Indirect partial liquidation (liquidation partielle indirecte) is a Swiss tax concept whereby the Federal Tax Administration (FTA) may requalify the proceeds of a share sale as taxable dividend income rather than tax-exempt capital gain, if the acquirer finances the acquisition using the target's own cash or assets. The FTA applies this doctrine when: (1) the seller holds at least 20% of the target, (2) the target has distributable reserves, (3) the acquirer uses the target's assets to repay acquisition debt within 5 years, and (4) the seller is aware of this financing arrangement. The tax risk — income tax on the requalified proceeds — can be material for entrepreneurs selling to leveraged acquirers.

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Example: a Swiss entrepreneur sells 80% of their company for CHF 15.0 million. The acquirer, a PE fund, finances CHF 10.0 million of the price with a loan repaid using CHF 8.0 million of dividends upstreamed from the acquired company within 3 years. The FTA may requalify the CHF 8.0 million as a taxable dividend to the seller — generating a tax liability of approximately CHF 2.0 million that eliminates a large portion of the capital gain exemption.

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Hectelion analyses indirect partial liquidation risk in every Swiss business sale involving a leveraged acquirer, structuring transactions to avoid inadvertent requalification.