a matter of economic strategy with tax implications – recent case law developments

Recent case law recognises that a formal error in identifying or declaring reserves arising from capital contributions does not always negate a legitimate economic reality.

After briefly discussing the importance of documenting contributions at their source, rather than having to defend their recognition later, and reviewing the relevant conditions, this article presents and welcomes a development in case law that is beneficial to entrepreneurs and shareholders.

In corporate life, each financing decision reflects a vision: that of a shareholder investing, strengthening the company’s equity base, and preparing for future growth. Among the instruments available, capital contribution reserves (CCRs) occupy a distinct place. These are amounts received directly from shareholders, whether in cash, in kind, or as share premiums, but outside the share capital itself.

From a tax perspective, their significance is crucial: unlike retained earnings, CCRs may be repaid free of withholding tax, income tax, or corporate income tax (Article 20(3) FDTA; Article 5(1bis) WTA), provided the required formal conditions are met. In other words, they enable an entrepreneur to return capital to investors without tax friction, whereas an ordinary distribution would trigger, among others, a 35% withholding tax.

While often viewed as a technical mechanism, CCRs are in fact a strategic instrument for capital management and wealth planning. Properly managed, they serve as a sustainable lever for optimization, enhancing financial flexibility while preserving shareholder value.

1. The direct approach: properly establishing capital contribution reserves

To qualify as CCRs, contributions must meet both substantive and formal requirements. Substantively, they must be made directly by equity holders. Accounting-wise, CCRs must be reported separately within equity. Procedurally, a notification to the Swiss Federal Tax Administration (“SFTA”) via Form No. 170 remains essential. Circular No. 29c and SFTA Communication 020 (18 September 2024) require notification within 30 days (after approval of the annual statutory accounts for contributions; after approval or payment for repayments). Although this is an administrative practice rather than a statutory deadline, compliance facilitates recognition and tax-neutral treatment, particularly for distributions exempt from withholding tax.

From a tax perspective, such contributions are subject to issuance stamp duty at a rate of 1%, after deduction of an allowance of CHF 1 million (Art. 5 and Art. 6 para. 1 let. h FSTA), which may be utilized in several instalments but only up to a total cumulative amount of CHF 1 million over the lifetime of the company. In the event of restructuring, a single exemption of CHF 10 million (Art. 6 para. 1bis FSTA) applies. However, for the portion benefitting from this exemption, the contribution is allocated to losses and therefore cannot give rise to capital contribution reserves (CCR). If recognition of CCR is desired, the taxpayer must waive the restructuring allowance and subject the contribution to the ordinary issuance stamp duty, after deduction of the CHF 1 million allowance, where applicable.

The documentation submitted to the SFTA must include, in particular, the company’s approved annual statutory financial statements (which, if not yet available at the time of filing, must be provided spontaneously at a later stage), the account statement showing the separate capital contribution reserve (CCR) positions in the statutory accounts, and the minutes of the general meeting recording the corresponding decision in the event of a repayment. Where foreign currencies are involved, the exchange rates applied must be indicated, together with a clear reference to the source used.

These requirements are not mere administrative formalities but reflect the need for complete traceability and transparency in the management of equity capital, which are essential conditions for the tax recognition of reserves arising from capital contributions and, consequently, for the benefit of the preferential treatment provided for in Article 20(3) of the Federal Tax Act (FDTA) and Article 5(1)(a) of the Federal Tax Act (WTA).

The repayment of CCRs must be expressly approved by the general meeting, and the procedural rules governing its resolutions, not discussed here, must be strictly observed to ensure validity. The resolution, which determines the amount of the repayment, should normally specify the amount in Swiss francs or in the currency of the share capital as registered in the Commercial Register.

However, shareholders residing abroad may wish to fix the repayment amount in their own currency, for example in euros. In such a case, and unless otherwise provided in the resolution or in the articles of association, the exchange rate on the date of the general meeting’s decision, which constitutes both the effective date and the accounting reference point, should be applied. The transaction is therefore fixed as of that date, and the amount reimbursed from the reserves must correspond to the equivalent value in Swiss francs determined on that same date.

