Valuation Reserves and Market Value Accounting

Context

In its ruling 9C_625/2023 of 19 February 2025, the Swiss Federal Supreme Court addressed a pivotal issue for accounting and tax practice:

Companies that measure securities at market value may no longer create valuation (fluctuation) reserves to neutralize unrealized gains for tax purposes.

The decision mainly affects entities applying Article 960b CO, where market value accounting is permitted under Swiss law.

Court rationale

The Court held that such reserves do not qualify as tax-deductible provisions under Article 29 DBG since they do not cover existing obligations but merely potential future losses.

This overturns a long-standing and widely accepted practice in which market-value accounting combined with valuation reserves was deemed both commercially sound and tax-neutral.

Implications for tax practice

The new precedent results in:

• Taxable recognition of unrealised gains under market-value accounting,
• No offset through fluctuation reserves, and
• A weakening of the traditional link between commercial and tax accounting (Massgeblichkeitsprinzip).

Effectively, a divergence between financial statements and tax base now exists – a major shift from the principle of alignment that has prevailed for decades.

Commercial accounting remains unchanged

Under Swiss accounting standards (CO, FER, Swiss GAAP FER) and professional guidance (Handbook for Swiss Auditors), creating valuation reserves alongside market value measurement remains permissible and prudent.

Such reserves serve to smooth volatility and reflect cautious valuation, but they will no longer have tax impact.

Possible exceptions

The Court acknowledged that flat-rate fluctuation reserves could remain deductible only if explicitly provided under cantonal tax law, which is rare.

Without such statutory backing, tax authorities will disregard these reserves for income-tax purposes.

Alternative approach: cost valuation

Companies may continue to measure securities at acquisition cost.

Unrealized gains then remain outside both the balance sheet and the tax base – a practical option for entities prioritizing stability and predictability.

Crowe assessment

This ruling constitutes a significant shift in Swiss tax-accounting interaction:

• Tax neutrality for unrealized gains is no longer accepted.
• Commercial law remains unchanged.
• The principle of “book-tax conformity” is effectively weakened.

Crowe view:

“Valuation reserves remain acceptable under commercial law but are tax sensitive. Firms using market value accounting should model the tax effect and plan for potential adjustments (acquisition cost accounting) early.”