Key takeaways
- A debt waiver from shareholders in favor of a corporation is neutral for CIT purposes, provided that the debt waiver is not accounted for in the profit and loss statement but directly as equity. Alternative and more complicated structurings to achieve a "debt-equity swap" result should no longer be necessary. This clearly eases financial restructurings and distressed transactions; nonetheless, prior coordination with the pertinent tax authorities remains key.
- A company must still choose between creating capital contribution reserves (CCRs), useful for withholding tax (WHT) purposes, and obtaining financial restructuring exemptions for issuance stamp duty purposes, since these exemptions require that losses be actually offset (including their removal from the financial statements).
In more detail
Circular 32a replaces the previous Circular 32 published on 23 December 2010. Circular 32a covers the tax treatment of financial restructurings for CIT, WHT and issuance stamp duty purposes.
Circular 32a addresses two key points. The first concerns the tax treatment of debt waivers by shareholders for CIT purposes. The second covers the treatment of capital contributions in financial restructuring measures and the relationship between the creation of CCRs for WHT and the use of financial restructuring exemptions for issuance stamp duty purposes.
Regarding the first point, according to Circular 32, debt waivers from shareholders were in principle treated as taxable events for CIT purposes, regardless of their accounting treatment (i.e., even when directly accounted for in equity and not via the profit and loss statement). This approach did not align with the economic reality of a debt waiver by a shareholder, which essentially results in a simple contribution at the subsidiary level. As a consequence, various work-around structurings had to be implemented to avoid a taxable gain (e.g., the shareholder commits to contributing an amount equal to the shareholder loan, and then the two claims are offset). According to Circular 32a, the accounting treatment of debt waivers is now the determining factor. If a debt waiver is directly accounted for as equity of the receiving entity, it should have no CIT consequences. On the other hand, if accounted for via the profit and loss statement, a taxable gain is generally triggered.
Regarding the second point, in cases of capital contributions aimed at financial restructuring measures, the accounting treatment of losses at the receiving entity level has been disputed due to various court cases in recent years. Initially, the SFTA required that existing losses reflected in the balance sheet be offset with the capital contribution amount to enable the company to benefit from restructuring relief for issuance stamp duty purposes. Consequently, no CCRs could be recognized and used for WHT purposes. A "double dip" for both optimizing the WHT position (by creating CCRs that enable WHT-exempt distributions) and reducing the issuance stamp duty burden (by using the restructuring relief) was not possible. This treatment has now been finally confirmed by the Federal Supreme Court (ruling 9C_610/2022 of 7 September 2023), thereby ending the previous discussion. This position is now reflected in Circular 32a, making it necessary to decide which option (CCRs/WHT vs. issuance stamp duty) provides more value to the company and its shareholders.
Against this background, Circular No. 32a provides significant additional certainty in financial restructurings and distressed situations. However, it remains crucial to review the details of each specific case and to engage in discussions with the pertinent tax authorities to avoid detrimental tax consequences.
