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Decision of the cantonal tax commission / administration for direct federal tax dated September 21, 2015 i.s. J. AG (StKE 99/2014)


1 Decision of the cantonal tax commission / administration for direct federal tax dated September 21, 2015 i.s. J. AG (StKE 99/2014) Valuation of securities with no market value for the purpose of determining the taxable net profit (Art. 58 DBG or 64 StG): Unfounded value adjustment on a company participation After a share deal may differ from the takeover of assets and liabilities (asset deal) of the goodwill included in the share price are not accounted for separately. Accordingly, the (derivative) goodwill cannot be written off or written down, unless the book value of the investment is no longer fully recoverable. Facts (summarized) In the assessment ruling 2012 of J.AG, with reference to a prior letter from the tax administration, the amortized goodwill in the amount of CHF was offset against the investment in K. AG for taxable net profit and capital or for federal taxation for taxable net profit. In the run-up to the assessment, the tax administration had announced that in the case of a share deal, the goodwill contained in the share price should not be separately StPS

2 are accounted for. Accordingly, the goodwill is not written off unless the book value of the investment is no longer recoverable as a whole. According to an examination of the 2012 financial statements of K. AG, the value of the investment is still given. The taxpayer objected to the assessment decision. The main reason given was that the opponent, newly founded in 2012, was in a weaker negotiating position when buying the shares in K. AG and therefore had to accept a high level of goodwill. However, the acquired goodwill is of no value. Subsequently, it turned out that great efforts would still have to be made in order to achieve the hoped-for efficiency of the company and to meet part of the estimated yield expectations in the future. The cantonal tax commission / administration for federal tax rejects the objection. Considerations According to the submitted sales contract of March 16/24. On April 1st, 2012, the opponent took over% of the share capital 2 StPS 2015 on May 1st

3 (nominal value CHF) of K. AG, (hereinafter: subsidiary), at the purchase price of CHF The opponent argues that the tax practice listed in the letter of January 16, 2014 and the assessment ruling of February 18, 2014 are incomprehensible. Evaluations are always individual, result from the time of consideration, the point of view of the observer and the strength of the position in negotiations. In the present case, the subsidiary was bought in order to acquire transport capacity and thus to build up a company, not to gain an advantage through financial transactions. Usually, a buyer starting a company is in a weaker negotiating position and has to accept a large part of the expected income from the seller as goodwill that can be bought. The acquired subsidiary had an intrinsic value of CHF as of January 1, 2012 (after the demerger), which had not changed significantly by December 31, 2012. The derivative goodwill was capitalized upon takeover and reported in the opponent's balance sheet. The independent auditor, however, doubts the value of the goodwill in accordance with commercial law and is calling for a massive valuation adjustment. With the consent of the creditors, the valuation shown in the balance sheet as of December 31, 2012 was left unchanged and the impending over-indebtedness could be rejected. As it turned out after the takeover of the subsidiary, great efforts (personnel, vehicles, quality control, etc.) would still have to be made in order to achieve the promised efficiency of the company and to meet some of the estimated earnings expectations in the future. It is therefore in the phase of the sub-StPS for an entrepreneur

4 company development in a difficult market environment () it is not understandable that the state is making a value assessment that is contrary to commercial law and that the liquid funds urgently needed for the development would have to be given to the state. The tax valuation of the derivative goodwill should be adjusted to the requirements of commercial law and international accounting standards in order not to jeopardize the chances of survival and success of a young, developing company. The directive on depreciation, value adjustments, provisions and reserves of the Schwyz Tax Administration of October 24, 2006 (WAWR; Schwyzer Tax Book No.) allows the excessively high purchase prices for intangible rights resulting from a weak negotiating position to be corrected (written off) for tax purposes. In addition, in a submission dated July 31, 2014, the opponent argued that according to Section 4 WAWR, immediate write-offs to one Swiss franc could be made on intangible rights in the year of acquisition or in the following years. According to Section 7 WAWR, depreciations on the production costs of investments (at least 20%) are permitted up to a maximum of the proportionate book equity of the subsidiary. Assuming that as of December 31, 2012 the book value of the holding at the opponent (before depreciation) was CHF (corresponding to the purchase price) and that the subsidiary's balance sheet showed equity of CHF, the question of the intrinsic value of the Participation. Also the evaluation of the subsidiary according to circular no.28 of the Swiss Tax Conference of August 28, 4 StPS 2015

