In a recent decision (ATF 148 II 243), the Federal Court clarified the conditions for the participation relief (hereinafter « PR ») when a partial package of less than 10% is disposed and the share of participations falls below 10%. In this decision, the Federal Court has defined the application of article 70 para. 4 let. b, 2nd sentence of the Federal Act on Direct Federal Tax (hereinafter « DFTA »).
 

The principle of the PR is based on articles 69 and 70 of the DFTA and aims to reduce double or even triple taxation on profits. These articles provide for a relief for corporations and cooperatives that hold participations in other companies. This is a reduction of income tax which leads to an indirect exemption of the net income from the participations, i.e. dividends and capital gains.
 

In order to benefit from the PR on the realisation of capital gains, specific conditions have to be fulfilled. These conditions are described in article 70 para. 4 DFTA. Thus, in order to benefit from the PR, a corporation or cooperative must cumulatively: 
          i. Hold at least 10% of the share capital of another company;
          ii. Disposing of a participation of at least 10%;
          iii. Hold the shares sold for a period of at least 1 year.
 

Note that in order to determine whether a participation of at least 10% has been sold, it is possible to cumulate several sales made during the same financial year even if the sales are not related to each other.
 

Article 70 para. 4 let. b, 2nd sentence DFTA mentions in particular the case of a participation falling below 10% as a result of a partial disposal. In such a case and according to the text of the law, the PR is granted on subsequent capital gains provided that the market value of the participation still held was higher than CHF 1 million at the end of the tax period preceding the sale.
 

However, in its recent decision, the Federal Court clarifies the conditions for the PR when a partial package of less than 10% is disposed in relation to article 70 para. 4 let. b, 2nd sentence DFTA.
 

First of all, despite the doctrinal divergences regarding the conditions for the PR, the Federal Court qualified the legal text and the meaning of article 70 para. 4 DFTA as sufficiently clear and explicit. 
 

In its decision, the Federal Court explains that if a partial package of less than 10% is disposed, the conditions of article 70 para. 4 let. b, 1st and 2nd sentences DFTA, must be cumulatively fulfilled. Thus, if a participation falls below the 10% limit, in order for the PR to be granted on the capital gains of subsequent disposals of less than 10%, it is imperative that a package of at least 10% has been disposed once before and that the market value of the participation rights is higher than CHF 1 million at the end of the tax year preceding the sale.
 

With this decision, the Federal Court wanted to put an end to the doctrinal divergences regarding the disposal of a package of participations of less than 10% when the share of participations is below 10%. However, the question of a sale of a package of less than 10% when the share of participations is still above 10% has not yet been decided by the Federal Court and therefore remains unresolved in our view.
 

The decision of the Federal Court refers in particular to the Message of the Federal Council (Message of 22 June 2005 concerning the RIE II) according to which the principle "once filled, always filled" should apply. Consequently, if we follow this principle, a company that has cumulatively met the objective conditions to obtain the PR on capital gains once should no longer be obliged to dispose a minimum share of 10% each time or during the same business year, provided that at the end of the tax year preceding the sale, the condition of a market value of CHF 1 million is met. Based on this analysis, we are of the opinion that it would be possible to benefit from the PR when a package of less than 10% isd disposed, even if the total share of participations held is still more than 10%, provided that the above three conditions have been met once before.
 

In conclusion, the Federal Court's decision has the advantage of clarifying the obligation to dispose a package of more than 10% in order to benefit from the PR, when the participation falls below 10%. However, it is unfortunate that the Federal Court did not take the opportunity to definitively resolve the issue of the case where a company disposes shares for more than 10% and then proceeds in the following tax years to sales of less than 10% per year, despite the fact that the holding of such shares remains above 10%. Although we are of the opinion that this situation should benefit from the PR, especially in view of the arguments put forward by the Federal Court in the present decision, a preliminary confirmation by the tax authorities remains strongly recommended (tax ruling).