A Q&A guide to tax on finance transactions in Switzerland. This Q&A is part of the PLC multi-jurisdictional guide to tax. It provides a high level overview of finance tax in Switzerland and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, and securitisations.
To compare answers across multiple jurisdictions, visit the Tax on corporate lending and bond issues Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to tax. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.
The FTA is responsible for the assessment of federal taxes, such as:
Value added tax (VAT).
Securities transfer stamp duty and issuance stamp duty.
Withholding tax.
In a proposed finance transaction (for example, M&A, restructuring and financing), important tax issues relating to the above taxes may need to be solved and ruled on by the FTA. VAT is normally not an issue in finance transactions.
There are 26 cantons (states) in Switzerland and each has its own independent tax administration. The cantonal tax authorities are responsible for assessing federal, cantonal and municipal corporate income taxes of residents, permanent establishments and real estate located in their jurisdiction.
In some cantons, the cantonal tax authorities are also responsible, along with the municipal tax authorities, for taxes relating to the transfer of real estate, such as:
Real estate capital gains tax.
Real estate transfer tax.
Alternatively, these real estate taxes can be the sole responsibility of the municipality.
Requesting a tax ruling from the tax authorities is quite common (see below, Mandatory or optional clearance?).
It is optional but quite common to request a tax ruling from the FTA, and if applicable, from the cantonal and/or municipal tax authorities, relating to proposed finance transactions. The ruling is normally negotiated before implementing the transaction. The request for a ruling must contain the following:
Disclosure of the parties involved.
Fact pattern and description of the planned transaction.
Tax consequences of the transaction, as proposed by the taxpayer.
Request for confirmation of the tax consequences assumed in the ruling request.
Depending on the transaction's importance, the ruling process normally takes two to eight weeks.
In relation to all federal, cantonal and municipal taxes, tax rulings are only binding on the tax authorities if both:
The transaction is implemented as described in the ruling request.
The information provided to the authorities to obtain the tax ruling is complete and correct, relating to all tax-relevant issues.
There is generally no time limitation on the ruling. However, an advance tax ruling is not a tax assessment, and it is not possible to appeal against it. A tax ruling is generally binding on the taxpayer. Therefore, once the ruling is signed off, the taxpayer cannot appeal against it if tax rules change or to further improve his tax position.
However, if a ruling request is not confirmed, the taxpayer can ask for a formal decision against which an appeal can be made. In practice, it is generally difficult or impossible to get a formal decision before the transaction's implementation. Therefore, an appeal can in general only be made after completion of the transaction on the basis of the final tax assessment. The taxpayer is therefore at risk if the tax ruling request has not been confirmed by the competent tax authorities.
Any receivables and liabilities between affiliated companies (and third parties) must be disclosed in the statutory accounts (Swiss Code of Obligations).
During tax audits, finance transactions between affiliated companies and/or the shareholder are often subject to review, and additional information may need to be disclosed to the tax auditor at that time on request.
The annual statutory accounts of a corporate entity must be filed with the cantonal tax authorities together with the annual tax return. In some cantonal jurisdictions it is required to separately disclose receivables and liabilities between affiliated companies and/or the shareholder, together with the applicable rate of interest. The statutory accounts may also reflect other finance transactions, so that this information is disclosed to the tax administration.
Key characteristics. Interest receivable under a loan or bond is subject to federal, cantonal and municipal corporate income tax, and is part of the taxable profit for corporate income tax purposes.
Calculation of tax. See below, Applicable rate(s).
Triggering event. See above, Key characteristics.
Applicable rate(s). The federal corporate income tax rate (on profit before tax) is 7.83%. Cantonal and municipal tax rates vary, depending on the canton and municipality of domicile of the company. The combined effective federal, cantonal and municipal corporate income tax rates currently range between about 11.8% (in Freienbach) and 24.2% (in Geneva), unless the company has a special status applicable to foreign-sourced income or is a company with holding tax status (see Question 14).
