Direct partial liquidation (Switzerland)

Direct partial liquidation is a Swiss tax concept covering the case where a company buys back its own shares from a shareholder beyond the thresholds and time limits allowed by law. Such a buyback is then recharacterised for tax: the surplus paid over the par value and the reserves from capital contributions is treated as taxable investment income in the shareholder's hands, and not as an exempt capital gain.

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It differs from Indirect partial liquidation (Switzerland), which concerns the sale of shares to a third-party buyer financing the acquisition through the target company's distributable substance. In direct partial liquidation, it is the company itself that buys back its shares; in the indirect form, the mechanism runs through a third-party buyer. Both nonetheless lead to the same consequence: turning a hoped-for capital gain into taxable income.

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Concretely, a company buys back its own shares from a shareholder for 1.2 MCHF, of which 0.1 MCHF of par value. If the legal thresholds and time limits are not met, the 1.1 MCHF surplus is recharacterised as taxable investment income, and not as an exempt private capital gain.

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Mastering these thresholds, notably the share of capital bought back and the resale or cancellation period of the shares, is essential for any Swiss shareholder contemplating a share buyback. Rigorous anticipation avoids an unexpected tax charge, which makes it a central point of vigilance in business valuation and wealth structuring.