5 2008 (guidance on the valuation of securities without a market value for wealth tax) results in a value that is far below the balance sheet items of equity investments and goodwill. An assessment of the tax-relevant operating income of the subsidiary in the division in the years before the demerger was not possible because the company had also carried out larger commercial and real estate transactions in addition to its business. 2.2 On January 1, 2013, the revised provisions of Art. 957 ff. Of the Swiss Code of Obligations of March 30, 1911 (OR; SR 220) on commercial bookkeeping and accounting came into force. If, as here, the new law is already in force during the pending administrative procedure and the revised law does not contain any transitional provisions that deviate from the principle, the new provisions apply (BGE 2C_309 / 2013 of September 18, 2013, E. 2.1 = StPS 2013 p . 82 ff. = StE 2013 B No. 42). According to Art. 960a Para. 3 revor, the use and age-related depreciation must be taken into account, other depreciations must be taken into account by value adjustments. Participations such as the opponent's subsidiary in this case are generally subject to value adjustments (BGE 2C_309 / 2013 of September 18, 2013, loc. Cit., E). The only thing to check in the following is therefore whether the investment in question has actually suffered a loss of value. 2.3 According to 64 para. 1 let. a and b StG and Art. 58 para. 1 let. a and b DBG, the taxable net profit of legal entities is composed, among other things, of the balance of the income statement and StPS

6 all parts of the business result that were eliminated prior to the calculation of the balance in the income statement and that are not used to cover business-related expenses, e.g. depreciation, value adjustments and provisions that are not justified for business purposes. As a result, these can only be deducted from taxable net profit if they are commercially justified. The facts which make value adjustments appear to be commercially justified are tax-reducing and must therefore be presented and proven by the taxable person. Whether the prerequisites for a value adjustment are met is generally judged by the circumstances on the balance sheet date. However, all information received up to the time the balance sheet was drawn up can be used in the annual financial statements, provided that this reveals conditions on the balance sheet date that have an impact on the balance sheet and income statement. Further consideration of subsequent events would contradict the key date character of the annual accounts and the principle of profit taxation based on the accruals (decision of the Zurich Administrative Court of December 7, 2011, StE 2012 B No. 38, E. 2.3 and 2.4). Goodwill is an intangible asset. When acquiring a stake (share deal), it is a special case. In the individual financial statements, this goodwill forms part of the acquisition costs of the investment and may not be shown separately. Accordingly, it may not be written off or written down, unless the book value of the investment is considered to be of no longer value as a whole (Swiss Auditing Manual, Volume 1, Bookkeeping and Accounting, Treuhand-Kammer 2009, p. 207). Dem- 6 StPS 2015

7 on the other hand, the (derivative) goodwill acquired separately on the assumption of assets and liabilities (asset deal) may be recognized at cost and must be depreciated within a reasonable period of time (Schweizer Handbuch der Wirtschaftsprüfung, op. Cit., P. 209). 2.4 From the purchase contract of March 16 / March 24 April 2012, items 1 and 3, it is clear that the shares of K. AG form the object of purchase, and the assets and liabilities of K. AG that have not been taken over. It is therefore a share deal and not an asset deal. Then it emerges from the opponent's account sheets that when buying shares, the nominal share value of CHF and the goodwill of CHF were accounted for separately, which is not permitted in the case of a share deal. In the case of a share deal, the participation is to be accounted for in the total amount. The opponent cannot derive anything in her favor from the provisions of the WAWR that have been invoked. The wording of the wording of the immediate depreciation for intangible rights and movable business equipment in accordance with Section 4 WAWR clearly relates to individual assets, thus to an asset deal. This provision does not apply to a share deal. The same applies to temporary reductions in value on various assets, which can be taken into account by means of a value adjustment in accordance with Section 11 WAWR. 7 and 12 WAWR determine the maximum deduction for depreciation or value adjustments on the prime costs of investments. However, this is not a lump sum, but the loss of value that has occurred must be effectively proven. StPS

