Swiss Federal Supreme Court clarifies requirements for recognition of capital contribution reserves

The Swiss Federal Supreme Court has issued an important decision clarifying the requirements for the recognition of capital contribution reserves. In order for reserves of a Swiss corporation to qualify as capital contribution reserves, which may be distributed without attracting the Swiss dividend withholding tax, the following requirements must be met:

• The capital contribution reserves must be recorded in a separate account for Swiss statutory accounting purposes at the time of a distribution to the shareholders. It is however not required, that the reserves are recorded on that separate account already at the time of their contribution. Subsequent reclassifications of shareholder contributions recorded on another account into capital contribution reserves are to be recognized, provided such reclassification is done in accordance with the applicable Swiss statutory accounting rules.
• The capital contribution reserves must be reported to the Swiss Federal Tax Administration prior to the due date of the dividend.

Introduction

Capital contribution reserves of a Swiss corporation are equity reserves created through the issuance of shares above par or contributions against no consideration (à fonds perdu) by direct shareholders.

Capital contribution reserves may be distributed free of the 35% Swiss withholding tax on dividends, provided that:

• the capital contributions are recorded in a separate account for Swiss statutory accounting purposes and
• any changes to this account are reported to the Swiss Federal Tax Administration.

In its administrative practice, the Swiss Federal Tax Administration required so far that the recording of the capital contribution reserves in a separate account occurs at the time of a contribution or shortly thereafter. Furthermore, the Swiss Federal Tax Administration did not accept the reclassification of contributions previously recognized with P&L impact to capital contribution reserves (see also circular 29c of 23 December 2022, section 3.2).

Facts and legal considerations

In the case that prompted the Swiss Federal Supreme Court’s decision (9C_690/2023 of 21 March 2025), a Swiss stock corporation (Aktiengesellschaft) had received a significant bequest from a shareholder. The bequest was recognized with P&L impact for accounting purposes. From then onwards, the relevant amount formed part of the corporation’s retained earnings. Several years later, in observance of the Swiss statutory accounting rules, and against the backdrop of a revision of applicable accounting rules, the corporation reclassified the reserves that had been created by the bequest from retained earnings to capital contribution reserves. The Swiss Federal Tax Administration refused to recognize the reclassified amount as capital contribution reserves which was confirmed by the Swiss Federal Administrative Court.

The Swiss Federal Supreme Court disagreed and held that the bequest – net of inheritance tax – qualified as capital contribution reserves. In particular, the Swiss Federal Supreme Court held that:

• Capital contribution reserves may only be distributed free of Swiss dividend withholding tax if they are recorded in a separate account for statutory accounting purposes at the time of the distribution or the due date of such distribution. 
• Contrary to the practice of the Swiss Federal Tax Administration, the recording of capital contribution reserves in a separate account does not need to occur at the time of the contribution or immediately thereafter. Subsequent reclassifications are permissible, if made in accordance with the applicable Swiss statutory accounting rules.
• Capital contribution reserves must be reported to the Swiss Federal Tax Administration at the latest at the due date of the dividend in order to qualify for a withholding tax-free distribution.

Practical implications

This decision has practical implications for Swiss corporations that received shareholder capital contributions, which have not been recorded in a separate account. We recommend reviewing whether a reclassification of other reserves to capital contribution reserves is permissible under the applicable Swiss statutory accounting rules. Once reclassified, the change of the capital contribution reserves must be reported to the Swiss Federal Tax Administration.

For evidentiary purposes – and irrespective of this decision – it remains best practice to record shareholder capital contributions directly in a separate account and report any changes to the capital contribution reserves to the Swiss Federal Tax Administration in a timely manner.

The decision marks the second recent Swiss Federal Supreme Court decision in which the court adopted a more lenient position than the Swiss Federal Tax Administration regarding the tax treatment of distributions of amounts contributed by shareholders. In BGE 149 II 158 of 17 March 2023, the Swiss Federal Supreme Court held that the requirement to record capital contributions in a separate account is not a pre-requisite for a Swiss income tax-free treatment of such distributions. Distributions made to Swiss tax resident individual shareholders by Swiss corporations held as private assets may thus be income tax-free even if they originate from hidden capital contributions. It remains to be seen whether the Swiss Federal Supreme Court will, in a future decision, also permit the Swiss withholding tax-free distribution of hidden capital contributions, provided that such reserves are first recognized in accordance with Swiss statutory accounting law and recorded in a separate account.

For further analysis or assistance with the implementation of these recommendations, please reach out to our Tax Practice Group.

Please do not hesitate to contact us in case of any questions.

Legal Note: The information contained in this Smart Insight newsletter is of general nature and does not constitute legal advice.