of 8.5-10.5 percent , depending on canton of domicile). A lower equity tax rate is also in effect.

if a legal entity performs at least seventy-five percent of its duties in the capacity of providing financial assistance to other closely held enterprises, the Finance Branch regime may apply . To achieve an effective tax rate of 1 percent to 2 percent, the Finance Branch uses a system based on a presumed interest deduction scheme (which exempts 91% of interest payments) and the application of the Mixed Company classification.

In order to qualify as a Principal Company, a company must be able to concentrate all of its operations and risks, as well as do business through contract manufacturing and limited risk distributors/commissionaires or agents. During the Principal Company regime, the LRD’s must generate at least 90% of their revenue from sales of Swiss Principal goods, and the LRD’s income margin must not exceed 3% of gross profit or total expenses. In addition, the Principal Company needs a sufficient number of employees to carry out its primary duties. The total effective income tax rate for the major headquarter fluctuates between 5% and 8% based on the services performed and the relevant foreign income allocation key used.

The tax statuses indicated above must be reviewed with and granted by the appropriate tax authorities before they can be used. A binding affirmation of the law’s application in particular situations is done by submitting ruling requests throughout the negotiating process (please also refer to our further comments below).

Flexible Regulations with the New Company Law after January 2023

On 2 February 2022, the Federal Council adopted changes to the Code of Obligations (OR) and its Commercial Register Ordinance (HRegV). From 1 January 2023, the upcoming legislation will apply and enable Swiss companies to be more flexible and adopt various innovations. The following are a few examples.

Foreign exchange capital

In the past, the share capital had to be in Swiss francs. As of now, foreign currencies can be used for business activities. Accepted currency types are Swiss francs CHF, British pounds GBP, Euros EUR, US-Dollars USD, and Japanese yen JPY.

It is relevant for all sides of corporate law, such as starting a company, increasing and decreasing its capital, allocating profits (dividends/reserves), assessing loss of capital/over-indebtedness, etc. Taxable profits must be converted into Swiss Francs.

In advance of the next fiscal year or retroactively, the General Assembly can decide on a change in currency.

Shares used to have a nominal value of at least one centime; now, all that is needed is that the value is greater than zero.

Introducing the Capital Band

Capital bands allow for more flexibility in calculating capital increases and decreases, and the General Assembly can add a corresponding article to the articles of association. Over half of the share capital registered in the Commercial Register can either exceed or fall below the capital band.

It replaces the current “approved capital increase” with a quasi-“approved capital decrease.”

Capital increases and decreases innovations

The amended law simplified the ordinary capital decreases. The Swiss Official Gazette of Commerce may now publish only one call to creditors instead of three previously. Furthermore, creditors have to request indemnification within 30 days (instead of 60 days previously).

Following the resolution of the General Assembly, the Board of Directors has six more months to implement it. The Commercial Register entry no longer determines compliance with this deadline.

Interim dividends

Dividends can now be directly decided by the General Assembly based on interim financial statements. Auditors generally audit annual financial statements. There are exceptions: when the Company waives the limited audit (opting-out) or, all shareholders agree to the payment of the interim dividend. No claims of creditors are affected by this payment.

Claim of arbitration

Swiss Arbitral tribunals can now judge disputes over corporate law if their basis is in the articles of association of a company. There has been controversy over whether a company can specify arbitration clauses for its Articles of Association and thus bind all shareholders.

Virtual General Assembly

Various modernizations are made to the General Assembly’s preparation and execution of the revised law. This will be the first time that the Swiss General Assembly can be held virtually, using electronic means. Swiss Code of Obligations now explicitly outlines this option. In addition to electronic voting, shareholders are also able to participate in circular voting even if they cannot attend.

Articles of incorporation

The acquisition of assets during the establishment or capital increase is no longer a qualified fact. As a result, it no longer has to be mentioned in the articles of association or accompanied by an audit report. In addition, it does not require publication in the Commercial Register.

Articles of association of Swiss companies will be able to be modernized under new legislation from 1 January 2023. The upcoming changes include establishing a capital band and holding a virtual General Assembly.

Dividends Distributed by Swiss Corporations

According to article 675 of the Swiss Code of Obligations, “dividends can only be paid out of the profit resulting from the balance sheet and the reserves created for the purpose.” However, in practice, the interpretation of this legal stipulation has evolved with time, and there can be more than one dividend payment per year. 

Below is a summary of current dividend distribution practices during the financial year. 

Extraordinary dividends This matter is not specially regulated under Swiss law. Nonetheless, a payment for such a dividend could be permitted when certain conditions under article 660 of the Swiss Code of Obligations are met. Those conditions are as follows: 

– The profit and the free available reserves are sufficient for such payments;

– The payment of extraordinary dividends doesn’t result in any liquidity issues for the companies;

– The company must draw up an interim balance sheet;

– The decision of the board of directors to approve payment of extraordinary dividend must comply with the law and, as such declared by an auditor;

– The payment of extraordinary dividends must be authorized by the general meeting of shareholders.

  • Advanced dividends 

Advanced dividends are usually offered to the shareholders out of the profit from the current year. In legal terms, this payment is treated as a loan, which should be compensated by the dividends once the general meeting of shareholders is held. In such a situation, the auditors should draft a report stating which payments have been made throughout the financial year. 

  • Interim dividends

The interim dividend usually comes out from the profit of the current financial year. Not long ago, such a dividend was considered an infringement of the Swiss Code of Obligations. 

However, according to modern legal theorists, payment of interim dividends is possible if specific criteria are met. The same conditions for extraordinary dividends apply to interim dividends also. With one difference, however, payment of interim dividends requires the drawing up of an interim balance sheet and approval of that balance sheet by an auditor when audits are obligatory for the specific company. 

  • Proposal for new law

A new addition to the Code of Obligation has been proposed by the Swiss Federal Council, according to which an interim dividend can be approved by the general meeting of shareholders when possible according to CO, and when an interim balance sheet is drawn up for the first half of the financial year. 

In cases where the company is subject to obligatory auditing, the balance sheet must be checked and approved. 

Such dividends must also be governed by the same rules that refer to the standard annual dividends. 

  • Sanctions 

By violating the dividend distribution rules, the decision of the general meeting of shareholders is nullified, while violation of formal dispositions (such as the drawing up of an audited interim balance sheet and the approval of the auditors) can be contested. 

In certain circumstances, the company may be able to reclaim dividends paid in an undue manner. In the event of a severe violation, the board of directors and/or auditors may also be held responsible civilly or criminally. 

  • Final words

Interim dividends were treated as illegal until recently. However, significant steps in eradicating such a view have been made with the emergence of new modern practices, legal theories, and the proposal for revision of the Swiss Law of limited companies.  

This change is to be welcomed since it reflects the needs of business practice and respects the principles of protection of corporate capital.