26 June 2019

Buyback of own shares

Articles
Legal
Tax
Transactions / M&A

Directors have to comply with fiduciary duties if own shares are bought back. Without understanding all details of such buybacks, severe tax consequences may be triggered.

In the event of the liquidation of a company, hidden reserves (=the difference between the fair market value of an asset and its book value) of the company are subject to income tax. The distribution of the final liquidation dividend to the shareholder is subject to Swiss withholding tax and, depending on the tax domicile of the shareholder, income tax.

If a shareholder is tax-resident in Switzerland and sells his privately-held shares, any capital gains are not subject to income tax. However, if a company buys back shares from its shareholders and destroys them afterwards (i.e. reduction of the capital), the company can be partially liquidated. In order to ensure equal tax treatment of a shareholder whose shares are repurchased by the company with a shareholder in a liquidation proceeding, the following is applicable:

Irrespective of the number of repurchased shares, the difference between the nominal value and the market value (=repurchase price) is subject to withholding and income tax if the shares are destroyed as part of a capital reduction (partial liquidation).
The same applies to the excessive part if a company repurchases more than 10% (or 20% for the acquisition of registered shares with restricted transferability, in connection with a transfer restriction) of its nominal capital of its own shares without reducing the share capital.
If a company repurchases less than 10% (or 20% for the acquisition of registered shares with restricted transferability, in connection with a transfer restriction) of its nominal capital in own shares without reducing the share capital, the shares must generally be destroyed or resold within 6 years. If this deadline is not complied with, withholding tax and income tax will be triggered. The 6-year deadline is limited to a tax point of view. According to Swiss company law, those shares acquired in connection with a transfer restriction which exceeds 10% of the share capital must be sold or destroyed within two years.
Special regulations apply in connection with convertible bonds, bonds with warrants and employee participation plans.

The Board of Directors is responsible for the buy-back of own shares. It may only decide on the purchase of own shares if the disposable funds exceed the statutory distribution restrictions and if the principle of equal treatment within the meaning of the company law is met, i.e. shareholders must not be discriminated. In principle, the same conditions must apply to all shareholders and the acquisition must take place ""at arm's length"". The payment of a premium (Paketzuschlag) is, therefore, problematic and generally not permissible.
The Board of Directors must also observe due diligence requirements and the principle of equal treatment when selling treasury shares. If the statutory provisions on the acquisition of own shares are violated, the corresponding legal transactions (assuming that the capital repayment prohibition is not violated), are generally legally valid but the Board of Directors may become personally liable in the event of damage.
Special features must be considered, among others, when taking a pledge, acquiring partially paid-up securities and when acquiring listed securities.

What do I have to do?

The repurchase of own shares can have serious legal and tax consequences if the relevant thresholds and deadlines are not met or if the board of Directors breaches its duty of care. In the context of M&A transactions, it is important to fully understand the repurchase of own shares in order to avoid unexpected tax consequences.
The MME M&A team will be pleased to assist you in keeping track of the situation and to discuss your interests.