SWITZERLAND Law and Practice Contributed by: Marco Toni, Gilles Pitschen, Leonard Baumann and Lara Pafumi, Loyens & Loeff
4.3 Liquidity Event: Form of Consideration The consideration in a sale of a Swiss privately held venture capital-financed technology company is usu- ally cash. Certain rollovers for the key management are structured such that the management holding equity in the company is paid with a mix of cash and equity. 4.4 Liquidity Event: Certain Transaction Terms Customarily, shareholders’ agreements between the founders and venture capital investors provide for drag- and tag-along rights in relation to liquidity events. Such drag- and tag-along rights contain pro- visions on the key terms and conditions that apply to shareholders in case of a sale event or a public listing. The terms of such provisions are usually highly negoti- ated and may contain more or less detailed provisions on what representations, warranties and indemnities the shareholders are required to give in a sale process. In general, any such liability is limited to each share- holder’s share in the purchase price and is several ‒ rather than joint ‒ with the other shareholders. Obliga- tions to enter into escrows or agree to hold-backs may also be contained in the drag- and tag-along rights. The use of warranty and indemnity (W&I) insurance is growing in Switzerland. W&I insurance is now gener- ally an accepted instrument among professional play- ers in the market. Usually, Swiss privately held venture capital-financed technology companies pursue one coherent business and are therefore not in a position to spin off a busi- ness. Therefore, spin-offs for such companies are rather unlikely. However, if a company has different lines of business that do not all match the strategic fit of a buyer, a spin-off may be the preferred structure. 5.2 Tax Consequences Spin-offs can be structured as tax-neutral reorgani- sations at the corporate level (including a so-called holding spin-off) if certain requirements are fulfilled – irrespective of the execution under civil law (eg, asset deal, two-step demerger or statutory demerger). The 5. Spin-Offs 5.1 Trends: Spin-Offs
most important requirements for Swiss tax purposes are that: • the tax liability in Switzerland continues; • the values previously relevant for income tax are taken over; • one or more businesses or parts of businesses are transferred; and • the legal entities that exist after the spin-off con- tinue to operate a business or part of a business. It should be noted that, especially in the case of tax neutral spin-offs, the key element is the so-called dou- ble business requirement. If the aforementioned conditions are fulfilled, the tax neutrality of spin-offs also applies to the shareholders, provided there will be no gain in the nominal value or so-called capital contribution reserves (for individu- als). There is no blocking period for Swiss tax purposes, provided the spin-off qualifies as a tax-neutral spin- off. 5.3 Spin-Off Followed by a Business Combination In principle, and bearing in mind that a tax-neutral spin-off is based on the requirement of two separate businesses without being subject to a blocking period, a spin-off immediately followed by a business com- bination should be possible for Swiss tax purposes. It should always be considered whether the general rules for tax avoidance may be applicable to the case at hand. Generally, tax avoidance would be assumed where a legal arrangement chosen by the parties involved appears to be unusual ( insolite ), improper or outlandish ‒ or, in any case, completely inappropriate to the economic circumstances (“objective element”) – if, in addition: • it can be assumed that the chosen legal arrange- ment was made abusively merely in order to save taxes that would be due if the appropriate circum- stances were in place (“intention to avoid”; “sub- jective element”); and
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