The chicken, the egg, and company valuation

Intangible assets are the new gold. Whether they also drive corporate value depends on the valuation method used. The following case clearly illustrates how legal and economic assessments (and valuations) can differ.

Things get complicated on their own

The case decided by the Zurich Tax Appeals Court on March 18, 2025 (1 DB.2024.79, 1 ST.2024.103) is quickly summarized, but its legal analysis is complex. A is self-employed as a designer, among other things. To promote further growth, he founded B AG in 2019, into which he initially contributed trademark and design rights as a contribution in kind (contribution in kind). The share capital – and the valuation of the intellectual property – amounted to CHF 750,000. The necessary liquidity was to be raised by bringing in investor C, who was to contribute CHF 1,000,000 in cash and receive a 65% stake in return. However, the negotiations failed in the same year.

Reflex vs. Judex

A initially reported the new investment in his business assets at CHF 750,000 and also declared an extraordinary revaluation gain in the same amount. As of December 31, 2019, it wrote off the investment in full due to the investor’s failed entry. The tax office considered the write-off to be commercially unjustified and added the full amount to the assessment.

The reflexive response would be to resolve the case with the conclusion “growth through financing, no growth without financing,” accept the investor’s exit as the reason for an unscheduled write-down, and disapprove of the tax office’s decision. However, if one looks at the whole thing from a formal legal perspective, as the court did, one may come to a different conclusion.

Hello again: Practical methods for evaluating young companies

First, the court distinguishes between the valuation of the intangible assets at the level of B AG and the valuation of the shareholding in this company at the level of A, even if “an interaction … cannot be completely ruled out due to the nature of the system” (E 5.b.aa.).

To value B AG, the tax appeals court refers to the practical procedure in accordance with KS 28, as the judgments cited by the lower court left “no doubt” (5.a.bb) that this was the appropriate method in this case. However, a review of the judgments cited shows that they either concerned other areas of law (valuation of employee shares) or other circumstances (valuation of a holding company). In this respect, doubts would have been entirely appropriate. However – and this defuses the discussion – KS 28 provides for the net asset value as the standard value for newly founded and developing companies. And valuation theory also takes the view that net asset value can be a suitable benchmark for the objective valuation of young companies (Hüttche/Schmid, TREX 2024, p. 142 f.).

The chicken-and-egg problem

The basis for the net asset value is the quantity and value structure of the balance sheet, which bridges the gap between the valuation of B AG and its intangible assets acquired through contributions in kind. B AG justifies their complete write-off with the withdrawal of investor C, even though little is known about his specific economic and financial potential. Although the court acknowledges the unfortunate development, “it would be reckless to conclude from this that any business events immediately affect the value of the assets” (7.c.aa.). It does not consider C’s withdrawal to be a triggering event that could have led to a mandatory loss in value of the trademark and design rights.

In conclusion, it can be said that the impairment of assets must be clearly proven. This is all the more true when, as the court assumes, an unscheduled write-down can only take into account a “definitive impairment” (E. 5.a.). This will be difficult to prove for assets that remain in the business assets, as a technical or economic recovery can never be ruled out.