When is there an indirect partial liquidation?

The indirect partial liquidation, a prohibited tax avoidance scheme through the sale of overvalued companies, unlawfully utilizes non-operating assets.

2020

When is there an indirect partial liquidation?

Indirect partial liquidation involves the sale of a company that has liquid assets not needed for business operations, from private to business assets. This procedure is prohibited because it reduces the taxable asset base.

Explaining indirect partial liquidation

If a company has liquid assets not required for operational purposes, these are often distributed as dividends. Income tax is levied on the dividend. To avoid this, profits can be retained and the company can then be sold for more than its actual value. The non-operational funds are used by the buyer to pay the purchase price and thus distributed by another company. Through this distribution, the value of the investment in the sold company decreases, it is written off, and the tax base is eliminated in this way. This procedure is referred to as indirect partial liquidation and is prohibited. Income generated in this way is treated by tax authorities not as tax-free capital gains (Art. 16 para. 3 DBG), but as taxable asset income. An indirect partial liquidation occurs due to a leveraged buyout or debt assumption.

Conditions for an indirect partial liquidation

An indirect partial liquidation exists according to Art. 20a para. 1 lit. a DBG if these conditions are cumulatively met:

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