Reducing share capital: when and how

Reducing share capital is a less frequent operation than an increase, but just as important: it serves to return funds to shareholders, to restructure a loss-making balance sheet or to reorganise the financial structure. Because the capital is the guarantee for creditors, Swiss law surrounds the reduction with precise safeguards. Let’s look at when it makes sense and how it is carried out, taking into account the revision of company law in force since 1 January 2023.

Why reduce the capital

There are three typical situations:

• Return to shareholders: the capital is oversized relative to needs and part of it is to be repaid to the shareholders or members.
• Covering losses: the company has accumulated losses and reduces the capital to realign the balance sheet, eliminating or reducing the carried-forward loss.
• Reorganisation: often combined with a simultaneous increase (the so-called “accordion” operation: capital is reduced to absorb losses and increased with new contributions).

The logic changes radically depending on whether resources leave the company or it is merely an accounting entry.

Ordinary reduction and reduction to cover losses

Swiss law distinguishes two main cases:

• Ordinary reduction: it amends the registered capital, with or without a return to shareholders. It requires full compliance with the creditor protection measures.
• Reduction intended to eliminate a capital deficit (covering losses): here no funds leave the company, it is an accounting adjustment. In this case the law provides a simplified procedure, with reduced creditor protection requirements, provided that the reduction genuinely serves to cover losses.

Distinguishing the two cases correctly determines the procedure, the timing and the costs.

Creditor protection

This is the heart of the operation. Because the reduction can affect the equity guarantee, the law requires measures to protect creditors, which in an ordinary reduction usually include:

• a verification by a licensed auditor attesting that the claims remain covered despite the reduction;
• a mechanism to inform creditors and the possibility for them to request security for their claims.

Only after these safeguards have been observed can the reduction be entered in the register. In a loss-covering reduction these precautions are reduced, precisely because there is no outflow of resources.

The minimum capital limits

The reduction cannot bring the capital below the legal minimums:

• AG: minimum capital CHF 100,000;
• GmbH: minimum capital CHF 20,000.

If the aim is to go below these limits (for example for a deep restructuring), the reduction must be combined with a simultaneous increase that brings the capital back to the minimum or above.

The procedure, step by step

1. Resolution of the meeting (general meeting in the AG, members’ meeting in the GmbH) on the reduction and the amendments to the articles of association.
2. Verification attestation by the auditor, where required, on the coverage of claims.
3. Fulfilment of the creditor protection measures provided by law.
4. Public deed before the notary, confirming compliance with the preconditions and adapting the articles of association.
5. Entry in the commercial register, which makes the reduction effective.

Tax aspects not to overlook

A reduction with a return to shareholders has significant tax implications. In particular, the repayment of share capital and capital contribution reserves that have been properly declared follows different treatment from a distribution of profits, which is subject to the 35% Swiss withholding tax (imposta preventiva). The classification of the reserves and compliance with the relevant rules are decisive: a mistake can turn a repayment of capital into a taxable distribution. This aspect must be analysed before passing the resolution.

Mistakes to avoid

• Confusing a reduction to cover losses with a reduction involving a return, applying the wrong procedure.
• Skipping or poorly executing the creditor protection measures: the entry is refused.
• Falling below the legal minimums without a simultaneous increase.
• Ignoring the impact on withholding tax and capital contribution reserves.

In summary

A capital reduction is possible and sometimes necessary, but it is a technical operation: the difference between a clean restructuring and a problem lies in correctly classifying the type of reduction, complying with creditor protection and assessing the tax effects in advance.

Do you need to reduce the capital to return resources or restructure the balance sheet? SIH ONE’s corporate division structures the operation in compliance with the law and with an eye on the tax consequences.