The conversion of a corporation from a tax law perspective: sole proprietorship to stock corporation

One of the most important issues in the field of corporate tax law is corporate restructuring. At some point in their developmental history, the majority of companies were faced with the need to change their legal form. This might entail the transfer of part of their business or a merger with another company. This blog post centers on the former, explaining in particular the transformation of a sole proprietorship company into a stock company, and the ensuing tax consequences. In the event of uncertainties in the field of corporate tax law, our tax lawyers will be pleased to help you.

From a civil law perspective, permissible transformations are listed exhaustively in Art. 54 of the Swiss Merger Act (Fusionsgesetz). The conversion of a sole proprietorship entities is not compared to partnerships. Hence, the direct change of this legal form is not possible. For the conversion, according to Art. 69 Merger Act, a transfer of assets is necessary.

The term ‘transformation’ is not identical in the context of tax law compared to civil law. Transformation as a tax law term also subsumes transformations which are carried out by transferring assets or a contribution in kind.

From a tax law perspective, a corporate restructuring incites the question as to whether hidden reserves are disclosed and realized at the time of the restructuring. Pursuant to Art. 19 of the Federal Law on Direct Federal Tax, a tax-neutral conversion is essentially possible if two conditions are met. On the one hand, tax liability must continue to exist in Switzerland so that the hidden reserves can also be taxed in the future, when the tax realization becomes relevant. Secondly, the values which were previously relevant for income tax must be taken over.

In the case of a corporate conversion from a sole proprietorship to a stock corporation, as well as in the case of other types of corporate restructuring, a blocking period of five years applies after the initial corporate change is made. Thus, despite allowing a tax-neutral conversion, the hidden reserves that are transferred are taxed if the equity securities are sold at a price exceeding the transferred taxable equity. Whether there was an intention to sell the equity at the time of the corporate restructuring is irrelevant from a tax law perspective. If the equity securities are sold at a price that does not exceed the transferred taxable equity, the blocking period is transferred to the acquirer. The blocking period is not violated in the case of a transfer of assets as inheritance or gifts.

Corporate restructuring can introduce many legal issues, so from a tax law perspective in particular, ambivalences tend to arise. Our attorneys for tax law will be happy to help you with this.