2. The indirect approach: hidden contributions and judicial recognition

Practice shows that things do not always unfold ideally. Some companies fail to segregate contributions into a specific CCRs account, inadvertently including them among retained earnings or other equity positions. Other situations give rise to what the SFTA refers to as ‘hidden contributions’ or ‘concealed equity injections’, typically in cases of undervaluation of contributed assets or the assumption or waiver of shareholder debt that is not recorded.

Under administrative practice, a contribution that is neither properly identified nor declared cannot be recognized as a CCR. Its reimbursement is therefore treated as an ordinary distribution subject to 35% withholding tax and income or corporate tax for the recipient. A mere accounting imprecision may thus deprive both the company and its shareholders of a significant tax advantage.

This strict position, however, has been softened by the Federal Supreme Court (“FSC”), which has reaffirmed that economic reality should, in certain cases, prevail over formality. When the intention to strengthen equity capital is clearly established and the financial flows can be traced in a conclusive manner, the Court accepts that an undeclared contribution may, in certain cases, be reclassified as a capital contribution.

3. When the Federal Court reaffirms the primacy of economic reality

The FSC has recently clarified and relaxed administrative practice concerning the recognition and repayment of CCRs through two landmark judgments that represent a notable shift in Swiss tax doctrine.

a) Decision 149 II 158 (17 March 2023): Treatment of hidden capital contributions in the context of income tax

In this decision, the FSC provided key clarification regarding the treatment of hidden capital contributions in the liquidation of a corporation (noting that the SFTA has decided to limit the application of this ruling to such liquidation cases). The Court held that the repayment of hidden capital contributions is not taxable under Article 20(3) FDTA, even in the absence of separate accounting recognition. In doing so, the Court set aside the accounting requirement of Article 5(1bis) WTA in the context of income tax.

The case involved a sole shareholder who, through several real estate transactions and unaccounted debt takeovers, had indirectly financed her company. Upon liquidation, the authorities considered the proceeds of the liquidation to be a concealed distribution of taxable profits. The Federal Court, on the other hand, accepted that this was a repayment of a concealed capital contribution, which was tax-exempt under Article 20(3) of the FDTA.

The Court emphasised that neither the wording nor the structure of the law requires formal accounting recognition to establish a shareholder-level capital contribution. Moreover, Swiss tax law should not disadvantage shareholders of Swiss companies compared to those of foreign companies, for which the SFTA accepts economic rather than accounting proof. Consequently, the recognition of hidden contributions depends on economic substance rather than formal accounting formalism.

However, the Court clarified that this interpretation does not affect the practice applicable to withholding tax, for which the accounting requirement set out in Article 5(1bis) of the WTA remains fully applicable. In other words, while the repayment may be exempt from income tax, the corresponding treatment for withholding tax purposes continues to be subject to strict formal requirements. It should further be noted that the burden of proof rests with the shareholder, who must demonstrate both the existence and the amount of the hidden contribution, for instance through a stamp duty declaration. The SFTA also emphasizes that a complete and accurate declaration remains essential to ensure the proper refund of withholding tax and the correct allocation of income.

b) Decision 9C_690/2023 (21 March 2025)

In this case, a Swiss company had received a substantial real estate legacy, which was initially booked under retained earnings before being reclassified years later into a ‘capital contribution reserve’ sub-account. The FSC held that such reclassification is permissible provided it complies with accounting law and is formally approved by the general meeting. This regularisation does not deprive the transaction of its tax-neutral character.

The Court also criticised excessive formalism: while notification remains a prerequisite for withholding tax exemption, no strict statutory deadline exists. However, to avoid withholding tax on a distribution, the formal conditions must be met at the time of the distribution itself. A late notification or reclassification does not retroactively extinguish withholding tax already due.

These two decisions reflect a welcome development in case law, restoring a balance between administrative rigour and recognition of economic reality. By placing substance above form, the Federal Court reaffirms that tax law must support the real economy rather than constrain it through excessive formalism.

This is reassuring reading for entrepreneurs and practitioners, but also a call for caution: it is still preferable to anticipate, document and declare contributions correctly rather than having to invoke the judge's leniency after the fact.