Applying the step-up upon immigration in Switzerland

Abstract

Jochen Wehrli-Ducaud and Mario Nivelnkötter of Deloitte Switzerland explain the step-up upon migration and its benefits.

Based on the new Swiss tax law applicable from 2020, companies can take advantage of a tax-neutral step-up of built-in gains (including self-generated goodwill) to fair market value for Swiss direct federal and cantonal/communal tax purposes when:

• Migrating their statutory seat or the place of effective management to Switzerland; or
• Transferring functions, assets and business units to a Swiss legal entity or Swiss branch office (e.g. relocation of foreign permanent establishment)

The built-in gains can stem from an undervaluation of assets or from an overvaluation of liabilities.

The step-up can be amortised tax effectively throughout the amortisation period pertaining to the individual assets or over a 10-year period in the event of self-generated goodwill. In case the Swiss company/branch makes a loss as a result of these amortisations, such a tax loss may be carried forward and offset against any taxable income generated in the next seven years.

Further, the disclosure of built-in gains is generally limited to tax accounts and do not need to be considered in the statutory financial statements. Whether and to what extent these built-in gains can be recognised in the statutory financials statements according to the Swiss Code of Obligation needs to be carefully discussed with the auditor.

The step-up on migration applies regardless of whether exit taxation is triggered in the foreign jurisdiction.

Swiss tax law stipulates no specific valuation method for determining the amount of built-in gains and self-generated goodwill. In practice, it is therefore recommendable to agree a recognised valuation method (e.g. discounted cash flow method) with the tax authority prior to the relocation to Switzerland in order to have legal certainty in this regard. In this context, however, it should be noted that the valuation method chosen also applies for the determination of the Swiss exit tax in case the company decides to leave Switzerland or transfer a part of its activities and/or functions abroad.

The new Swiss tax law provides opportunities for all different kind of companies, especially for principal companies too as they can now apply for a step-up also on federal level. Besides the Swiss corporate tax consequences, stamp duty and withholding tax consequences as well as foreign tax consequences should be carefully analysed.

In addition, tax accounting consequences for companies applying International GAAP (e.g. IFRS or US GAAP) should be considered. The step-up for Swiss tax purposes may lead to the recognition of a deferred tax asset in the first year. Under IFRS, the step-up affects the company’s deferred tax position because the initial recognition exemption is not applicable, as the step-up does not lead to the initial recognition of an asset or a liability in the IFRS but amends the tax base of existing assets and liabilities. The recognition of a deferred tax asset affects the tax rate reconciliation and the effective tax rate of the company/group will decrease in the first year (one-off effect).

Jochen Wehrli-Ducaud

T: [phone]

E: [email protected]

Mario Nivelnkötter

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E: [email protected]