The cantonal and communal capital tax of Swiss companies applies primarily to the equity capital at the end of the tax period, but at least to the nominal value notwithstanding over-indebtedness. Shareholders often invest in their companies not only through capital contributions, but also through loans, either because it is quicker and easier than increasing the share capital, or because it reduces the tax burden on the company’s equity.
Even if there is no intention to evade tax, shareholder loans disproportionate to the company’s capitalisation needs may be reclassified by the tax authorities as hidden equity capital and thus added to the tax base. The reason for this is that a third party creditor would not have granted the same loan on the same terms, which is why the company borrows on more favourable terms because of the relationship with its lending shareholder. Furthermore, the concealed equity capital is not offset by losses and must therefore be treated as nominal value, i.e. the minimum tax base.
Furthermore, interest on such a loan is considered to be a deduction from the company’s own funds and is therefore not deductible in the same way as dividends are. Interest on concealed equity capital thus constitutes hidden distributions of profits, which are both non-deductible from the company’s taxable profits and subject to withholding tax.
For the sake of simplicity, the tax authorities rely on the circular with a schematic calculation, which is clear and easy to apply but not always reliable. Indeed, it is up to the taxpayer to prove the contrary, in the sense that the circular’s calculation is only a rebuttable presumption. It is therefore advisable to carefully determine the market value of the assets at the end of the year, to calculate the weighted average in the case of a loan whose duration does not coincide with the tax period, or to demonstrate that under comparable conditions a third party would have granted such a loan on similar terms.