Corporate Taxation

Swiss Federal Tax Authority issues new Circular Letter no. 6a regarding thin capitalization rule applicable to corporations and co-operatives

On 10 October 2024, the Swiss Federal Tax Administration (SFTA) has published the new circular no. 6a on hidden equity in corporations and cooperatives. Circular no. 6a came into force upon its publication. It replaces the previous circular no. 6 dated 6 June 1997.

The new circular no. 6a is linked to the previous regulation and merely updates it in some areas.

Relevant adjustments

The following adjustments should be highlighted:

  • The circular now explicitly applies also to withholding tax. In practice, this has already been the case.
  • The paragraphs on average capital and equity tax have been removed. These paragraphs had lost its relevance at federal level since the change from the return-linked profit tax to the proportional tax rate and the abolition of the equity tax as of 1 January 1998. Nevertheless, the cantons may continue to adhere to the provisions of the new circular no. 6a for the purposes of their equity taxes.
  • The section on loss offsetting has also been deleted, according to which hidden equity was to be equated with share capital. It can only be hoped that the associated practice of some cantons of adding hidden equity to the minimum taxable capital will now be abandoned.
  • Based on a decision by the Federal Supreme Court, in the circular letter it is now indicated that hidden equity is to be determined in accordance with the values in the functional currency.
Conclusion

Fortunately, there are no changes for taxpayers. However, in terms of legal certainty and the uniform application of the law, it is regrettable that the SFTA did not take the opportunity to clarify various aspects in relation to hidden equity and its related interests.