For a loan granted to a shareholder or any other related party, minimum interest must be charged by the lender. Otherwise, deemed interest income is taxed at lender level. Minimum interest rates on loans to related parties are published annually in a circular letter by the FTA. For the fiscal year 2012, the minimum interest on equity financed loans denominated in Swiss francs granted to shareholders is 1.5%. If the loan is leveraged, a mark-up of at least 0.5% (on a loan of up to CHF10 million) and a mark-up of at least 0.25% (on a loan exceeding CHF10 million) is required according to the FTA (as at 1 March 2012, US$1 was about CHF0.9).
If all or part of the interest received on the loan is treated as a deemed dividend (see Question 7, Withholding tax on interest and deemed dividends), the deemed dividend may be tax exempt and benefit from participation exemption at recipient level, if the recipient holds either:
Shares in the borrower with a market value of at least CHF1 million.
At least 10% of the shares in the borrower.
Key characteristics. Equity (share capital plus open or taxed hidden reserves including deemed equity under thin capitalisation rules) is generally subject to annual cantonal and municipal equity tax.
Calculation of tax. See below, Applicable rate(s).
Triggering event. See above, Key characteristics.
Applicable rate(s). Equity tax rates depend on the canton and municipality of domicile and range between:
0.001% (in Altdorf) and 0.525% (in the City of Basel) for ordinarily taxed companies.
0.001% (in Altdorf and Sarnen) and 0.1% (in Neuenburg) for special tax status companies (see Question 14).
However, in many cantons corporate income tax laws are changed to allow for imputation of corporate income tax from annual equity tax. Therefore, if corporate income tax in the canton is higher or equal to the annual equity tax in a given tax year, only corporate income tax is due (see above, Corporate income tax).
Key characteristics. The Swiss finance branch concept is used by many multinational companies for tax-optimum group financing. Finance activities are typically carried out by a Swiss branch of a Luxembourg company. The Luxembourg company allocates existing or new funds (typically equity rather than debt of the Luxembourg company) to the Swiss branch. The Swiss branch uses these funds to grant interest-bearing loans to group companies and third parties. The key factor is that the foreign branch exemption applies at the level of the Luxembourg head office for the profits of the Swiss branch. To achieve this, the Swiss finance branch must have sufficient substance (own personnel and premises).
The requirements of the finance branch concept are as follows:
Finance branch rulings are only granted by the Swiss tax authorities if the total branch assets are at least CHF100 million.
75% of the total branch assets and 75% of the gross branch profit must relate to finance activities.
Loans granted to Swiss entities must not exceed 10% of the total branch assets.
The tax benefits of the Swiss finance branch structure are as follows:
A special tax status of the branch at cantonal and municipal taxation level. No special tax status is available at federal taxation level.
A deemed interest deduction, which erodes the tax base substantially. This applies to both cantonal and municipal and federal taxes.
Calculation of tax. See below, Applicable rate(s).
Triggering event. See above, Key characteristics.
Applicable rate(s). Total Swiss tax on the combined profit of the legal entity (foreign head office and Swiss branch combined) for a Swiss finance branch is about 1.5% to 2%, assuming that:
All the company's assets are allocated to the Swiss branch.
The funds allocated to the Swiss branch are fully financed by equity of the company.
Advance tax rulings must be obtained for both federal and cantonal and municipal tax purposes, from the cantonal tax authorities of the canton in which the Swiss branch is located.
Key characteristics. Interest paid on borrowings is in general deductible for corporate income tax purposes.
Calculation of relief. See above, Key characteristics.
Triggering event. See above, Key characteristics.
Applicable rate(s). For applicable corporate income tax rates, see Question 4, Corporate income tax: Applicable rate(s).
If the interest paid on an inter-company loan exceeds the maximum interest rates on borrowings from related parties, the excess amount is considered to be a deemed dividend by the tax administration. The excess interest paid is not tax deductible.
If the borrower is in breach of federal thin capitalisation guidelines, the FTA can treat part or all of the interest paid on a loan granted by related parties as a deemed dividend on deemed equity, so that the interest paid is not tax deductible. Loans granted by third parties, for which security (guarantees, pledges and so on) is granted by related parties, are treated like related party loans for tax purposes. (For "safe-haven" interest rates and thin capitalisation guidelines, see Question 7, Withholding tax on interest and deemed dividends).