8 3. It remains to be checked whether the participation, as permitted in a share deal, may at best be written down because the book value of the participation as a whole can no longer be regarded as valuable. 3.1 In the notice of objection dated March 14, 2014, the opponent stated that it had bought the subsidiary in order to increase its income in the area. The basis for the purchase decision was thus neither the equity nor the wealth tax value. In a letter dated July 31, 2014, the opponent submitted the assessment of the cantonal tax office. to the subsidiary as of December 31, 2012. This results in an intrinsic value of CHF and an enterprise value according to the practitioner method of CHF. Assuming that the book value of the investment (before depreciation) is CHF as of December 31, 2012, the question of overvaluation or intrinsic value arises. The opponent could not understand which calculation method the tax administration now uses to question the relevance and necessity of a depreciation in the 2012 annual financial statements. The following can be seen in the subsidiary's income statements regarding the development of income in the division: In 2010, 2011 and 2012 (adjusted for the division), income remained largely the same. If after the purchase on March 16/24. If there had been a slump in earnings in April 2012, this would have had a corresponding effect on the 2012 income statement and an annual profit of CHF would hardly have been achieved. The balance sheet as of December 31, 2012 shows that the company liquid 8 StPS 2015

9 and equity is covered. The present annual financial statements therefore speak against the commercial justification of a value adjustment. With regard to the question of the valuation method, it should also be stated that K. AG, which was acquired on May 1, 2012, is merely a part of the former company of the same name. According to the demerger plan of March 8, 2012, part of the assets and liabilities were transferred to the newly founded L. AG. According to federal court practice (BGE 2C_309 / 2013 of September 18, 2013, loc. Cit., E. 3.6 and 3.7), neither the pure asset value method nor the conventional practitioner method are able to adequately capture atypical constellations and structures. In that case, the P. AG to be valued emerged on February 28, 2008 through a spin-off from Q. AG. In the following July, the shares in P. AG were transferred to O. AG. The Federal Supreme Court described it as compliant with federal law if the lower courts, based solely on the audited financial statements for 2008 and 2009 (static method) and without assessing the future prospects (dynamic component), failed to provide a value adjustment of around 30 percent of the purchase price as of December 31, 2009 . Thus, in the present case, too, the annual financial statements can primarily be used and the practical method or pure net asset value method can be neglected. 3.2 The auditor's report dated April 29, 2013 invoked by the opponent can only be used for tax purposes with caution. The auditor has to comply with the provisions of commercial law and observe the protection of creditors, while the tax authorities carry out the assessment in accordance with the tax law StPS

10 regulations and to record the actual profit for the period. The audit report states, among other things: Due to my audit, there is reason to assume that the balance sheet items investment and goodwill (both of which concern the takeover of K. AG) ​​require a value adjustment that goes beyond the depreciation already made. The assessment of the intrinsic value of the above-mentioned balance sheet items essentially depends on the future course of business. The report also assumes that the question of the value adjustment only arises with a view to the future business development (which is not to be taken into account here) (dynamic component; see section 3.1). In any case, it cannot be inferred from the audit report that an omission of the depreciation that has already been carried out would have to be corrected under commercial law. Should the book value of the investment as a whole no longer be recoverable due to the future course of business, the value adjustment would not have to be made in 2012, but rather in a later tax period. In any case, the report does not find any violation of mandatory maximum valuation regulations, which would also have to be observed under tax law. 3.3 In summary, due to the situation on the balance sheet date (December 31, 2012), there are no reasons for a write-down of the investment. The assessment department rightly added the unjustified value adjustment of CHF to the taxable net profit or taxable capital. The objection thus proves to be unfounded and must be dismissed. 10 StPS 2015