For Swiss residents, a capital gain realised on the sale of privately held shares in a Swiss or foreign limited liability company is generally exempt from income tax, while dividends and liquidation bonuses constitute taxable income. However, as some creative minds have devised complex structures to receive a dividend from their company disguised as an exempt gain, tax legislation and practice is developing accordingly to tackle these artificial arrangements. One such case is that of partial indirect liquidation.

This occurs when a shareholder sells shares in a target company to a company or an independent entrepreneur with a surplus, while the target company sold contains substantial accumulated profits that are not needed for continued operation. These profits are quickly distributed to the buyer without any tax because he can immediately write off the value of these acquired shares at a price that has been determined, in part, on the basis of the target’s substantial retained earnings. There is a suspicion of abuse when the buyer uses this profit distribution to finance the acquisition, because overall these dividends are then returned to the seller, but in the form of a capital gain, so it is a dividend, just with extra steps.

However, there are some reasonable limits to this recharacterisation. First of all, the seller must cooperate with the buyer, otherwise it is illegitimate to tax the seller who has no idea how the buyer will finance the acquisition. Nevertheless, it is sufficient that the seller has a reasonable suspicion of such an intention of the buyer.

Secondly, the sale must involve at least 20% of the share capital, although subsequent sales of packages and concerted sales by several shareholders are also relevant, provided that this threshold is reached in aggregate within 5 years. The distribution of the target’s profits to the acquirer must also occur within 5 years, but may take various forms, including an upstream merger.

If the conditions for an indirect partial liquidation are met, the taxable income logically amounts to the sale price. However, the seller cannot reasonably be expected to empty the company completely before the sale, because on the one hand some accumulated profits are still needed for the continuation of the business, and on the other hand Swiss law provides for strict rules on the distribution of dividends, since some profits have to be kept as legal reserves. As such, the taxable income is therefore reduced to the funds that could be distributed as dividends according to Swiss or foreign law governing the target company. Furthermore, we cannot reasonably object to the fact that even this disposable profit relates to significant assets of the company, as opposed to mere cash, otherwise the distribution of the disposable profit would require the liquidation of these assets and would hinder the continuation of the business. Finally, as the important criterion concerns the possible distribution of profits to the buyer to cover the purchase price, the taxable income can only be assessed up to this amount.

It is important to note that the moment of realisation of this taxable income occurs when the seller acquires a legal and certain claim for the purchase price against the buyer. Since the conditions for partial indirect liquidation may sometimes be fulfilled in subsequent years, especially in the case of successive transfers of shares, the tax authorities have to resort to reassessing the taxes of previous years.

Although the relationship between the director and the company is mainly qualified as a mandate and not as an employment contract, his fees are considered as coming from the salaried activity from a tax point of view. Thus, the fees are subject to withholding tax to be paid by the Swiss employer if the director is not a Swiss resident.

However, if his usual place of work is not in Switzerland either, the remuneration may only be subject to withholding tax to the extent that it covers his position as an administrative or supervisory body, e.g. signing the financial statements, preparing the general meeting or other inalienable rights of the board of directors. A clear and reliable division between the fees of a supreme body and the salary received as an employee, even if it is a managerial employee, is also necessary.

Depending on the residence status of the director, his place of work and his nationality, but also on his affiliation to compensation funds abroad and the rate of work carried out for the Swiss company, it may be necessary to collect and pay social security contributions from his salary or fees.

It is the Swiss employer’s duty to find out the situation of the employees and to determine whether withholding tax or social security contributions are necessary. Thus, it is recommended to analyse the situation clearly in order to avoid fines, interest on arrears and unforeseen charges.

The first consideration of every employer to avoid withholding tax is to prove that the hired personnel is not in fact an employee with an employment contract, but a director, external consultant, independent agent, that they work only part-time or on a one-time basis.

The reason for this is that the withholding tax applies in principle only to the staff carrying out employed activity, the only exception being artists, sportsmen and conference holders, whose income may be subject to withholding tax even if they are self-employed. It is also up to the employer to withhold social security charges from the salary, whereas an independent entrepreneur has to do it for himself.

However, the definition of employed personnel in tax and social security law differs significantly from employment contract definitions and encompasses other types of personal services that may seem out of scope at a first glance. It is not required to have a formalized agreement, a long-term engagement or even an employment-type remuneration. As such, withholding tax and social security obligations of the employer arise in presence of directors, part-time contractors or even long-term independent consultants whose work schedule and duties resemble that of an ordinary employee.


“Employee tax applies to more than just employees”


Another common argument is that the fees or salary are not actually paid directly to the service provider, but are reinvoiced to a different company, which in turn employs these personnel.

Provided subjugation to Swiss taxes is a requirement for the withholding tax on employees, the Swiss Confederation has recently extended anti-abuse measures and thus may consider a Swiss beneficiary of services as a de facto employer, or even retain a staff rental agreement. From the perspective of Swiss social security, it is required that the personnel is either working or residing in Switzerland.