Key characteristics. Transfer of a debt under a loan is generally not subject to securities transfer stamp duty or other Swiss taxes. Securities transfer stamp duty may become due if the debt is treated as a taxable security (a bond, according to the Stamp Duty Act; see Question 10, Securities transfer stamp duty).
Calculation of tax. See below, Applicable rate(s).
Triggering event. Securities transfer stamp duty is generally due if taxable securities are transferred for consideration and a Swiss securities dealer (according to the Stamp Duty Act) is involved in the trade as a party or intermediary. However, there are numerous exemptions and exempt parties under the Stamp Duty Act (see Question 11, Securities transfer stamp duty).
Securities dealers are:
Swiss banks, brokers, and asset managers.
Among others, Swiss companies or Swiss branches of foreign companies that hold taxable securities with a book value of more than CHF10 million in their balance sheet.
Taxable securities are, in particular, stocks, bonds (according to the Stamp Duty Act) and shares in collective investment vehicles.
Liable party/parties. Each party usually bears half of the duty. The Swiss securities dealer involved is responsible for collecting and delivering the stamp duty to the FTA.
Applicable rate(s). The applicable rate is 0.15% of the transaction price for Swiss securities, and 0.3% for foreign securities.
Key characteristics. The transfer of debt may crystallise a capital gain (for example, foreign exchange gain on the increase in a loan denominated in a foreign currency) at seller level. This capital gain may be subject to corporate income tax.
Calculation of tax. Not applicable.
Triggering event. See above, Key characteristics.
Liable party/parties. Tax is payable by the seller.
Applicable rate(s). For corporate income tax rates see Question 4, Corporate income tax: Applicable rate(s).
After the transfer of the debt, the interest may be subject to Swiss withholding tax or Swiss-source taxes (see Question 7, Source taxes on mortgage secured loans). This issue must be checked carefully in each case before the transfer.
Interest payments on inter-company loans from a Swiss borrower are not generally subject to Swiss withholding tax. However, if the Swiss borrower is considered a financial institution under the Withholding Tax Act, interest payments are subject to Swiss withholding tax at the rate of 35% (cash pooling or intra-group financing is generally exempt). A Swiss company becomes a financial institution, for withholding tax purposes, if it has, on a given day, outstanding interest-bearing liabilities to more than 100 creditors and of at least CHF5 million in total.
If the Swiss borrower is issuing bonds or notes, interest payments on the bonds are subject to Swiss withholding tax. A liability is deemed to be a bond if the Swiss borrower has, on a given day, either:
Outstanding liabilities with more than ten creditors with identical conditions.
Outstanding liabilities with more than 20 creditors with similar conditions.
Swiss and foreign banks (as defined by applicable banking law) are not considered as creditors if these banks are acting on their own account and risk.
If the interest paid on an inter-company loan exceeds the maximum interest rates on borrowings from related parties, the excess amount is considered to be a deemed dividend by the tax administration and is subject to withholding tax. The maximum interest rates on borrowing are published annually in a circular letter by the FTA. For the fiscal year 2012, the maximum interest on unsecured loans between related parties denominated in Swiss francs is 3.75%. For loans denominated in other currencies, the maximum allowed interest rates for the most important currencies are also published by the FTA. For the fiscal year 2012, the maximum interest rate for loans denominated in US dollars is 2% and for loans denominated in euros is 2.5%. However, the interest rates published by the FTA are "safe-haven" rates. Thus, if higher or lower effective interest rates are applied, and are challenged by the tax administration, proof can be provided to the tax authorities that the applied interest rates have been agreed at arm's length.
If the borrower is in breach of federal thin capitalisation guidelines, the FTA can treat part or all of the interest paid on a loan granted by related parties as a deemed dividend on deemed equity, so that the interest paid is not tax deductible. Loans granted by third parties, for which security (guarantees, pledges and so on) is granted by related parties, are treated like related party loans for tax purposes.
The minimum capitalisation is calculated based on the maximum debt financing of all of the assets. For each type of asset, a specified maximum percentage can be financed with debt from related parties (directly or indirectly). According to FTA practice, the maximum percentages of debt for each type of asset are the following:
Liquid assets: 100%.
Receivables on supplies and services: 85%.
Other receivables: 85%.
