Simultaneous recognition of income (subsidiary/parent) in group relationships
The disruptive time lag in revenue recognition within the Group can be eliminated with a new regulation.
While the owners of partnerships are immediately credited or debited with the profit and loss shares of their company at the end of the financial year on an accrual basis, this was previously not permitted in group relationships between legal entities. The prohibition of paying an interim dividend applied (Art. 675 para. 2 CO). As a result, the parent company recognized the investment income at the same time as the dividend resolution of the subsidiary in the following year. However, the fact that shareholders of partnerships have an unrestricted entitlement to profits also exists in group relationships with control of the subsidiary, which is why there has been unequal treatment in this respect to date.
In the Swiss Handbook of Auditing (volume "Bookkeeping and Accounting"), our profession made a proposal to change this practice. The Federal Tax Administration (FTA) has now followed this proposal and has assessed the proposed procedure as compliant with withholding tax.
In group relationships, the parent company is therefore permitted to recognize the investment income of the subsidiary in the income statement in the same financial year in which the subsidiary generated it. The following three conditions must be met for this:
the balance sheet date of the subsidiary may not be later than that of the parent company
the Annual General Meeting of the subsidiary, with its resolution on the appropriation of profits, must have taken place before the Annual General Meeting of the parent company
the parent company must make reference to this fact in its notes to the financial statements
To this end, the parent company recognizes this investment income in the financial statements on a deferral basis (entry: assets in transit to investment income), reversing this entry in the opening balance sheet of the following year. The transaction/entry relevant for withholding tax is only the definitive entry of the investment income in the income statement when the taxable payment is due, i.e. the subsidiary's resolution on the appropriation of profits at its annual general meeting in the following year (entry: Bank to investment income). With this procedure, the parent company preserves its rights to a refund of withholding tax as well as the right to carry out the reporting procedure.
Sources:
Swiss Handbook of Auditing - Volume "Accounting and Financial Reporting" - 2014
Federal Tax Administration FTA - Communication-008-DVS-2018-en
