Tax treatment of the reissuance of treasury shares under an employee participation program pursuant to the principle of relevance

Facts

The A. AG (hereinafter: the taxpayer), a listed holding company based in Zurich engaged in the reinsurance business, issued treasury shares to employees in the 2015 financial year as part of an employee participation program. The taxpayer recorded the difference between the allocation value (CHF 65,082,950.-) and the acquisition costs of the shares as a contra-equity item in equity without adding this amount to taxable net profit.

The Zurich cantonal tax authority corrected this approach in an assessment proposal dated 20 March 2020 by increasing taxable net profit by the non-expensed difference. The taxpayer appealed this proposal but was unsuccessful in all cantonal instances. The Federal Tax Administration (FTA) then filed a public law appeal with the Federal Supreme Court with the aim of setting taxable net profit at CHF 3,642,250,000.- and reducing the participation deduction to 92.762%. The Federal Supreme Court dismissed the appeal.

Considerations

The Federal Supreme Court first confirmed the principle of relevance pursuant to Art. 58 para. 1 lit. a DFTA, according to which taxable net profit is generally derived from the annual accounts prepared in accordance with commercial law. The commercial law treatment of treasury shares as a contra-equity item (Art. 959a para. 2 no. 3 lit. e CO) was recognised as correct since treasury shares do not constitute an asset and their repurchase and reissuance are to be qualified as a capital reduction transaction.

The FTA argued that the difference between the issue price and acquisition costs constituted taxable capital gains since the taxpayer had obtained an economic benefit through the reissuance. The Federal Supreme Court rejected this view: the wording of Art. 58 para. 1 lit. c DFTA requires an “income” for a correction, which was not the case here. Moreover, it could not be described as a “capital gain” since treasury shares do not embody any asset value. A tax correction was therefore not permissible.

The FTA also relied on Art. 20 para. 1 lit. c DFTA in conjunction with Art. 4a para. 2 WTA to establish a systematic connection between withholding tax, income tax and profit tax. The Federal Supreme Court dismissed this approach: the systematic connection was too weak to…