The current Swiss law of succession does not provide for specific provisions for businesses (except for agricultural-related businesses). Thus, companies are treated like any other asset in the estate although they constitute – by their very nature - an asset which requires special knowledge from its successor and that is difficult to share among the heirs of the deceased.
Every year, some 16,000 companies are faced with a succession in Switzerland. It is estimated that 3,400 of them may have financial problems due to the lack of specific succession rules for companies.
In view of this issue, the Federal Council and the Parliament have decided to reform the current inheritance law; and part of the revision already entered into force on 1 January 2023. Although these new provisions allow for greater flexibility in the transfer of companies by succession, they are still not sufficient. The Federal Council has therefore suggested to introduce new provisions specifically for the transfer of businesses. The latter measures will enter into force shortly with the aim of alleviating company-related issues, ensuring greater stability and strengthening the Swiss business location.
This article reviews the changes that came into force at the beginning of the year and details the new provisions that will come into force shortly.
New Inheritance Law In Force Since 1 January 2023
Swiss law provides forced heirship rules that protect the statutory heirs. The testator is not entitled to dispose of all his/her assets freely by drafting testamentary dispositions as wills or inheritance contracts. The new regulations aim to provide greater flexibility and freedom of disposal of the testator. The forced heirship of the descendants was reduced to half, as opposed to three quarters before, and the statutory entitlement of the parents was abolished.
The latter amendments result in a significant increase in the testator’s freedom to distribute his/her future estate. The reduction of the statutory entitlement, which was considered to be one of the main obstacles to the transfer of businesses, thus gives the testator more freedom to transfer his/her business to the heir or third party of his/her choice.
New Succession Law On The Transfer Of Businesses To Come Into Force Shortly
In view of the other difficulties specifically encountered by entrepreneurs or their heirs in the context of succession, the Federal Council has proposed the following four main measures to facilitate the transfer of businesses by inheritance, in addition to the above-mentioned new inheritance law. The revision aims in particular to improve the succession of family businesses and SMEs.
If the deceased has not planned anything under a will or inheritance contract, an heir will have a right of full allocation of the business as part of the distribution of the estate.
Under the current law, it is possible to provide for a business to be transferred in its entirety to one of the heirs by way of a will or inheritance contract. The situation is different when the deceased has not made any provisions and, if the heirs have not reached agreement, the judge must proceed with an allocation of the estate's assets. In such a case, although there are many reasons for allocating a business to an heir, the law in force makes it difficult to do so and the full allocation of the business to a sole heir is very often impossible. This situation is unsatisfactory as it is a clear obstacle to the transfer of a business by inheritance.
The Federal Council's solution to the latter issue is to provide for the possibility of allocating the entire company or all the company's shares to one heir if this would enable him/her to obtain or keep the control over the company. Each heir will be able to make a request, if necessary to the judge. If several heirs make this request, the judge will have to award the business to the one who seems most able to continue the good running of the business. If several heirs agree to a joint takeover of the company, this will also be possible under the same conditions. The idea behind this measure is to maintain the activity of the company in order to preserve the employment and its know-how.
Where the deceased's business is the main or only asset of the estate, its allocation to one person alone would contravene the inheritance entitlement of the other heirs. The successor heir would therefore have to pay equivalent amounts to his/her co-heirs. Under the current law, the successor heir must always pay the amounts owed to his/her co-heirs, which can cause him/her liquidity issues and may make it difficult, if not impossible, to take over the entire business.
In order to remedy this, the Federal Council proposed that extended payment deadlines be introduced for the successor heir who is not in a position to pay the other heirs immediately. Thus, in the event of severe financial difficulties that could prevent the business from being taken over, the successor heir will be able to benefit from a payment period up to 10 years to settle the inheritance entitlements of the other heirs. The determination of the terms of the deferment (duration, repayment plan, setting of business objectives, etc.) will be made in the light of all relevant circumstances of the case and in accordance with the interests of the other heirs. The deferral of payment should therefore only apply to the necessary amounts and for the time necessary to take over the business. A period of 10 years should therefore only be granted in exceptional cases and if the conditions set limit as much as possible the prejudice to the rights of the other heirs. Furthermore, unless circumstances preclude it, the successor heir is expected to provide securities for the amounts subject to deferral and pay equitable interest.
