Capital contribution principle (KEP)

The capital contribution principle (German Kapitaleinlageprinzip, KEP) is a Swiss tax rule, in force since 1 January 2011, under which the repayment to shareholders of reserves from capital contributions (share premium, additional paid-in capital) is treated like the repayment of par value: it is exempt from withholding tax and not taxable as income for the private shareholder.

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These reserves must be booked separately and declared to the Federal Tax Administration to be recognised. The KEP is a major lever in distribution planning and target valuation: two companies with identical earnings do not offer the same net value to shareholders depending on the amount of contribution reserves they can distribute tax-free. For listed companies, a repartition rule has limited the use of these reserves since 2020.

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Example: a Swiss company holds CHF 2.0 million of duly declared capital contribution reserves. It can distribute them without levying the 35% withholding tax or income tax, versus a charge that could exceed CHF 400,000 on an equivalent distribution of ordinary reserves.

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At Hectelion, we factor capital contribution reserves into the net value analysis of a Swiss target and into post-acquisition distribution planning.