Buying treasury shares: limits and rules

Can an AG buy its own shares? Yes, but within precise limits. The purchase of treasury shares is a useful operation in many situations — buying out a departing shareholder, managing participation plans, reorganising the shareholder base — but it touches a raw nerve: if a company could reimburse its capital by buying its own shares without rules, the protection of creditors would be hollowed out. This is why the Code of Obligations sets clear conditions. Let us look at them, taking into account the reform of AG law in force since 1 January 2023.

The general 10% limit

The basic rule is that a company may acquire treasury shares up to 10% of the share capital. It is the ceiling designed to allow ordinary transactions without compromising the substance of the company’s assets.

There is an exception linked to the transfer of registered shares: in connection with a restriction on transferability, the limit may rise to 20%. In this case, however, the portion exceeding 10% must be disposed of or cancelled by means of a capital reduction within two years. The higher ceiling is therefore temporary and conditional: it is not a way to permanently hold a fifth of the capital.

The capital condition: available reserves are needed

The percentage limit is not enough. The purchase is permitted only if the company has freely available equity equal to the amount required for the purchase. In other words, treasury shares are bought with the available reserves, without eroding restricted capital or the reserves that the law protects.

This is the heart of creditor protection: buying treasury shares is, economically, equivalent to returning funds to the selling shareholders. The law allows this return only to the extent that genuinely distributable profits and reserves exist. Without sufficient capacity, the operation cannot be carried out.

Membership rights remain suspended

As long as the company holds treasury shares, the membership rights attached to those shares are suspended. In particular:

• the voting right and the rights connected to it cannot be exercised;
• treasury shares do not count towards the presence quorums of the general meeting.

The rationale is clear: a company cannot “vote for itself” nor use its own shares to steer the decisions of the general meeting. The suspension prevents the board, through the treasury shares, from influencing the balance of power among the shareholders.

The accounting treatment

With the reform of accounting law, treasury shares no longer appear among the assets of the balance sheet: they are recorded as a negative item (as a deduction) of equity. It is a representation that reflects the substance of the operation — a reimbursement to shareholders — and makes transparent, to anyone reading the balance sheet, that those funds have left the company.

This approach has a practical effect: the purchase of treasury shares reduces the equity shown and must be planned with an eye to the impact on equity and on future distribution capacity.

Mind the tax aspect

The purchase of treasury shares has tax implications that must be assessed before proceeding. In particular, a buy-back beyond certain limits or beyond certain holding periods may be treated, for tax purposes, as a partial liquidation, with the consequent levy of 35% withholding tax on the difference between the buy-back price and the nominal value (plus any capital contribution reserves). It is one of the most costly mistakes: an operation set up only from the corporate side, without considering the tax qualification, can generate an unexpected burden. The practical rule is to check the shares, holding periods and treatment of the reserves upstream.

Mistakes to avoid

• Exceeding 10% (or the temporary 20%) without complying with the obligation to dispose of or cancel within the deadlines.
• Proceeding without available reserves sufficient to cover the purchase.
• Forgetting the suspension of voting rights, with the risk of challengeable resolutions.
• Ignoring the possible qualification as a partial liquidation and the withholding tax.

In summary

The purchase of treasury shares is a legitimate and often valuable instrument, but it lives on three safeguards: the percentage limit, the capacity in available reserves and the suspension of membership rights. To these must always be added the tax analysis, which decides whether the operation stays neutral or triggers withholding tax. Setting it up well means coordinating the corporate plan and the tax plan from the outset.

Do you need to buy back shares to buy out a shareholder or manage a participation plan? The corporate division of SIH ONE structures the operation in compliance with the legal limits and with attention to the tax effects.