Circular 6a – A Strategic Update for Swiss Companies

Circular No. 6 from 1997. This update had been long awaited, as economic, accounting, and tax practices have significantly evolved over the past decades.

Circular 6a provides substantial clarifications and introduces important changes in how hidden equity is identified and treated for tax purposes. These changes have direct implications for Swiss companies, particularly regarding intra-group financing, interest deductibility, and withholding tax risks.

What is Hidden Equity?

Hidden equity refers to foreign funds (often shareholder or related-party loans) that, due to their nature or excessive amount, are reclassified as equity for tax purposes.

This reclassification results in:

Non-deductibility of interest on the portion of the loan considered as equity
Withholding tax (35%) on the interest paid
Inclusion of hidden equity in the taxable base for capital tax
Economic double taxation in certain cases

Circular 6 vs. Circular 6a: What Has Changed?

Circular 6a modernizes the FTA’s approach by incorporating recent case law and contemporary accounting practices.

Key differences include:

These adjustments aim to modernize the tax approach, reduce uncertainty in rule application, and align Swiss practice with international standards.

Practical Example

A Swiss company owns a commercial property recorded at CHF 5 million. Its market value is CHF 6 million. According to Circular 6a’s capitalization ratios, external financing should not exceed 70% of the market value, i.e., CHF 4.2 million.

If the company is financed by a shareholder loan of CHF 4.5 million, fully remunerated at the maximum allowed rate, then CHF 300,000 will be considered hidden equity.

The tax consequences are:

Interest on this amount is not tax-deductible
It is subject to 35% withholding tax – the company must report the case to the FTA and regularize it
The company must economically justify the debt level and financing structure
The hidden equity is included in the taxable capital

Good to know: It is possible to optimize this situation by adjusting the financing structure.

How RSM Can Support You

At RSM Switzerland, we are here to help you:

Analyze your financing structures in light of Circular 6a
Model capitalization ratios and identify requalification risks
Optimize economic documentation to justify intra-group loans
Anticipate tax impacts related to withholding tax and non-deductibility
Assist with capital restructurings to avoid hidden equity pitfalls

These actions can be implemented during the company’s life cycle or even at the time of incorporation.

We are happy to support you with our company formation services, as tax considerations are just as critical as legal ones for the proper functioning of your entities.

Our approach is cross-functional, combining tax, accounting, and legal expertise to offer you tailored solutions adapted to your sector and structure.