A financial year dominated by COVID-19. Seven tips for annual financial statements.
The 2020 financial year was dominated by coronavirus. While many companies were able to avoid liquidity problems by taking advantage of the COVID-19 credit, economic uncertainty remains. Seven questions and answers on tax and legal issues that should be kept in mind when preparing your financial statements.
1) What changes are resulting from Switzerland's new COVID-19 Solidarbürgschaftsgesetz (joint and several guarantee act)?
The COVID-19 Solidarbürgschaftsgesetz took effect on December 19, 2020. It replaces the Federal Council's COVID-19 Solidarbürgschaftsverordnung (joint and several guarantee ordinance) passed under emergency law on March 25, 2020. The main changes under the law are as follows: Extension to the term of COVID-19 credit from five to eight years (in cases of hardship, extension for another two years); the credit can also be used for new investments or for expansion (previously allowed only for replacement investments), and restructuring pursuant to the Merger Act (FusG) is now expressly allowed under an existing COVID-19 credit.
What has not changed, however, is that shareholders and associated persons cannot receive funds, i.e. dividends or loans, as long as there is a COVID-19 joint and several guarantee.
2) How do you declare COVID-19 credit on the balance sheet?
Depending on the interest arrangements, COVID-19 credit must be declared under "interest bearing" (if > CHF 500,000) or "other" liabilities. Whether it is categorized as short-term or long-term debt depends on the specific COVID-19 credit agreement with the bank. In the notes to the financial statements, you must also disclose the details (amount, repayment provisions, and interest).
3) What are the tax implications of valuation adjustments or provisions?
Some cantons such as Zug, Valais, and Aargau permitted additional COVID-19 tax provisions for the 2019 annual financial statements at cantonal and communal tax level. These provisions were generally limited to one year. If a company made use of this option, it must cancel these provisions in accordance with the cantonal requirements for the 2020 annual financial statements. The rules from each specific canton are authoritative.
4) How are rent reductions handled in tax terms for the business assets?
Rent reductions result in a higher taxable profit for the tenant, or a smaller loss (the reverse is true for the landlord). If the rent reduction was granted by an associated person and no third-party comparison is available, you may need to clarify this with a tax expert.
According to initial guidance from the tax authorities, a gift tax will not likely apply, because a rent reduction is intended for protection of the long-term lease and not as a gift (depending on the specific situation).
5) What are the obligations of the Board of Directors if the company's financial situation deteriorates?
Apart from monitoring liquidity, one of the main obligations of the Board of Directors is to evaluate the equity. The following two situations in particular require urgent action:
- Half of the equity and the legal reserves are no longer covered (capital loss under Art. 725(1) Code of Obligations).
- Along with all of the equity, debt is no longer fully covered (excess of liabilities over assets under Art. 725(2) Code of Obligations).
If the company has suffered capital loss, the Board of Directors must immediately initiate financial restructuring measures. If an excess of liabilities over assets has been ascertained (at going concern and liquidation values), the company can avoid having to notify the court only if there are postponements of priority from company creditors to the extent of the shortfall in cover (the obligation to initiate financial restructuring measures remains in effect, however).
Note: Any COVID-19 credit under Art. 3 of the COVID-19 Solidarbürgschaftsverordnung (up to CHF 500,000) is not counted as debt when calculating a capital loss or excess of liabilities over assets.
6) What values must be declared in the 2020 financial statements: going concern or liquidation values?
If a company experiences serious economic difficulty due to COVID-19, this may also affect the applicable accounting regulations. Under the Code of Obligations, when assessing the company's value you must switch from going concern to liquidation values if the company is likely to, or will have to, cease operations within 12 months of the balance sheet date. Please note that switching to liquidation values may result in a larger reduction of the asset values or equity and, in the worst-case scenario, to an excess of liabilities over assets.
7) What are the tax implications of company restructuring?
According to the practice of the Federal Tax Administration, a company must be restructured if it has no declared and/or hidden reserves that could cover the losses disclosed. Note: Some contributions to restructuring measures can have different tax consequences. In the case of corporate income tax, a distinction is made in this regard between real and artificial restructuring income. Real restructuring income (such as from a waiver of claims or non-repayable contributions from third parties) is generally subject to corporate income tax. In return, it can be offset against losses from prior years, with no time restrictions (instead of the usual seven-year limit). Artificial restructuring income (such as from a capital reduction followed by recapitalization or non-repayable contributions from shareholders), however, has no effect on corporate income tax.
As tax regulations are very complex, it is a good idea to consult a restructuring expert in advance.
How else can Credit Suisse help me?
If needed, our experienced tax experts in corporate tax law can assist you in these matters and put you in touch with other specialists if required.