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Popular with company founders – trading in shell companies

Startups can buy themselves time and reduce costs by acquiring a public shell company – advantages that speak for themselves. But what risks are involved?
By acquiring a public shell company, a new company can be incorporated without a cash contribution.

Buying and selling so-called shell companies remains a practice that is widely extolled by the financial media. Acquiring a shell company makes it possible to save time and reduce costs when starting a new company – at first glance, then, there appear to be strong arguments for doing so. But what about the risks involved? Let’s take a closer look at the “shell-company trade”:

The trade in shell companies typically involves the sale of the majority shareholding (usually 100%) in a corporation that has ceased operations and has liquid assets at the time of the transfer. Via the purchase, the buyer receives an “empty company”, more commonly known as a shell company.

Possible reasons to buy a shell company include:

  • To “incorporate” a company without needing to raise the necessary funds in cash.
  • If necessary, to acquire an entrepreneurial past. If the purpose of the shell company dovetails with the new company’s future business activities, the new owners may be able to circumvent certain rules governing their dealings with suppliers and lenders.
  • To eliminate the need for an in-kind capital contribution. The obligation to disclose the in-kind contribution – and to have it reviewed by an expert auditor – can be avoided or circumvented by purchasing a shell company.
  • To avoid any delays when it comes to conducting business activities through the newly acquired company.

For the seller of a shell company, the primary motive is to avoid an (often protracted) liquidation process and the associated costs. In addition, it may still be possible to generate a profit by selling the shell company.

The main stumbling blocks when purchasing a shell company – and a not inconsiderable risk – involve the assumption of obligations that arose in the course of the company’s previous business activities. These may include legal disputes, back taxes, promises of guarantees, etc. To rule out any bad surprises, a thorough review of the respective risks via scrutiny of the shell company’s accounting records and legal documents is essential and, as experience has shown, this can be a time-consuming and costly affair.

From a tax perspective, the trade in shell companies is treated identically in all cantons. Such sales are deemed liquidations for tax purposes with a subsequent new incorporation on the effective date of the transfer. It is therefore not possible to apply a loss carry-forward under the company’s new owners. If the loss carry-forwards are applied without adjustment postings, withholding taxes of 35 % will be incurred.

In summary, a great deal of effort is required to assess the risks involved in a “shell purchase”; there are no tax advantages to speak of in the case of a properly executed transaction, and the time savings when it comes to initiating business activities are marginal. We would be happy to assist you in setting up your new business!

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