Deductions in the taxation of liquidation gains

When a self-employed person ceases their professional activities, they benefit from privileged taxation on liquidation gains. Contributions to pension and occupational provisions can be deducted from the liquidation profit. One case went as far as the Federal Court.

A self-employed farmer, over 55 years old, ceased his professional activities in 2011 and consequently sold one of his properties, while he transferred another into his personal assets. The competent tax administration assessed the privileged liquidation gain at 2,156,733 Fr in the same year. In 2015, the taxpayer objected. He believed that real estate gain tax rather than liquidation taxation should apply. However, the properties in question were designated for construction and mixed-use, thus the application of income tax was correct. Nevertheless, the taxpayer appealed to the Aargau Canton Special Administrative Court arguing that the tax bill lacked legal recourse instructions. He further complained that the tax commission had not addressed his requests. The complaint was dismissed. The Administrative Court of Aargau Canton agreed. In May 2017, the former farmer then lodged a complaint against the ruling of the Administrative Court with the Federal Court, where he first requested it be declared that no assessment had taken place and secondly, that the bill should be corrected.

Being represented by a non-lawyer worked to the farmer’s disadvantage: The Federal Court dismissed both applications as unfounded, particularly emphasizing the accuracy of the tax commission's calculation.

The law offers self-employed taxpayers privileged liquidation gain taxation at the cessation of operations like in this case. This is stipulated in Art. 37b DBG. This gain consists of the silent reserves of the last two years before ceasing professional activities. Where there are gaps in occupational provision, missing contribution years can be purchased and deducted from the liquidation gain.

In this case, however, considering a fictitious purchase was not possible. It would have been taxed at one-fifth of the rate according to Art. 36 DBG. However, as it was absent, the entire liquidation gain is subject to the tax rate, which corresponds to one-fifth of this amount.

The complaint was dismissed by the Federal Court. Since it was clearly an unfounded complaint, it could be judged by a panel of three judges.

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