• Rinaldo Neff, Director |
  • Sandra Bütler, Expert |


Most Swiss companies prepare – at least as a basis for the tax return – annual financial statements in accordance with the principles of the Swiss Code of Obligations (CO). In the meantime, however, the CO also allows for the use of "recognized accounting standards". Groups of companies above a certain size are further required to prepare consolidated financial statements. If the financial statements are prepared in accordance with one of the recognized standards such as Swiss GAAP FER or IFRS, they fulfill the principle of "true & fair view" and enable a reliable assessment of the economic situation. Interesting questions arise with regard to the tax valuation of shares in such companies. The determination of the applicable capitalization rate as well as the cantonal differences in the handling of the lump-sum deduction for minority interests can considerably influence the tax valuation of companies and the wealth tax value for shareholders.
Circular No. 28 (guidelines for the valuation of securities without market value for wealth tax purposes; hereinafter "KS 28") aims at the uniform valuation for Swiss tax purposes of domestic and foreign securities that are not traded on any stock exchange. Often, the formula value according to KS 28 is lower than the company’s effective market value. If significant changes of ownership of these unlisted shares take place among independent third parties, the corresponding sales price is generally considered to be the fair market value until further notice and is therefore also relevant for wealth tax purposes.

Basic principles

For tax purposes in Switzerland, the assets of individuals are to be valued at fair market value. Whereas the fair market value of listed securities corresponds to the stock exchange price, the valuation of unlisted shares is generally carried out in accordance with the guidelines for the valuation of securities without a market value for wealth tax (Circular letter no. 28 - hereinafter "KS 28"). The purpose of the guidelines is to ensure a uniform valuation throughout Switzerland of domestic and foreign securities that are not traded on a stock exchange or are not regularly traded over the counter.

Valuation methods differ depending on the business activity of the company

Pure holding, asset management and financing companies are valued at net asset value. 

In the case of a trading, industrial or service company, the enterprise value is derived from the double weighting of the capitalized earnings value and the single weighting of the net asset value. 

Net asset value

The net asset value of a company corresponds to the taxable equity capital. Subsequently, hidden reserves e.g., on securities, participations, and real estate – after deduction of deferred taxes – are added to the net asset value. Deferred taxes can be considered if the hidden reserves are subject to taxation upon realization (e.g., hidden reserves on real estate). 

Note from practice: The hidden reserves disclosed in accordance with the tax reform, including the self-created added value, are not recognized for the determination of the net asset value. 

Earnings value

The basis for determining the capitalized earnings value is the net profit according to the annual financial statements of the relevant business years. The net profit is increased or decreased by the following corrections provided for in KS 28 (list not exhaustive). To be added to the net profit are, for example:

  • One-off and extraordinary expenses (e.g., extraordinary depreciation for capital losses, creation of provisions for extraordinary risks).

To be deducted from the net profit are e.g.:

  • Non-recurring and extraordinary income (e.g., capital gains, release of reserves as well as release of provisions within the scope of unrecognized expenses previously corrected in the valuation).

The corrected net profit determined in this way is then either simply weighted over three years (model 2) or the net profit of the last financial year is given a double weighting and the net profit of the previous year is given a single weighting (model 1). 

The weighted adjusted net income is then capitalized at 9.5% for financial statements in Swiss francs. The basis for determining the applicable capitalization rates for Swiss francs and foreign currencies has been recently adjusted for valuations from 2021 onwards. 

Note from practice: The company is generally valued by the tax authorities of the canton in which it is domiciled. The cantons each select one of the two valuation models (model 1 vs. model 2) as the standard model. A company is free to deviate from the cantonal standard model if the other model leads to a more sustainable or appropriate result. In principle, the company remains bound to the model once selected for the next five years.

Illustrative example

Consulting AG achieves a profit of CHF 150'000 in the financial year 2021, a profit of CHF 75,000 in the previous year and a profit of CHF 90'000 in 2019. The equity of the company amounts to CHF 400'000. Consulting AG does not hold any investments and does not own any real estate. 

Net asset value: CHF 400'000

Average annual profit: (CHF 150'000 + CHF 75'000 + CHF 90'000) / 3 = CHF 105'000 (model 2)

Earnings value: CHF 105'000 / 9.5% = CHF 1'105'263

Enterprise value: ([CHF 1'105'263 x 2] + CHF 400'000) / 3 = CHF 870'175

The enterprise value of Consulting AG for wealth tax purposes amounts to CHF 870'175.

Basis for the valuation according to KS 28

In the guidelines for the valuation of securities without market value for wealth tax (hereinafter "KS 28"), the term "annual financial statement" is used for the figures on which the valuation is based. There is no indication of the principles according to which the annual financial statement must be prepared. This is probably due to the fact that KS 28 dates from 2008, and thus from the time before  the new accounting law was introduced. At that time, companies had to prepare their financial statements in accordance with the provisions of the CO, which meant that the term "annual financial statements" referred to the financial statements prepared in accordance with the CO. The new accounting law offers companies the option of applying recognized accounting standards such as Swiss GAAP FER or IFRS. 

The statements in KS 28 on the application of the consolidated financial statements as a basis for the company’s valuation leave considerable room for interpretation. Consequently, it is advisable to examine whether the individual valuation of group companies (incl. offsetting of hidden reserves on participations) or the valuation based on consolidated financials is more beneficial for tax purposes. In certain constellations, it may be worthwhile to prepare (consolidated) annual financial statements in accordance with the Swiss Code of Obligations in addition to the consolidated financial statements in accordance with a recognized accounting standard for tax valuation purposes. 