Inventory: 85%.
Other circulating assets: 85%.
Swiss bonds and foreign bonds in Swiss francs: 90%.
Foreign bonds in foreign currency: 80%.
Swiss and foreign quoted shares: 60%.
Other shares and investments in limited liability companies: 50%.
Participations: 70%.
Loans: 85%.
Installations, machines, tools, and so on: 50%.
Operating real estate: 70%.
Villas, parts of real estate, vacation houses and construction land: 70%.
Other real estate: 80%.
Cost of constitution, increase of capital and organisation: 0%.
Other intangible assets: 70%.
The required equity is calculated based on the fair market value of all assets, as stated in the balance sheet at the end of the business year.
Withholding tax is charged at the rate of 35% but the rate may be reduced under a double tax treaty. Domestic deemed dividends may be exempt from withholding tax on notification. Alternatively, withholding tax is fully reimbursed on request.
Interest payments on loans secured by a mortgage on Swiss property may be subject to source tax. The rates vary depending on the cantonal tax law of the canton in which the property is situated. Source tax may be reduced under a double tax treaty.
To improve the conditions for international corporate group finance in Switzerland, a change of law was implemented on 1 August 2010. Borrowings and loans between related parties (subject to consolidation according to general accounting standards) are no longer treated as bonds, and the borrower is not treated as a financial institution merely due to intra-group borrowings. Therefore, interest paid on borrowings between group companies after 31 July 2010 is generally no longer subject to Swiss withholding tax or stamp duty (under the reservation that in addition to the intra-group financing the Swiss finance company or another Swiss affiliated company does not provide a guarantee relating to a bond issued by a foreign affiliated company (see Question 8)).
If a Swiss company that is part of a Swiss-based corporate group provides a guarantee relating to a bond issued by a foreign affiliated company, and more than 10% of the bond equivalent is used to finance activities of affiliated companies in Switzerland, the FTA treats the bond in the same way as a bond issued by a Swiss entity, so that interest on the bond is subject to 35% Swiss withholding tax (see Question 7). The company granting the guarantee must charge an arm's-length guarantee fee to the bond issuer. The guarantee fee is subject to corporate income tax at guarantor level.
As of 1 August 2010, borrowings and loans between related parties (subject to consolidation, according to general accounting standards) are not generally treated as bonds, and the borrower is not treated as a financial institution (provided that in addition to the intra-group financing the Swiss finance company or another Swiss affiliated company does not provide a guarantee relating to a bond issued by a foreign affiliated company).
There is no difference in corporate taxation relating to interest received on loans or on bonds (see Question 4, Corporate income tax and Question 5).
Interest on a bond or a note issued by a Swiss entity is subject to 35% Swiss withholding tax, subject to double tax treaty reduction, whereas interest payments on loans (including loans between related parties) from a Swiss borrower are generally not subject to Swiss withholding tax (see Question 7, Withholding tax on interest and deemed dividends and Exemptions from withholding tax). The issuer of the bond or notes is liable to collect and deliver the withholding tax to the FTA. If a Swiss company that is part of a Swiss based corporate group provides a guarantee relating to a bond issued by a foreign affiliated company, and if more than 10% of the bond equivalent is used to finance activities of affiliated companies in Switzerland, the Swiss guarantor is treated as the bond issuer for tax purposes. The Swiss entity is liable to collect and deliver the withholding tax (see Question 8).
To increase Swiss competitiveness in the international bond market, the Swiss parliament has decided to abolish issuance stamp duty on the issuance of bonds (at the rate of 0.12%) and money market papers issued by a Swiss issuer (at the rate of 0.06%; 1/360 of the rate for each day of the term) after 1 March 2012 (see Question 20, Increasing Swiss competitiveness in the international bond market).
The issuance of a Swiss bond or of Swiss notes is not subject to securities transfer stamp duty. Bonds issued by a foreign issuer are subject to transfer stamp duty of 0.3%, unless they are Eurobonds (bonds issued in a foreign currency where interest and repayment is paid in a foreign currency).
Transfer of a bond or a note is subject to securities transfer stamp duty if a Swiss securities dealer (as defined in the Stamp Duty Act) is involved in the trade as a party or an intermediary.
