26 June 2024

Corporate income tax consequences of the reissue of treasury shares - Federal Supreme Court ruling of June 6, 2024 (ruling 9C_135/2023)

  • Articles
  • Tax
  • Structuring / Relocation
  • Transactions / M&A

In its ruling of June 6, 2024 (9C_135/2023), the Federal Supreme Court ruled that corporate income tax law does not contain a correction provision according to which proceeds from the reissue of treasury shares recognized in equity under commercial law can be offset. The ruling supplements the rulings on treasury shares concerning capital tax (ruling of November 14, 2019, 2C_119/2018) and VAT (ruling of October 5, 2021, 2C_891/2020).

  • Dr. Hagen Luckhaupt

    Senior Tax Advisor

  • Leila Sonderegger

    Tax Consultant

Background

Since the revised commercial law came into force in 2013, treasury shares must be reported as a negative reserve in equity (Art. 959a para. 2 no. 3 lit. e CO1). From an accounting perspective, this resulted in a paradigm shift, according to which the repurchase of treasury shares no longer qualifies as the acquisition of an asset but is regarded as a capital reduction transaction.  

Accordingly, the prevailing view is that the difference between the issue price of the treasury shares and their acquisition costs – analogous to a capital increase – should be recognized directly in equity.2 In some cases, the view is also held that in addition to the profit-neutral treatment – in the sense of an option – the difference may be recognized in the profit and loss statement.3

To date, the conference of Swiss tax authorities ("SSK") has taken the view that treasury shares are assets regardless of their treatment under commercial law. Therefore, book profits or losses must be considered for tax purposes when the shares are reissued.4

With regard to capital tax, the Federal Supreme Court already rejected this view in its ruling of November 14, 2019 (2C_119/2018). In the ruling, the Federal Supreme Court stated that accounting under commercial law is decisive for capital tax purposes. The holding of treasury shares, therefore, reduces the taxable capital.5 In its ruling of October 5, 2021, the Federal Supreme Court also had the opportunity to comment on the VAT treatment of the sale of treasury shares. In this decision, the Federal Supreme Court also followed the new commercial law and ruled that the acquisition of treasury shares should be considered a capital reduction transaction for VAT purposes and that the proceeds from the reissue of these shares should be qualified as a capital increase.6

Federal Supreme Court decision of June 6, 2024

In its ruling of June 6, 2024, the Federal Supreme Court has now addressed the issue of the corporate income tax consequences of reissuing treasury shares.

In the case in question, a listed holding company domiciled in the Canton of Zurich ("A AG") acquired treasury shares. As part of an employee participation program, A AG sold treasury shares to its employees after a holding period of around three years. The positive difference between the acquisition costs and the allocation value was booked by A AG to the statutory capital reserves with no effect on corporate income and declared accordingly in the corporate income tax return. The Zurich cantonal tax authority objected to this declaration during a tax audit and added the positive difference between the acquisition costs and the allocation value of the company's treasury shares to the taxable profit. After the objection by A AG and the appeal to the Tax Appeal Court were unsuccessful, the Administrative Court ultimately followed the view represented by A AG and rejected the offsetting by the Zurich Cantonal Tax Office. The Swiss Federal Tax Administration ("SFTA") filed an appeal against the ruling of the Administrative Court of the Canton of Zurich with the Federal Supreme Court.

In its reasoning, the SFTA, as the complainant, referred to the SSK analysis of the new commercial law7  and put forward art. 58 para. 1 lit. c DBG as a correction provision. In addition, the SFTA pointed out a tax systemic connection between art. 58 para. 1 lit. c DBG on the one hand, and art. 4a para. 2 VStG and art. 20 para. 1 lit. c DBG on the other. Without a correction for corporate income tax purposes, there would be a risk that the repurchase of treasury shares and their reissue within six years would not result in a taxation of the corresponding proceeds at the level of the shareholder (individual) or the reissuing company. As a result, a tax gap could arise. As a result, art. 58 para. 1 lit. c DBG must allow the principle of correlation to be breached in the case of a profit-neutral entry, and the positive difference between the issue price and the acquisition costs must be subject to taxation.8

The Federal Supreme Court did not follow this view. It held that art. 58 para. 1 lit. c DBG cannot be applied because the reissue of treasury shares does not give rise to "corporate income" within the meaning of art. 58 para. 1 lit. c DBG. Furthermore, "under commercial law, there is no asset value with regard to treasury shares, which is why the reissue of treasury shares cannot be considered a "capital gain" either".9 The Federal Supreme Court also considers taxation on the basis of the tax system connection between art. 58 para. 1 lit. c DBG on the one hand, and art. 4a para. 2 VStG and art. 20 para. 1 lit. c DBG on the other hand to be too weak for the principle of correlation to be breached. Rather, the reissue of treasury shares is a tax-neutral capital contribution transaction pursuant to art. 60 lit. a DBG.10

Significance of the decision for practice and further outlook

This ruling of the Federal Supreme Court should render the current administrative practice regarding the corporate income tax treatment in case of the reissue of treasury shares obsolete. Instead, irrespective of whether the positive difference between the issue price and the acquisition cost is recognized directly in equity or via the profit and loss statement, it is a tax-neutral capital contribution transaction.

1. Swiss code of obligation

2. See Peter Böckli, OR-Rechnungslegung, 2nd edition, Zurich/Basel/Geneva 2019, 125 N. 470 and 223 n. 997; Lukas Handschin, in: ZK OR, Zurich 2016, Art. 659-659b, n. 147 f.; Markus Vischer, Kapitalerhöhung, Kapitalherabsetzung, insb. innerhalb des Kapitalbands, und der Erwerb und die Veräusserung eigener Aktien, SZW 2021, p. 321 ff., p. 326; as also provided for in IFRS, IAS 32.33 and US GAAP 505-30-30-10).

3. See HWP III2.32.2, para. 640, or formerly HWP IV.2.30.3; Bertschinger, Die handelsrechtliche und steuerliche Gewinnermittlung unter dem revidierten Rechnungslegungsrecht, Bern 2020, p. 357; Robert Gutsehe in: Pfaff/Glanz/Stenz/Zihler [eds.], Rechnungslegung nach Obligationenrecht, Praxiskommentar, 2nd ed., Zurich 2019, Art. 959a N. 174; Markus Neuhaus/Rodolfo Gerber in: Honsell/Vogt/Watter [eds.], BSK OR II, 5th ed., Basel 2016, Art. 959a N. 91.

4. Cf. analysis of the SSK Executive Board on the new accounting law, February 12, 2013, updated on February 5, 2020.

5. See SSK: Analysis of the Executive Board on the new accounting law (version of November 26, 2014).

6. Judgment 2C_891/2020, E. 3.3.2.

7. Cf. analysis of the SSK Executive Board on the new accounting law, February 12, 2013, updated on February 5, 2020

8. Cf. judgment 9C_135/2023, E. 5.3 f.

9. Judgment 9C_135/2023, E. 5.3.

10. Cf. judgment 9C_135/2023, E. 6.

 
Back