“It matters not who pays and how, but what is the nature of provided work”


Nevertheless, even when a service provider has no presence in Switzerland, directors and members of the board may still be subject to withholding tax and social security at the expense of a Swiss company, in some cases. Multiple international agreements precise different rules of international revenue allocation and the coordination of social security systems.

Besides, international double-taxation conventions only provide for an allocation of salaries and deductions, but do not impede the procedural application of rules. The employer still has to comply even if nothing is to declare.


“When it gets international, it gets complicated”


Every employer or beneficiary of an independent service provider must thus carefully assess the scope of application of the above rules at the moment of signature, upon each payment and every month, as well as to review the situation on an annual basis.

At present, only over-indebtedness and a loss of capital on the balance sheet trigger the duty to act of the board of directors. The reform of the Code of Obligations now provides for the obligation to monitor solvency. Indeed, creditors only file for bankruptcy if they are not paid on time, regardless of the company’s lack of equity.

Although Swiss commercial law does not require the presentation of a cash flow statement, the lack of liquidity is the most important risk and the most common reason for the bankruptcy of a company. The board of directors is then obliged to act swiftly and take the necessary measures to ensure solvency, or even to propose reorganisation measures to the shareholders if such measures fall within the competence of the general meeting.

Among several possible measures, the legislator places particular emphasis on the possibility of applying for a debt-restructuring moratorium. It is indeed possible to apply for an instalment plan directly with the creditors whose debts cannot be discharged in time, or even to agree on a partial waiver of their claims. The debtor can apply to the judge for a debt-restructuring moratorium, provided that there are prospects of reorganisation or that the future approval of a composition agreement appears possible.

In this case it is important to be able to prove the reliable chances of the company’s survival, to reorganise the balance sheet in order to present the best situation to the creditors, but above all to be aware of the current financial situation.


Swiss labour law strictly regulates the termination of the employment contract. Except in serious cases allowing for immediate dismissal, an employee can only be fired after giving at least one month’s notice in the first year of employment, two months in the second and three months in the third. However, in the case of a trial period, which can last up to a maximum of 3 months, the notice period is shortened to 7 days.

The trial period serves as a safeguard for the employer and the employee to get to know each other better before committing themselves to a longer employment contract. Indeed, it allows the employer to assess the knowledge and skills of his new employee. Therefore, when one employment contract is succeeded by another, the probationary period is generally not applicable because there is no longer any reason for it, as the employer and employee already know each other quite well.

However, there are exceptions, in particular when the new employment contract provides for significantly different requirements or tasks compared to the old contract and the employer cannot yet form a clear opinion about the employee’s ability to take on these new responsibilities. In these circumstances, the trial period is justified and can be applied to this new employment contract.

It should be made clear that the periods of leave are counted not on the duration of each individual contract, but on the duration of service, in the sense that the duration of the probationary contract is added to the contract of indefinite duration that replaces it for the purpose of calculating the notice periods for dismissal.

Failure to comply with the conditions for dismissal often leads to employees paying additional charges and compensation, which is why we advise careful analysis of each situation before making a decision.

Dividends are decided by the shareholders at the ordinary general meeting and are based on the closed financial statements not older than 6 months. Indeed, the meeting must be held no later than 6 months after the end of the accounting year.

In principle, shareholders are not allowed to have the share capital returned to them until the liquidation is completed, but the appropriation of profits is also strictly regulated. Currently, 5% of the year’s profit must be allocated to the general legal reserve until it reaches 20% of the paid-up share capital (“first allocation”). In addition, and except for holding companies, 10% of dividends exceeding 5% of the share capital is also allocated to the reserve until it reaches 50% of the share capital (“second allocation”). Thus, only the profits remaining after these allocations can be distributed as dividends.

In addition to the distribution of profits, shareholders may have their contributions made directly to the company and recorded in the general reserve distributed, but only on the amount exceeding 50% of the share capital. The reform now provides for an increase in the first allocation to 50% of the share capital, and at the same time abolishes the second allocation. It will come into force in 2022, the date not yet set by the Federal Council.

It must be noted that there are other legal and statutory reserves that must be respected, which is why the dividend distribution must take them into account. It is therefore advisable to make a careful calculation in order to avoid a violation of the law.

Employers in Switzerland are obliged to register vacancies with the regional employment office in industries with an unemployment rate of at least 5%. This concerns one in ten jobs. However, it is not necessary to advertise if an applicant was already working in the company or if the applicant is a person close to the management, or for the duration of the work not exceeding 14 days. Apprenticeships and traineeships that are part of a training course are also not subject to the obligation to advertise, nor are jobs that are filled by jobseekers registered with the Regional Job Centre.

Where such an obligation applies, it is necessary to wait at least 5 working days after the job has been advertised at the Regional Job Centre before applying elsewhere. It should be noted that headhunters carry out these advertisements on behalf of the employer.