Experience shows that tax authorities are collaborative in the application of different valuation approaches, whereby their top priority is consistency! Thus, once a valuation basis has been selected, it must be applied for a certain period of time along with the chosen valuation method. 

Capitalization rate

Another decisive factor influencing the market value of securities for wealth tax purposes is the capitalization rate. According to KS 28, the enterprise value is calculated (with some exceptions) by weighting the capitalized earnings value twice and the net asset value once. To determine the capitalized earnings value, the average annual profit (of the last two or three years, depending on the valuation model) is divided by the capitalization rate. 

The capitalization interest rate is composed of the interest rate of a risk-free investment and the risk premium applicable to unlisted companies (incl. surcharge for illiquidity) and is published annually in the price list of the FTA. For the 2021 tax year, it is set at 9.5%. The approach for deriving the capitalization interest rate may lead to an inappropriate result, in particular with regard to the risk premium. This is the case with an above-average entrepreneurial risk due to an individual business model. Some cantons are cooperative in evaluating the appropriate interest rate.

Lump-sum deduction for asset-related restrictions

In order to take into account the limited influence of minority shareholders on a company, the minority shareholder (shareholding up to and incl. 50%) can claim a flat-rate deduction of 30% on the gross tax value of his shares. However, this is generally only granted if the shareholder has not received an appropriate dividend. The dividend for the 2021 financial year is appropriate if it amounts to at least 1.8% in relation to the market value of the share. This is based on the average of the dividends paid in the last two calendar years.

While the Canton of Basel-Landschaft always allows the lump-sum deduction for a yield of less than 3%, the Canton of Aargau grants a general reduction of the gross tax value of 50% (in addition to the ordinary lump-sum deduction for minority shareholdings). The Canton of St. Gallen grants the lump-sum deduction even if the shareholder has received an adequate dividend. 

Significant change of ownership among independent third parties

The term " significant " is not used uniformly in tax law and has deliberately not been quantified as a percentage in the commentary to KS 28. A change of ownership price is to be taken into account if a justifiable, plausible market value can be derived from it. This means that it must be examined in each case whether a relevant transfer price can be derived from a transaction. As a rule of thumb, however, it can be assumed that a transaction volume of 10% per year can be regarded as significant. 

Not every transfer price precedes a formula valuation. If shares are bought and sold by the company itself or among shareholders, the corresponding transactions are generally not considered to have taken place "among independent third parties" and therefore no fair market value arises.

Shareholders’ agreement (“ABV”)

According to KS 28, contracts under private law, such as ABV, which affect the transferability of shares are irrelevant for tax purposes. This has been criticized in practice and can lead to disruptive results if the wealth tax value of a participation is higher than the effective sale price to be achieved or obtained.

Example: The shares of an unlisted company are held 50% each by two private persons. In their ABV it is agreed that the shares have to be sold at the net asset value. The enterprise value of this company amounts to CHF 2 million based on the formula valuation according to KS 28, but the net asset value of this company is only CHF 1 million. 

Although according to the ABV the shareholder can achieve maximum sales proceeds of CHF 500,000, he has to declare his shares with a net worth tax value of CHF 1 million in the tax return.

Financing rounds

A market value, which is applicable for wealth tax purposes, is also established by prices paid by investors on the occasion of financing rounds or capital increases. During the startup phase of a company, however, these investor prices are not taken into account. 

The startup phase is neither precisely defined in KS 28 nor in the commentary thereto. However, as soon as representative business results are available, the company is no longer to be valued at net asset value but at formula value.

Sales negotiations

According to the commentary to KS 28, the fair market value is the purchase price that arises in the case of significant changes in ownership among independent third parties. Taxpayers who have tried to lower the tax value to the purchase price offered using concrete purchase offers have had little success in the past. According to a decision of the Tax Court of the Canton of Basel-Landschaft, sales negotiations merely indicate a possible intention to purchase, but do not provide any reliable information from which a market value can be derived. In our opinion, this should also apply to e contrario. Accordingly, in our opinion, neither a purchase offer that exceeds the property tax value according to KS 28 can lead to a fair market value that is relevant for wealth tax purposes. In this regard, a valid purchase agreement is required in any case.


Depending on the business activity, different valuation methods are applied. In addition, for company valuations in which the capitalized earnings value is taken into account, a choice can generally be made between model 1 and model 2. The wealth tax rate in Switzerland varies between approx. 0.1% and 1%, depending on the canton/municipality of residence of the individual shareholder. Thus, the determined wealth tax value of privately held securities may have a significant influence on the wealth tax and total tax burden of an individual shareholder. 

As part of a blog series on the valuation of unlisted securities, we will discuss possible optimization potential in company valuations as well as the determination of the tax value due to changes in ownership in a second and third part.

Although KS 28 describes in detail the framework conditions for the valuation of shares without market value, it contains a certain margin of discretion in some areas. It is worth analyzing this for the individual case at hand, examining different scenarios and finding an appropriate solution in collaboration with the tax authorities.

From a tax point of view, it must be examined in each case whether transactions qualify as significant changes in ownership and whether a justifiable, plausible market value can be derived from them which is relevant for wealth tax purposes. In this context, caution is required in particular concerning the question of significance / when independent third parties are involved as well as about financing rounds and (public) sales negotiations.

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