The principle of capital contribution simply explained

According to the principle of capital contributions, reserves from capital contributions can be repaid tax-free by a company to its shareholders. The capital contribution principle introduced with the Corporate Tax Reform II as of January 1, 2011, replaced the previously applicable nominal value principle.

With the enactment of Corporate Tax Reform II, the Capital Contribution Principle (KEP) also came into effect on January 1, 2011. More than ten years later, the Capital Contribution Principle still frequently becomes the subject of political discussions.

Nominal Value, Premium, and Capital Contribution

When a company issues capital, it can do so at the nominal value or at an amount exceeding it. The nominal value is considered the intrinsic value of the respective share, which is also registered in the commercial register. The part exceeding the nominal value is commonly referred to as premium and reflects the valuation of the company. The term capital contribution encompasses the total investment made by the investor and shareholder.

Example: A company issues 100,000 registered shares with a nominal value of CHF 1.00 at an amount of CHF 2.60. For 50 registered shares with a nominal value of CHF 50.00, an investor accordingly pays CHF 130.00. The capital contribution of CHF 130.00 includes the nominal value amount of CHF 50.00 and a premium of CHF 80.00.

Capital Contribution Principle Replaced Nominal Value Principle

The Capital Contribution Principle allows companies to distribute reserves from capital contributions tax-free to the shareholders. These reserves include all contributions, grants, or premiums made by holders of participatory rights (e.g., partners, shareholders, cooperative members) to a capital company or cooperative. It replaced the Nominal Value Principle, under which only the repayment of the nominal value is tax-free and any payment exceeding this amount represents a taxable income gain for the recipient. In contrast, under the Capital Contribution Principle, in addition to the nominal value, other contributions made by the shareholders into the reserves are also exempt from income tax.

Repayment and Partial Liquidation Rules of the STAF

The proposal on Tax Reform and AHV Financing (STAF), accepted in the popular vote of May 19, 2019, partially moderates the Capital Contribution Principle. Specifically, the STAF prescribes restrictions for Swiss-listed capital companies and cooperatives in the form of the following regulations: