Tax-free capital gains are attractive for investors and entrepreneurs in Switzerland. However, what appears to be an advantage at first glance can turn out to be a tax trap. Under certain circumstances, capital gains can be classified as income - with significant tax and social security consequences. This article shows what shareholders and investors should be aware of.
Private capital gains are generally tax-free in Switzerland - a significant advantage for investors and entrepreneurs. However, a recent ruling by the Federal Supreme Court [1] highlights the com-plexity of distinguishing between tax-free capital gains and taxable income. This ambiguity can result in unexpected tax consequences under specific circumstances. The matter becomes par-ticularly complex when commercial securities trading or a self-employed activity is suspected. If a capital gain qualifies as taxable income, it may result in significant and often unanticipated income tax and social security contributions. This article highlights the main issues.
The realization of a tax-free capital gain preconditions the (profitable) sale of private assets. By contrast, gains from the sale of business assets are in any case subject to income tax and social security contributions.
The assumption of business assets presupposes the exercise of a self-employed activity. If no such activity is carried out, no business assets can be assumed against the will of the taxpayer, meaning that all assets held constitute private assets from which tax-free capital gains can be generated. If a taxable person – consciously or unconsciously – is self-employed, it must be determined on a case-by-case basis whether an asset is to be classified as private or business asset. This depends on the individual circumstances, whereby the so-called technical-economic function of the asset in question plays a central role. In this context, it should be noted that the holding and management of assets themselves – be it securities, real estate or other stores of value – could, under certain circumstances, constitute (part-time) self-employment. The intention to actually be self-employed is not decisive in this respect.
The term self-employment is not defined by law, but all income from a trade, business, liberal profession or other self-employed activity is subject to tax. In practice, the term is interpreted broadly. Accordingly, all profits from activities that go beyond the simple management of private assets are considered taxable income. This also includes capital gains from the sale or use of business assets.
The determination of whether a person is self-employed hinges on the specific circumstances of each individual case. The Federal Supreme Court takes the following indicators into account:
Each of these indicators may be sufficient together with others but may also be sufficient on their own to assume self-employment. The fact that typical elements of self-employment are not fulfilled in individual cases can be compensated for by other elements that are particularly pro-nounced. The individual aspects may not be considered in isolation and can also vary in intensi-ty. The decisive factor is that the activity as a whole is aimed at earning income.
The assessment of all the circumstances without a clear hierarchy of the listed indications makes it difficult to assess in individual cases whether or not self-employment is to be assumed. The fact that even a single indication can be sufficient if it is particularly pronounced shows that the hurdle for assuming self-employment is relatively low. This – of course – is particularly relevant when the activity is profitable.
The distinction between private and business assets is made according to the technical and eco-nomic function of the asset in question. This refers to the connection of the asset with a possi-ble self-employed activity.
A sufficiently close connection is generally deemed to exist if an asset is objectively recogniza-ble as being used for business purposes or actually serves the self-employed activity. The ques-tion is therefore whether an asset (e.g. a shareholding) serves to increase income or reduce expenses of the self-employed business activity. If a participation grants significant influence over a company in the same or a related industry as the owner's own company, this is consid-ered an indication that the participation qualifies as business asset. This assumption is in general confirmed, if the participation generates mandates for the owner's own company. This is the case, for example, with an architect who holds shares in real estate companies and acquires ar-chitectural contracts for his own architecting company from these companies.[2]
However, it is important to note that not only shareholdings in the same sector can qualify as business assets. Shareholdings outside the same sector can also be regarded as business as-sets if they are suitable for usefully expanding or supplementing the field of activity of the parent company or for diversifying business activities. In any case, the decisive factor is the intention of the person concerned to use the participation specifically to improve the operating result of their own company or its opportunities on the market.
Against this background, the Federal Supreme Court recently ruled [3] that self-employed lawyers are not prohibited from holding additional securities of their clients as private assets. The Feder-al Supreme Court thus protected the position of the taxpayer and upheld his appeal. In its rea-soning, the court stated that the lawyer's activities, repeated advice, investment activities and membership of the board of directors were not in themselves sufficient evidence to classify the shareholding as (self-employed) business activity. As long as the purpose of the participation is not to increase income or reduce expenses within the scope of the original gainful activity (in this case the activity as a lawyer), there is no room to assume that the participation is a business asset or to assume self-employment. Nevertheless, the qualification as business assets is not excluded, as the participation could also form part of commercial securities trading.
