Huge impact of the new 50/50 rule concerning the capital contribution on listed companies in Switzerland

In this context, the Swiss Federal Tax Administration (SFTA) published on December 23, 2019 its new (adapted) Circular N°29b on capital contribution principle, which contains new guidance on this subject.

Situation up to the end of 2019

Up to the end of 2019, corporations and co-ops having seat or place of effective management in Switzerland were basically subject to withholding tax on dividend distribution stemming from retained earnings (with some exceptions in cases where the notification procedure was applicable), while capital contribution reserves reimbursement was always exempt from Swiss withholding tax. The SFTA’s practice limited opportunities for disproportionate capital contribution reserves / retained earnings ratios in asymmetric dividends leading to tax avoidance – a position recently reconfirmed.

New 50/50 rule applicable since January 1, 2020

Starting from January 1 2020, the 50/50 rule is now applicable to companies listing their shares on the Swiss stock exchange, excluding foreign-traded and private owned companies. Hence, according to this new rule, an ordinary distribution or bonus shares should be financed for at least a half by retained earnings (provided their sufficiency), this within every separate decision.

In case of violation of this rule, the excessive capital contribution reserves employed shall be requalified as retained earnings distribution and subject to Swiss withholding tax and, potentially to Swiss income tax depending on the shareholder's situation.  

It is also important to keep in mind that the 50/50 rule knows specific exemptions. Indeed, dividend distributions in favour of corporate shareholders with equal or higher than 10% of shareholding are exempt. Another exception applies to capital contribution reserves deriving from a cross-border merger / restructuring or immigration after February 24, 2008 (so-called “foreign capital contribution reserves”), as well as for capital contribution reserves repaid as a result of a formal liquidation / emigration abroad is also exempt.

What about the dividend distribution decided in 2019 and effectively distributed in 2020?

Based on this new concept, a first interesting (practical) question arises for Swiss listed companies that have already decided, during their 2019 annual general meeting, to distribute dividends out of capital contribution reserve (exclusively or partially), with a due payment of such dividend in fiscal year 2020. In such a case, and according to SFTA’s current practice, despite a formal decision from the Annual shareholder meeting in 2019, the restriction on capital contribution reserves should apply as the dividend due payment is in 2020 – and the new 50/50 rule applies since January 1, 2020.

We advise the Swiss listed companies to reconsider their equity investment strategy and dividend distribution policy with particular consideration to payments on previous years’ resolutions. Bookkeeping and financial statements’ presentation likewise entails certain adjustments. Due to mirrored amendment of the income tax act, shareholders’ fiscal burden remains at the discretion of the public company whose decisions they often cannot influence.

Article written by Virginie Perlotto and Andriy Chubatyuk