Hidden equity

Hidden equity is relevant where a company is financed with excessive debt from shareholders or related parties compared with arm’s-length standards. Swiss tax authorities may reclassify part of the debt as equity for tax purposes. Interest on that portion can be treated as non-deductible and potentially as a hidden profit distribution, with possible withholding tax consequences. The reclassified amount may also increase the basis for cantonal capital tax. The analysis depends on the company’s assets, risks, financing structure and applicable safe-harbour practice.