Legal reserve (Switzerland)

The legal reserve (réserve légale générale) is a mandatory equity reserve under Swiss CO law, built by allocating a minimum of 5% of annual net profit until the reserve reaches 20% of paid-in share capital. It serves as a financial buffer protecting creditors and cannot be distributed to shareholders while below the statutory threshold. In addition, the CO requires allocation of a portion of capital increases to legal reserves. In financial due diligence, legal reserve adequacy is verified as part of the Swiss equity composition analysis — its insufficiency may signal historical under-provisioning or aggressive distribution policies.

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Example: a Swiss SA with CHF 1.0 million share capital must build a legal reserve of CHF 200,000 (20%) before distributing dividends freely. With annual net profit of CHF 500,000, the mandatory allocation is CHF 25,000/year (5%) until the threshold is reached — meaning 8 years of minimum allocations before the full legal reserve is constituted and the distribution constraint is lifted.

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Hectelion analyses legal reserve adequacy and distributable equity composition in every Swiss due diligence and structuring mandate.