Overview

On April 24, 2024, the Federal Supreme Court of Switzerland delivered a significant ruling (case number 9C_680/2022) concerning the taxation of liquidation profits in the context of Swiss tax law. The judgment offers crucial clarification on the criteria and treatment of such profits, particularly in relation to the accounting reevaluation of assets.

Participants and background

The case involved the Federal Tax Administration (AFC), challenging a decision by the Cantonal Tax Administration of Vaud. The taxpayers in question had jointly operated a partnership, which was converted into a corporation effective January 1, 2014. During the fiscal year 2013, preceding the transformation, the partnership reevaluated certain fixed assets, leading to a significant accounting profit.

Legal issue

The core issue revolved around whether the profit from this reevaluation could be treated as liquidation profit and thus taxed separately at a special rate under Article 37b, paragraph 1 of the Federal Direct Tax Act (LIFD). The taxpayers had declared this profit separately in their 2013 tax returns, which the local tax office initially rejected. However, the Cantonal Tax Administration of Vaud later accepted the taxpayers’ claim.

Cantonal Court decision

The Cantonal Court of Vaud sided with the taxpayers, prompting the AFC to appeal to the Federal Supreme Court. The AFC argued that the profit from the reevaluation should be included in the regular income from self-employed activities for the 2013 tax period, rather than being treated as a liquidation profit eligible for separate taxation under Article 37b LIFD.

Federal Supreme Court ruling

The Federal Supreme Court upheld the decision of the Cantonal Court, affirming that the profit from the reevaluation of fixed assets prior to the transformation of the partnership into a corporation could indeed benefit from the preferential tax treatment under Article 37b LIFD. The Court reasoned that the reevaluation was directly linked to the cessation of the independent business activities, and thus, the profit qualified as liquidation profit.

Key legal reasoning

The Court clarified that the law does not distinguish between different forms of latent reserves (realization, systematic realization, and accounting realization). Hence, the reevaluated profit could be considered as liquidation profit.

The judgment highlighted that Article 37b LIFD was intended to alleviate the tax burden on self-employed business owners ceasing their activities, addressing the lack of mandatory professional pension schemes for the self-employed.

The Court emphasized the sufficient causal link between the reevaluation of assets and the cessation of independent activity, indicating that such reevaluation would likely not have occurred in the absence of the business cessation.

The Court dismissed concerns about arbitrary tax benefits, noting that the taxpayers’ actions were consistent with the law’s intention and did not constitute tax evasion.

Conclusion

The Federal Supreme Court’s decision is a significant clarification for taxpayers and tax authorities alike, ensuring that profits resulting from the reevaluation of assets during the cessation of independent business activities can benefit from the preferential tax treatment under Article 37b LIFD.

Implications

This judgment provides a precedent for similar cases, offering a clear interpretation of the tax treatment of liquidation profits and opportunities of tax planning for individual desiring to cease their self employment activity or transfer it to a corporate entity.

Please do not hesitate to contact us in case of any questions at contact@axcord.com.