Hidden reserves (Switzerland)

Hidden reserves (stille Reserven) denote, in Swiss accounting and tax practice, the gap between the book value of an asset and its true market value. They form when an asset is carried on the balance sheet at an amount below its market value, for example a building depreciated beyond its economic wear or understated inventory. Swiss accounting law, more prudent than international standards, allows the creation of such reserves.

‍

A distinction is drawn between taxed hidden reserves, on which tax has already been paid, and untaxed hidden reserves, which conceal a future tax charge. This distinction is crucial on a transaction: realising an asset carrying untaxed hidden reserves triggers taxation of the corresponding profit, which weighs on the net proceeds to the seller and on the Substantial value (Adjusted NAV) retained.

‍

By way of illustration, a building is carried on the balance sheet at 2 MCHF while its market value reaches 5 MCHF: the hidden reserve amounts to 3 MCHF. Its realisation on a sale would trigger taxation of the corresponding profit, a tax charge to anticipate in the net price expected by the seller.

‍

Identifying hidden reserves is a central point of financial due diligence in Switzerland, since it reveals both a value hidden on the balance sheet and a potential tax debt. It is also decisive in restructurings, where tax neutrality requires carrying these reserves forward without realising them, under precise conditions.