The hidden reserves. Change in status for mixed companies from privileged to ordinary taxation

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Thomasine Austin
5 years ago
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1 Preliminary note In the course of the CTR III, the change in status for mixed companies and the procedure to uncover the hidden reserves played an essential role. This issue has to be discussed as well in the new tax submission (SV17). The solution of the SV17 will be, in our opinion, consistent with the version of the CTR III. It is therefore worth it not to lose sight of this topic of change in status and to examine which version gives the better result in a particular case.

2 The hidden reserves Change in status for mixed companies from privileged to ordinary taxation 2

3 Contents 1. Introduction 2. Previous legal position & practice (step-up method) 3. Valuation of an enterprise 4. Special accounting as per CTR III (future legal position & practice ) 5. Comparison of both methods 6. Summary 7. Deferred taxes under IFRS 3

4 Introduction The abolishment of the mixed company status is an uncontested measure in the course of the SV17 Question: What happens to hidden reserves when switching from privileged to ordinary taxation? The following open points need to be clarified: What happens to the hidden reserves, including goodwill, which were generated under the privileged status? Do hidden reserves have to be disclosed in the tax balance sheet? Is it better to switch from privileged to ordinary taxation before or after the entry into force of SV17? 4

5 Previous legal position & practice The tax authorities have agreed to the step-up approach under certain conditions for the change in status The full or partial disclosure of hidden reserves is permitted, including original goodwill Hidden reserves are not actually realised, the disclosure is merely for tax purposes Disclosure of hidden reserves without affecting tax Only certain reserves can be disclosed Hidden reserves on investments and properties cannot be disclosed The disclosed sum can be depreciated in ordinary profit over a 10-year period 5

6 Previous legal position & practice Taxable profit decreases as a result of annual depreciation The actual impact therefore depends on the amount of the hidden reserves and changes in profit The step-up approach is permitted until the entry into force of the SV17 Cantonal practice regarding step-up is inconsistent The next steps must be systematically discussed with the tax authorities 6

7 Valuation of an enterprise 7

8 Valuation of an enterprise The first step is to calculate the amount of hidden reserves including original goodwill by means of a valuation of the enterprise The value of the enterprise is determined using the Praktikermethode (2 x Earnings value + Asset value : 3), possibly also other methods are allowed, such as the DCF-method The earnings value applies to the future profits of an enterprise and is calculated on the basis of profit for the year and a capitalisation rate of 7.5% The asset value corresponds to the equity of the company 2 Earnings value Asset value 3 Enterprise value 8

9 Valuation of an enterprise Determination of hidden reserves including original goodwill Within the calculation of hidden reserves the amount which can be dedicated to the special status, needs to be separated. Only the amount of hidden reserves which were generated under the special status can be depreciated without affecting tax 9

10 Valuation of an enterprise / calculation example Determination of hidden reserves including original goodwill 10

11 Valuation of an enterprise / calculation example Determination of hidden reserves including original goodwill 11

12 Special accounting The SV17 will most likely also include a special accounting, as did the CTR III. It could be designed as follows: 12

13 Future legal position & practice It will be compulsory to change status upon entry into force of the SV17 The change in status applies to privileged companies only, i.e. holding, domicile and mixed companies On the date of the status change Valuation of hidden reserves including original goodwill The SV17 will provide those companies with a special tax rate solution, which is explained in more details on the following slides 13

14 Future legal position & practice The valuation of the hidden reserves will be approved by means of an official notice of determination from the tax authorities The hidden reserves calculated including goodwill will be used with a special rate in a special account for a period of five years During this phase of special accounting, the enterprise will have the same tax burden as throughout the special status period There is no disclosure of hidden reserves in the commercial and tax balance sheet The remaining, unused hidden reserves expire after this five-year period 14

15 Future legal position & practice Hidden reserves will be separated into foreign source income and domestic income (slides 9) Foreign source income is diversified to the company and canton During the period of special tax rate, the net profit will either be separated into foreign source income and domestic income Profit of the enterprise, which is allocated to the foreign source income, will be taxprivileged Profit of the domestic income will be taxed ordinarily Additionally, the federal tax needs to be considered Those steps go on for a period of five years 15

16 Future legal position & practice Hidden reserves will not be disclosed in the tax balance sheet, that is why there is no increase of the capital tax A further 5 years at the ordinary tax rate must therefore be taken into account for comparison purposes The SV17 will ENTER entry into force between 2018 and 2022 (reservation of a referendum), whereby with what the cantons are obliged to change their tax law until this date of implementation From the implementation onwards, a no "step-up" will no longer be possible anymore and the "special tax rate" method will be applicable 16

17 Comparison of both methods 17

18 Determination of hidden reserves Step-up of hidden reserves Comparison: previous vs. future model Model 1: Step-up method Disclosure of hidden reserves in the tax balance sheet & depreciation over 10 years Special tax rate for 5 years Model 2: Special tax rate method Start of CTR III 18

19 Comparison: previous vs. future model Step-up method A means of disclosing hidden reserves including original goodwill The disclosure in the tax balance sheet leads to an increase in the assessment basis for capital tax purposes Can be depreciated over 10 years in annual profit Special tax rate method A means of determining hidden reserves including original goodwill Also referred to as shadow accounting because no new capital is disclosed as a result of the realisation, and consequently, there will be no capital tax Hidden reserves are taxed at a privileged rate for five years only 19

20 Summary

21 Summary There are two methods of taking advantage of the tax benefits associated with these hidden reserves including original goodwill which were generated under the special status. The first method is the step-up approach and the second is the special tax rate method. The Step-up approach is permitted until the entry into force of the SV17. There are a few current cases mentioning the change in status for mixed companies from privileged to ordinary taxation At first sight, the special tax rate method is more profitable. However, it only lasts for a period of 5 years. Compared to the step-up solution (expect that will be depreciated over 10 years), a further four years of taxation must be added at an ordinary tax rate, as well as a further year (2019) of taxation as a privileged company Many different factors need to be taken into account and an extremely precise verification must be carried out before deciding whether to change status before or after the entry into force of the SV17 21

22 Summary If a company changes status before the entry into force of the SV17, the privileged status will be lost immediately Several points still need to be clarified with the relevant cantonal tax authorities in order to establish which calculation methods, special tax rates, depreciation rates etc. will be used. The calculations above are therefore only intended as a guideline The current status and our provisional calculation methods show (depending on cantonal practice) that a status change before the entry into force of the SV17 could be more profitable, provided that the step-up approach is actually permitted and subject to accounting effects 22

23 Deferred taxes under IFRS Under the step-up approach, the hidden reserves are disclosed in the tax balance sheet but not in the IFRS balance sheet Disclosure in the tax balance sheet results in a tax-deductible temporary difference Disclosure on the tax balance sheet increases the tax base at the time of the status change, but this is not actually taxed / is taxed at a 0% rate Under IAS 12.24, a deferred tax credit should be capitalised on the IFRS balance sheet, equivalent to the applicable tax rate on this step-up amount This capitalisation leads to a one-time tax benefit in the year of the status change. This one-off effect can result in certain disadvantages for companies 23

Key issues of planned Swiss corporate tax reform III

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