Although this measure may represent a very significant infringement of the entitlement rights of the reserved heirs, it must be borne in mind that simplifying the transfer of businesses by means of inheritance law can unfortunately only be done to the detriment of the reserved heirs’ rights.
Another new feature, which is central to many business transfers, concerns the value of the business and, in particular, the decisive moment for valuing it, when it is transferred during the lifetime of the deceased. Under current law, the value of a business that is transferred in whole or in part to an heir during the owner's lifetime is calculated at the time of the owner’s death. The latter value is the one taken into account in the estate at the time of division. If the value has changed between the change of ownership and the date of death, the difference, whether positive or negative, is borne by the community of heirs, which is unsatisfactory. The Federal Supreme Court has already ruled that it is contrary to equity that the heir who takes over the business has to share the profit of his/her entrepreneurial activity with his co-heirs and that the co-heirs have to bear the costs in the event of losses incurred by the business.
The present revision takes account of these considerations and aims above all to create the necessary legal certainty and predictability. The principle will remain the same, i.e. that assets are valued on the day of death, but an exception will be made for companies. The latter will be, where possible, valued at the time of the transfer during the entrepreneur’s lifetime.
In such a case, if the heir who took over the business can prove that the latter has increased in value since then, the added may be attributed to him/her. This will encourage a valuation of the business at the time of the change of ownership, which will facilitate long-term estate planning.
While the three above-mentioned measures seem to be effective in facilitating the transfer of businesses and despite the safeguards they include to limit infringements of the other heirs’ right, they are sensitive from the equality between heirs’ perspective. The Federal Council has therefore decided to propose improvements to the position of co-heirs with statutory entitlements.
The new law provides for the possibility for heirs with statutory entitlement to refuse to be allocated, against their will, a minority shareholding in a company over which another heir has control in the context of the division of the estate. This safeguard will thus prevent heirs from being de facto deprived of their statutory entitlement through the transfer of a few shares in a company, which shareholding is generally difficult to negotiate and whose value may be reduced.
Every year in Switzerland, thousands of companies are confronted with a succession and almost a quarter of them find themselves in a problematic situation and encounter financial difficulties. This revision of inheritance law, which takes into account the importance of the continuity of companies for the economy and society as a whole, will obviously have a positive effect on economic growth by improving greater stability for companies and thus for employment in Switzerland.
While the new provisions proposed by the Federal Council undeniably promote the transfer of businesses, active succession planning must be prepared in advance, during the entrepreneur’s lifetime, and put in place as soon as possible, so as not to leave it to the heirs and to avoid potential disputes being brought before the courts.
Private Client Partner. Grégoire advises families, entrepreneurs, financial intermediaries and sport individuals on cross-border private client, family law, philanthropy and sports matters. Grégoire acts as executor of high-net worth estates. He also advises clients who are living in, or looking to relocate to, Switzerland. Grégoire specializes in asset structuring and estate planning, charitable trusts and foundations, as well as commercial law for family-owned businesses. He has particular expertise working with international families who are looking for effective governance structures through which to organize the long term transition of wealth, including family businesses. Grégoire's clients include wealthy families, boards of trustees, trust companies, business owners, sports individuals and agents.
Alexia Egger Castillo
Alexia Egger Castillo is a Swiss attorney-at-law, who advises families, entrepreneurs, financial intermediaries and other organisations on cross-border private client, family law and tax law. She also advises clients who are living in, or looking to relocate to, Switzerland. Alexia deals with asset structuring and estate planning, as well as charitable trusts and foundations and a wide range of cross-border family work.
Guillaume is a Trainee lawyer with the firm, specialising in dispute resolution.