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.

‍

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.

‍

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