The duty is usually borne equally by the parties in the trade, and the Swiss securities dealer involved is liable for collecting and delivering the duty to the FTA (see Question 6, Securities transfer stamp duty).
The rate is 0.15% for Swiss securities and 0.3% for foreign securities, based on the consideration.
In relation to the issuance or the transfer of bonds or notes the following transactions are exempt.
As of 1 March 2012 the issuance of Swiss bonds and money market instruments by a Swiss issuer are no longer subject to Swiss issuance stamp duty (see Question 20, Increasing Swiss competitiveness in the international bond market).
The following transactions are exempt from securities transfer stamp duty:
Redemption of taxable securities.
Denomination of bonds or notes by a foreign entity (without a guarantee of a Swiss affiliated group entity).
Trading in money market papers (with a term of less than 12 months).
Intermediation, sale or purchase of bonds or notes denominated by a foreign entity (without a guarantee of a Swiss affiliated group entity) if the parties in the trade are foreign entities.
Transfer of taxable securities in a tax-neutral reorganisation (for example, in a merger or demerger).
The following parties are exempt from paying their half of the duty:
Professional securities dealer, when making trades out of its own trading account.
Foreign states and national banks.
Collective investment schemes.
Foreign social security institutions.
Foreign pension funds.
Foreign life insurance companies.
Foreign stock quoted companies.
Refinancing costs in connection with the leasing are in general tax deductible. To what extent depreciation of leased goods is accepted by the tax authorities depends on the type of leasing contract. If the lease is a mere "cession of rights to use" for a defined period of time, with no intention to sell the goods to the lessee at maturity of the leasing contract, depreciation accepted by the tax authorities is limited to the maximum rates for depreciation of assets published by the FTA (see Question 13). Further depreciation is subject to negotiation with the tax authorities.
If the leasing contract grants the lessee the right to purchase the leased goods at the end of maturity or before maturity, tax authorities have to accept the depreciation included in the annuity according to the leasing contract. However, if the leased goods are not sold to the lessee at maturity after all, part of the depreciation must be recovered in relation to corporate income tax, to match the maximum rates for assets depreciation published by the FTA.
Paid leasing costs are generally fully tax deductible if the lessee has no right to purchase the leased goods at maturity or before maturity. If the lessee has the right to purchase the leased goods at a defined price, depreciation is generally limited to the difference between the price when the goods are taken over for lease and the market value the goods have when the purchase option is exercised. Interest and administrative costs included in the annuity are fully tax deductible.
The maximum annual rates for assets depreciation have been published by the FTA in a circular letter. The rates depend on the type of assets. The depreciation rates to be applied on the book value of major assets are as follows:
Residential building (without land): 2%.
Residential building (including land): 1.5%.
Office building (without land): 4%.
Office building (including land): 3%.
Office furniture: 25%.
Motor vehicles: 40%.
Machinery and IT: 40%.
Intangibles: 40%.
There are special tax regimes in Switzerland relating to companies that do not carry on business in Switzerland, or only have limited business activity in Switzerland. Special tax status such as holding status, domicile status and mixed company status have been under the scrutiny of the European Commission for some time.
Due to ongoing pressure from the EU, the federal council has proposed to abolish the domicile status and to amend the taxation of holding companies and mixed status companies in Switzerland. The proposed amendments have not yet been accepted by the Swiss parliament.
If the proposed amendments become effective, the effective tax rate relating to auxiliary income, such as interest and royalties of a company with holding status, will increase from 7.83% to about 8.52% (in Freienbach), and to about 9.37% (in the City of Zurich). A company with holding status is not allowed to carry on its own business activity (currently, income from auxiliary activities of up to 10% of the total income is generally accepted).
In relation to mixed status companies, the proposed amendments will increase the effective tax rates on foreign income from 8.52% to about 8.74% (in Freienbach), and from 9.37% to about 10.85% (in the City of Zurich). Mixed status companies must generate at least 80% of their income from foreign sources and have less than 20% of their expenses billed from Swiss sources. In relation to holding and mixed status companies, income from Swiss real estate is taxed at ordinary tax rates (see Question 4, Corporate income tax: Applicable tax rate(s)).
