On December 14, 2023 (published on December 27, 2023), the Federal Court issued another noteworthy decision on the topic of indirect partial liquidation (9C_665/2022 14.12.2023). This decision brings new insights into the obligations and risks for sellers of company shares held as private assets.
1. What was the case about?
Two individuals sold all the company shares they held in their private assets to an acquisition company. Within five years, this company merged with the target company. The central issue was the sellers’ involvement under Article 20a(1)(a) of the Swiss Direct Federal Tax Act (DBG), with all other requirements for indirect partial liquidation being undisputed.
2. The Decision in Detail
- Knowledge and Will Element
The court reaffirmed that a seller's involvement is generally assumed if the sellers knew or should have known that funds were being withdrawn from the target company to finance the purchase price, which were not being replaced. - Seller's obligation to Access Solvency
Sellers are required to verify whether the acquiring company can finance the purchase price without using the target company's funds. This means conducting a thorough assessment to ensure that the acquiring company has the necessary financial resources. - Contractual Safeguards are insufficient
Common provisions in share purchase agreements that prohibit the acquiring company from withdrawing funds from the target company are typically not enough. What is needed is a plausible and comprehensible presentation of the acquiring company's ability to finance the purchase independently. - Excessive Retention of Earnings
Even in the case of financially strong acquiring companies, there may be passive involvement, particularly if the target company holds disproportionately high reserves that are not necessary for business operations. Caution is advised when there is excessive retention of earnings.
3. Conclusion
In cases where the target company holds substantial, non-operational assets, it becomes challenging for sellers to negate the subjective element of involvement under the requirements of indirect partial liquidation as per Article 20a(1) of the Swiss Direct Federal Tax Act. Sellers must be vigilant and ensure thorough due diligence to avoid the implications of indirect partial liquidation. This decision underscores the need for careful financial planning and clear documentation when selling company shares to ensure compliance with tax regulations and to mitigate risks.