Within 3 working days, the Regional Job Centre proposes candidates whose files are relevant or finds that it does not have any. The employer then informs it of the candidates it has selected and invited to a job interview or aptitude test, whether it has hired any of the candidates proposed or whether the position remains vacant.

Non-compliance with the obligation to advertise vacancies is punishable by a fine of up to CHF 40,000. It is therefore strongly advised to examine on a case-by-case basis whether such an obligation should be respected in order to reduce the risks.

The liability of companies is limited by their funds, but directors are jointly and severally liable for unpaid debts to the extent of the losses accumulated since the discovery of the over-indebtedness and the bankruptcy of the company. It is indeed their inalienable duty to file for bankruptcy of a company in case of over-indebtedness, but there are alternatives.

Firstly, the easiest thing to do is to postpone the shareholder’s claim. The postposition agreement provides that the claim only accrues to him when the company is able to pay all debts. In other words, there is no need to declare the company bankrupt as long as it is still able to pay the other debts that the shareholder has postponed.

It is also possible that the company’s balance sheet is negative while there are economic values not disclosed in the financial statements. For example, it is possible that the market value of a fixed asset exceeds its book value, the difference being called “hidden reserves”, in which case they must be taken into account when over-indebtedness arises because, in reality, the company has enough – admittedly hidden – funds to honour its debts. Furthermore, already when the loss exceeds half of the share capital and legal reserves (“capital loss”), it is possible to revalue a property or a holding at its market value for accounting purposes if it exceeds its acquisition cost or cost price. This requires a prudent valuation and the certification of the auditor. However, it represents an accounting profit which is subject to tax.

It should also be noted that the company may be in difficulty only temporarily, for example due to the confined or seasonal nature of the business, such as a hotel in the mountains. Thus, a clear and reliable financial analysis shows that the company has every chance of emerging from the debt situation and that it is therefore not necessary to declare bankruptcy.

In any case, it is the responsibility of the directors to be aware of the financial situation of the company and to take measures already in case of a capital loss. This requires a clear and up-to-date view of the ledger. The reform of the Code of Obligations introduces the obligation to audit the accounts in case of a threat of overindebtedness or loss of capital.

Some taxes, such as VAT, stamp duty and withholding tax, must be declared and paid spontaneously, with the tax authority intervening only in the event of a request for additional information or a tax audit. In contrast, direct federal tax and cantonal and communal tax on profit and capital are notified by a tax authority which determines the tax burden on the basis of the taxpayer’s declaration and information, the so-called “mixed” procedure.

Under this procedure the taxpayer has to pay taxes – as well as costs and interest – on the basis of the final tax slips. However, the administration may also issue a provisional tax assessment or request advance payment of taxes in instalments.  Taxes collected on the basis of a provisional assessment or on the basis of instalments are set off against the taxes due on the basis of the final assessment. This results in a balance in favour of the taxpayer or the tax authority at the time of the tax due date, which does not necessarily correspond to the date of notification of the tax slips and varies between direct federal tax and cantonal and municipal taxes.

Direct federal tax generally falls due on 1 March of the calendar year following the tax period concerned, but interest on arrears only accrues from the 31st day following notification of the provisional or definitive tax assessment slip, but not on instalments.

In Geneva, cantonal and communal taxes are generally due on the last day of the fiscal year concerned, and the interest on arrears runs from the 31st day following this date. In addition, interest on arrears runs on unpaid instalments.

It is therefore advisable to check the balance of cantonal and municipal taxes on the last day of the tax period, taking into account carryovers from previous years and advance payments, and if necessary to request additional payment slips in order to pay the estimated tax balance on time and avoid default interest.

Teleworking is unlikely to stop with the end of the pandemic, especially as it looks very attractive, at least in part, to many people. The growth of managers working constantly in a location other than the head office is leading the tax authorities to review the corporate tax system.

Indeed, a corporation pays direct federal tax and cantonal and communal tax on profit and capital at the place where it has its registered office, but there are exceptions and additions. Firstly, the place of effective management can substitute the place of the company’s seat, which is very important at the international level, knowing also that most international conventions provide for the primacy of the effective management. Thus, for a sole director of a French company working and residing mainly in Switzerland, the place of taxation is very likely to be Switzerland and not France.

It must be noted that in the case of several places of effective management, the most important place is the one that is decisive. Thus, if one of the directors constantly works in a place other than that of the company’s headquarters, there is also a risk that the permanent establishment will be recognised at this place of work, in which case the company will pay its taxes partly in the public authority concerned.

At the international level, these facts lead not only to surprises on the part of the Swiss tax authorities, but also to problems of regularisation of foreign taxes which may have already been entered into force and can no longer be reviewed except by applying the long, costly and difficult international mutual agreement procedure. At the inter-cantonal level, even taxes that have already come into force can be reviewed within 30 days of the decision of the last canton, when several cantons at the same time are competent to tax the taxpayer. In both cases, it would be desirable to obtain a prior decision from the authorities concerned in order to make the situation clear and predictable.