Rentals from Swiss real estate are taxed at ordinary corporate income tax rates, irrespective of the tax status of the company (see Question 4, Corporate income tax: Applicable tax rate(s)). The taxes are levied according to the law of the canton and/or municipality in which the property is located. Foreign real estate income is exempt from Swiss income tax.
Taxation of rentals from other sources depends on the tax status of the recipient. If the recipient is an ordinarily taxed company, rentals are subject to ordinary corporate income tax rates. If the recipient has mixed company tax status, rentals from non-real estate sources are subject to the special tax rate for a mixed company, if the rentals are from foreign sources (see Question 14). If the rentals are from Swiss sources, the rentals are subject to ordinary corporate tax rates.
It is advisable and common to request an advance tax ruling from the cantonal tax authorities of the anticipated domicile of the company, relating to special tax status such as holding status or mixed company status (see Question 14).
If the interest on the loan is deferred and added to the capital, the interest is still subject to corporate income tax at lender level and tax deductible at borrower level, provided that an arm's-length interest rate is calculated and the borrower is not in breach of federal thin capitalisation guidelines (see Question 4, Corporate income tax, Question 5 and Question 7, Withholding tax on interest and deemed dividends).
If the interest on the loan is written off or renounced, the write-off is subject to income tax at borrower level and is tax deductible at lender level, if the lender is not a related party. If the lender is a related party (but not a shareholder in the borrower), the write-off is not tax deductible at lender level, but no income tax is levied at borrower level, depending on the specific group relation of the two companies.
If the loan is granted interest free from a shareholder in the borrower to the borrower company, there are no corporate income tax consequences.
Written off or released (wholly or partly)?
Replaced by shares in the borrower (debt for equity swap)?
If the loan is wholly or partly written off, the write-off is subject to income tax at borrower level and is tax deductible at lender level, whether the lender is a related or non-related party.
In the case of a financial reorganisation and if the lender is a shareholder in the borrower, the write-off may be seen as a contribution at borrower level (not subject to issuance stamp duty of 1%) and is not subject to income tax at the level of the borrower. The write-off of the loan at shareholder level is tax deductible, but according to the tax authorities' practice, only to the extent to which a write-off of the investment in the borrower is required.
If the loan is converted into shares in the borrower, this is a mere balance sheet transaction without profit and loss or corporate income tax effect. However, the issuance of new share capital (exceeding a share capital of CHF1 million) or a contribution into the reserves of the borrower is subject to 1% issuance stamp duty, based on the amount of the converted loan.
Swiss special purpose vehicles (SPVs) are rarely used. If the SPV is Swiss, the issuance of the bond or notes to the investors issued after 1 March 2012 is no longer subject to issuance stamp duty. Interest paid on the bond or notes to the investors is subject to 35% Swiss withholding tax, although this may be reduced under a double tax treaty (see Question 7).
In asset securitisation structures, Swiss withholding tax may arise even if interest is paid and debt instruments are issued by a foreign SPV. The FTA has set out various rules on this. The following is only an outline of the issues and rules, and is not comprehensive.
For example, if a foreign SPV issues a bond or notes, which are guaranteed by a Swiss entity that is part of a Swiss based corporate group, and more than 10% of the bond equivalent is used to finance activities of affiliated companies in Switzerland, Swiss withholding tax is still due (see Question 7). In relation to asset securitisation, the FTA has established safe-haven rules which must be met, so that no Swiss withholding tax arises for the foreign SPV.
If the SPV is a non-related third party, or a related party issuing the bond or notes without guarantees from a Swiss entity, and the originator's assets are transferred to the SPV in a "true sale", there is no Swiss withholding tax, according to the FTA's safe-haven rule, if all the following apply:
The sale is conducted at arm's length.
The transaction is properly accounted for as a sale, and respectively a purchase, in the accounts of the seller and the SPV.
All risks associated with the receivables, particularly the debtor's risk, must pass over to or must be fully borne by the SPV and no longer by the seller.
The originator has no repurchase obligation in relation to the sold assets.
If there is no true sale, the foreign SPV is recognised and no Swiss withholding tax is due if the borrower of the assets (that is, the foreign SPV) is an unrelated party such as a fully fledged bank or a financing company that provides financing facilities to many different parties.
