Company valuation: Calculating with the new capitalization rate

Valuation of unlisted companies for tax purposes. Eight questions and answers.

Over the past few years, tax administrations have valued unlisted companies based on largely constant factors. The Swiss Tax Conference (SSK) has drawn up new recommendations for the practice of calculating capitalized income value in order give better consideration to the changing market movements. We explain what you need to know.

1. What's new?

The formula applied to the capitalization rate, which is used to calculate the taxable capitalized income value, is new. The previous formula was very rigid, with the rate of 7% remaining unchanged since 2015. Now, it is more dynamic and dependent on the market. Taxpayers will be happy to see that a rate of 9.5% applies to their 2021 financial statements (see question 3 for details).

All other things being equal, that results in a lower enterprise tax value and thus a positive effect on the wealth tax owed. By contrast, the basic formula behind corporate valuation for tax purposes with application of the "mean value method" ([2 x capitalized income value + intrinsic value]/3) has proven to be effective and remains unchanged.

2. What do we advise you to review?

From a strategic point of view, we recommend – in addition to applying the new capitalization rate correctly – that you look at how the changes will specifically impact your personal situation. The focus here is on three aspects in particular:

  • You can have a positive effect on the enterprise tax value by choosing the right method of calculating capitalized income value (covering the last two vs. the last three financial years).
  • Please note that the enterprise tax value in cantons with a cap on wealth tax can have a direct effect on your distribution strategy (salary vs. dividend) (see also question 6).
  • The enterprise value for tax purposes also often serves as a reference value – for example, in a shareholders' agreement, for employee stock purchase plans, marriage and inheritance contracts, or a last will. It is highly advisable to regularly examine whether the contract reflects the will of the parties, even if the reference value changes annually. As an alternative, you can specify a different (static) reference value.

3. What is the reason for the new, more dynamic formula?

To determine the capitalization rate, the SSK still relies on the total of a risk-free interest rate and risk premium (with a surcharge for illiquidity). However, the system is now based on more adequate data.

Calculating the capitalization rate for unlisted companies


Until 2020

New as of 2021
Basis for risk-free interest rate Five-year swap rate (at least 0% if this is negative) Average interest rate on risk-free investments (20-year federal bonds or, if negative, tied to savings deposit or current account rates – with a minimum of 0%) and loans (fixed-rate mortgages in the lowest risk category).
For 2021: 0.72%
Basis for risk premium Fixed risk premium of 7% (4% for market risk, plus 3% for corporate risk and illiquidity). Risk premium for companies included in the Swiss Performance Index (SPI) (excluding real estate companies and SNB). This is where volatility is now likely to occur because this risk premium fluctuated heavily between 0.74 and 3.09 in the time horizon from 2013 to 2018.
Capitalization rate calculation for unlisted companies Risk-free interest rate (0% since 2015), plus risk premium of 7% Total of risk-free interest rate and risk premium for unlisted companies* with a surcharge for illiquidity of 17.65%. The average capitalization rate for the previous three years (n-1, n-2, n-3) calculated in this way equals the capitalization rate for the tax year in question (n). For 2021: 9.5%

*Calculation: Risk premium for SPI companies (see above) multiplied by a risk factor of 3.01 for unlisted companies.

4. In what direction will the risk premium head in the future?

That is difficult to predict. The three-year period from 2018 to 2020 (average) currently relevant for calculation of the capitalization rate for 2021 shows a falling trend. This could mean that capitalization rates may be lower in the future. At the very least, they should be less than the 7% that has been used for a considerable amount of time now.

However, the new, dynamically adjusted risk premium is certainly likely to lead to corporate tax values that fluctuate annually and independently of business performance. The reviews recommended under question 2 should therefore be understood as a recurring checklist.

5. Are there differences between cantons?

It can be assumed that most cantons will adopt the new formula. Cantons like Zurich and Bern have adjusted their system of assessment accordingly so the new capitalization rate will already be applied to the 2021 tax period.

However, experience shows that intercantonal tax competition may also occur in this area. For example, the Canton of Vaud has announced a capitalization rate as high as 16%, subject to compliance with certain conditions. We advise looking into how the system is being implemented in the canton where your company is domiciled and examining your individual options for optimization.

6. I enjoy cantonal privileges or have a special arrangement. What do I need to do?

The wealth tax privileges for shares in unlisted companies and tax limits that exist in roughly half of all cantons will probably remain – irrespective of the change in the capitalization rate. Therefore, you should examine the effect of these measures in the event of a change in the enterprise value.

If you have previously entered into an individual arrangement with your cantonal authorities concerning the applicable capitalization rate, we advise you to proactively check whether it remains in effect.

7. What should I pay careful attention to on my 2021 tax return?

The new formula will be used for the first time when assessing your taxes for 2021. Therefore, when you receive your tax assessment, it is absolutely essential you make sure that the capitalization rate of 9.5% has been applied (unless you have a separate arrangement). Keep in mind that you have a short period of 30 days in which to object.

8. How can Credit Suisse help me?

We will be happy to help you analyze your situation as well as negotiate individual solutions with local tax authorities if need be. Our tax experts follow an integrated approach that, in addition to considering enterprise tax value and wealth tax, covers other aspects such as your distribution strategy, shareholders' agreement, marriage and inheritance contract, and employee stock purchase plans.