Under certain circumstances, the (profitable) sale of shares can be regarded as commercial se-curities trading and thus as self-employment. In practice, the following criteria are used for this purpose [4]:
In this context, reference should be made to a ruling by the Federal Supreme Court [5], in which it had to deal with the sale of a shareholding that was classified as commercial securities trading by the lower courts. Specifically, a person who was initially still working as an independent man-agement consultant acquired a stake in a holding company that held two subsidiaries operating in the packaging industry. These companies were in financial difficulties, which made restructuring measures necessary. Together with another business partner, the person concerned succeeded in restructuring the companies and then selling them at a profit. The responsible tax office and the Federal Tax Administration were of the opinion that this approach went beyond the scope of private asset management, meaning that the realized increase in value would constitute (subse-quent) remuneration for the intensive restructuring efforts and thus income from self-employment from an economic point of view. In this regard, the Federal Supreme Court stated that, from a tax perspective, owners of participations are not prohibited from attempting to in-crease the value of the participation by participating in the company. [6] In this specific case, there was therefore no basis for a subsequent reclassification of the capital gain as remuneration for work performed, meaning that the gain could be recognized as a tax-free capital gain.
Although the term "trader" is often associated with repeated purchases and sales, the single sale of an asset can also be regarded as self-employment under certain circumstances. From a tax perspective, it is questionable whether the single sale of an asset can lead to the assumption of self-employment as a trader.
According to the case law of the Federal Supreme Court, the mere one-off sale of an asset does not in principle protect against the assumption of self-employment. For example, the sale of a single property or the (partial) sale of a shareholding can lead to the assumption of (part time) self-employed. However, this requires that the asset in question was acquired as part of a planned, acquisition-oriented activity and managed with a view to a future profitable sale. A tax-free capital gain from the sale of an individual asset is therefore only possible if the sale can still be attributed to private asset management. This is invariably the case when a one-time oppor-tunity is taken - whereby the burden of proof lies with the taxpayer. As long as the threshold for self-employment is not exceeded, a certain asset management activity in relation to the asset to be sold should not be detrimental. However, the circumstances of the specific individual case must always be considered.
According to federal court rulings, if an occupation is primarily held as a form of employment, part-time self-employment may be considered in exceptional cases and under specific circum-stances. Indications in this regard include any external financing, risks taken or a particularly sys-tematic or planned approach. The proximity to the profession and the specialist knowledge used are also indications to be considered. The Federal Supreme Court has determined that the amount of profit made is of secondary importance.[7]
A current example is provided by the Federal Supreme Court [8]: In this instance, the revenue de-rived from the one-time sale of a share was classified as income from self-employment. The decisive factor was that the taxpayer was systematically and entrepreneurially involved in the project over a longer period of time, invested considerable financial resources, took entrepre-neurial risks and cooperated with an experienced business partner. Despite the lack of repetition of this activity, these circumstances were sufficient to assume a taxable gainful activity.
The distinction between tax-free capital gains and taxable income is complex in many cases and depends on various indicators. In order to realize a tax-free capital gain, it is important to careful-ly examine the relevant criteria and, if necessary, take measures in good time to avoid tax disad-vantages. Early and forward-looking planning is essential in view of the tax consequences of refusing the benefit of tax-free capital gains. This applies all the more as social security contribu-tions are due on the capital gain in addition to income tax.
[1] Cf. judgment FSC 9C_454/2023 of December 11, 2024.
[2] Cf. judgment FSC 2A.547/2004 of April 22, 2005.
[3] Cf. judgment FSC 9C_454/2023 of December 11, 2024.
[4] Cf. circular letter of the FTA no. 36, section 4.3.2.
[5] Cf. judgment FSC 2C_115/2012 and 2C_116/2012 of September 25, 2012.
[6] Cf. judgment FSC 2C_115/2012 and 2C_116/2012 of September 25, 2012 E. 2.5.3.
[7] See in particular.judgment FSC 9C_403/2023 of June 25, 2024 E. 5.5.
[8] See in particular. judgment FSC 9C_403/2023 of June 25, 2024.