In the course of the amendment of the Banking Act designed to resolve the "too big to fail" issue and the promotion of contingent convertible bonds (CoCos) in Switzerland, the Swiss parliament has decided to increase Swiss competitiveness in the international bond market by abolishing issuance stamp duty on bonds and money market instruments issued by a Swiss issuer after 1 March 2012.
To further increase the competitiveness of the Swiss capital market the Swiss Federal Council proposed to amend the Swiss Withholding Tax Act in respect of interest on bonds and money market papers. According to the proposal, Swiss withholding tax of 35% on interest paid on bonds, notes and money market instruments should only apply if both:
The beneficial owner is an individual, resident in Switzerland.
The interest is paid through a Swiss paying agent.
According to the proposed amendments, Swiss withholding tax of 35% would no longer be limited to interest on bonds, notes and money market instruments of Swiss issuers but would also be levied on bonds, notes and money market instruments of foreign issuers provided that a Swiss paying agent is involved in the interest payment. However, Swiss withholding tax on Swiss bonds and Swiss money market papers should no longer apply if the beneficial owner is a non-Swiss resident or a Swiss corporate entity.
However, in relation to individual beneficial owners that are resident in an EU state, the scope of the EU savings tax would be expanded to include interest paid on bonds, notes and money market instruments issued by a Swiss issuer and as such replace Swiss withholding tax. According to the proposed changes, the liability for the Swiss withholding tax on bond interest will shift from the issuer of the bond, note or money market instrument to the Swiss paying agent (as defined for EU savings tax purposes).
The proposal from the Swiss Federal Council has been rejected by the Swiss parliament on the grounds that the proposed changes to the Swiss withholding tax should be reviewed in view of the bilateral withholding tax agreements Switzerland has concluded with Germany and the United Kingdom and the forthcoming requirements under US Foreign Account Tax Compliance Act (FATCA). Therefore, the implementation of the proposed changes is pending.
The goal of the Corporate Tax Reform III is to increase the appeal of Switzerland as a business destination. The implementation date is still unknown, as the proposed changes must be approved by the Swiss parliament.
One of the matters currently being discussed is the abolition of the 1% issuance stamp duty on paid-in equity to render Swiss financial centres more attractive and to stimulate economic growth.
In the context of this reform, Switzerland will use the opportunity to adapt its tax laws and reorganise the cantonal tax schemes for holding companies and mixed companies, in light of pressure from the EU (see Question 14).
In addition, the current system of the participation exemption is due to be replaced by a "direct exemption system". According to the proposed changes, participation income will be directly deducted from the corporation's profit and therefore fully tax exempt. Capital gains deriving from the sale of participation will not be subject to income tax, irrespective of the holding period and the investment quota (currently a minimal investment quota of 10% and a holding period of at least one year apply). Following the amendment to the participation exemption system, the disadvantages of the current system will be abolished; previous year losses will no longer be credited against tax free participation income and financing and administration costs related to the participations will be fully tax deductible. However, under the new system depreciation of participations and capital losses deriving from the sale of participations will not be tax deductible for income tax purposes.
With regard to loss carryforward the Federal Council intends to abolish any time limitation on the crediting of losses against future profits (currently, losses can only be carried forward for seven business years). Furthermore, it is intended to enable final losses of Swiss and foreign subsidiaries upon a liquidation to be credited against profit of a Swiss parent company.
The proposed measures will enable Switzerland to draw level with most of the European countries.
T +41 44 215 77 77
F +41 44 215 77 70
E monika.gammeter@taxpartner.ch
W www.taxpartner.ch
Qualified. Switzerland, 2002
Areas of practice. National and international corporate and private tax; tax planning for and restructuring of national and international corporations and entrepreneurs; banking and finance.
T +41 44 215 77 77
F +41 44 215 77 70
E stephan.pfenninger@taxpartner.ch
W www.taxpartner.ch
Qualified. Switzerland, 1995
Areas of practice. Real estate tax and tax efficient real estate investments; national and international corporate and private tax; tax planning for and restructuring of national and international corporations and entrepreneurs.
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