In Switzerland, sole proprietorships, partnerships and legal entities (stock corporations) have bookkeeping and accounting requirements. The scope of the documentation and auditing obligations depend on the type of company, its turnover or size.
Determination of the Financial Year
For accounting purposes, the financial year must be defined. It is generally 12 months and corresponds to the calendar year. For tax reasons, it makes sense for seasonal businesses (e.g. construction, tourism) to set the fiscal year in such a way that it is closed before the high season. This allows for higher reserves based on a fully-stocked warehouse and permits the evaluation of the seasonal figures. In some cantons, such as Lucerne, it is possible to establish an extended fiscal year in the first year following the formation of a company. This practice brings tax advantages because profits arising in subsequent years can be offset against the losses of the last 5 years.
Preparation of the Annual Accounts
Within 6 months of the end of a financial year, the annual accounts must be drawn up and a general meeting must be held to approve the accounts. The following points must be taken into account when preparing a company’s first annual accounts:
- Recognition of Income and Expense for the Period
Income and expenses must be booked in the appropriate period. This means that all services received or rendered in the current year must be booked in this year regardless of the date of payment. In order to achieve period equity, there is the option of building accrual or deferral liabilities.
- Valuation Rules for Assets and Liabilities
The principle of caution applies to the valuation of the balance sheet items of a stock corporation (PLC). According to the lowest value principle and the realization principle, assets and income should be set low and debts and accruals for expenses should be set high. For example, until goods are sold, they may not be accounted for at more than the acquisition price. Investments, raw materials and securities must not be reported at more than the lowest possible value. These are, in particular, the acquisition or manufacturing costs less the necessary depreciation. The annual depreciation of fixed assets is to be carried out using the depreciation table of the cantonal tax office. It should be noted that in certain cantons, such as Lucerne, one time depreciations of 100% are permitted in the year of acquisition.
- Correction of Accounts Receivable
Receivables that will not be recovered must be derecognised using the profit and loss account “losses on accounts receivable”. For the remaining receivables, the value adjustment account “del credere” can be used to create tax recognized provisions at a flat rate of 5% on domestic receivables and 10% on foreign receivables. These provisions reduce the annual profit.
- Creation of Provisions
If payments to third parties are expected in subsequent years due to a specific risk that has arisen in the current year, a provision may be created for the expected payment. For example:
- Unused holidays, overtime
- Claims for damages as per the balance sheet date
- VAT due for settlement according to the system received
- Provisions for ongoing legal proceedings
- Payments Between Parties or Related Parties of Companies
Caution must be exercised with regards to loans or advances between the company and participants or affiliates. Both the payment as well as a wrong interest rate can lead to unpleasant tax consequences. Before agreeing to a loan or advance, an expert should be called in to prevent financial risks from simulated loans, deposit refunds or hidden profit distributions.
In the case of sole shareholders, there is also the risk that non-essential operating ex- penses such as expenses for private valuables, meals or holidays will be paid for via the company account. These expenses may not be booked under company expenses; rather, they must be debited to the shareholder (e.g. via a current account).
Creation of Reserves and Dividend Payments
Five percent of the annual profit must be allocated to the statutory reserves with the resolution on the appropriation of profits passed by the general meeting of shareholders until they cumulatively constitute 20% of the share capital. In the case of an annual loss, the formation of reserves is omitted. Dividends may be paid to shareholders from the balance sheet profit and the reserves formed for this purpose. The basic dividend is 5% of the share capital. A variable distribution in excess of this 5% is called a surplus dividend. On this basis, legal reserves of 10% of the surplus dividend must be created. It should be noted that the dividend is subject to withholding tax. The company must notify the FTA of the decision to pay a dividend and pay 35% of the dividend directly to it. The remaining 65% of the dividend is paid directly to the shareholders.
Verification of the Obligation to Pay VAT
Once the annual financial statements have been prepared, it’s necessary to verify if there are any VAT obligations from the following year. If this is the case, a corresponding registration must be made with the Federal Tax Authority (FTA) immediately.
