Switzerland has for a long time been regarded as a highly attractive
business location. Despite that, Switzerland has felt the pressure due
to the economic crisis, in particular in Europe. However, due to a very
competitive economy, the country's GDP still shows growth and the
unemployment rate has remained stable at approximately 3%, despite a
fast growing population due to migration. All the discussions around
bank secrecy, including the topics of tax planning strategies of the big
Swiss banks in the US and the exchange of information to neighbour
countries, have significantly changed the Swiss environment within a few
years.
Taxation principles of Swiss holding companies
Income and net wealth tax
General comments and conditions
The tax laws of all Swiss cantons foresee a special privileged tax
regime for companies whose main objective is to hold substantial
investments in the capital of other corporations. A corporation has to
fulfill the following conditions to qualify for the holding privilege:
- The company's main purpose according to the company's articles of
incorporation is the long-term management of equity investments in
different companies;
- In the long-term, the participations should cover two-thirds of the
assets or the derived income (dividends) represents at least two-thirds
of the total income (based on the assets' fair market values); and
- The corporation may not carry out business activities in
Switzerland. Administrative and minor business activities to the benefit
of the group such as financing, group management or to a certain extent
intellectual property (IP) management are allowed as far as they remain
accessory.
A holding company is exempt from income tax at cantonal and communal
level. Accordingly, besides dividend income, other income such as
interest, royalty, or management fee income is fully exempt from
cantonal taxation.
At a federal level, no privilege applies and all income is thus
subject to ordinary taxation at an effective tax rate of 7.83%. However,
thanks to the participation reduction system, income and capital gains
derived from qualifying participations are virtually tax exempt.
Participation reduction
The participation reduction applies on:
- Dividend income: either a participation of at least 10% in a
company's equity or a fair market value of at least SFr1 million
($974,000) is required. No minimum holding period applies;
- Capital gains: the sale of a participation of at least 10% of a
company's equity that has been held for a minimum holding period of one
year is required. The SFr1 million threshold also applies provided at
least 10% of the share capital has been held once in the past. The
participation reduction applies on the gain exceeding the acquisition
costs (recapture of previous value adjustments do not benefit from the
reduction);
- No further test applies (such as minimum taxation or performing
active business at the subsidiary's level). This allows tax free
repatriation of profits resulting from offshore subsidiaries or passive
investments.
The exemption is an indirect one. Income tax is calculated on the
basis of total taxable profit (including the participation income) and
then reduced in the proportion of the net participation income (gross
income less allocated administration and financing expense).
Controlled-foreign-corporations rules
Switzerland does not have any CFC legislation. Thus, income from
foreign subsidiaries is never subject to tax in Switzerland before
actual distribution, provided the effective place of management of the
subsidiary is not in Switzerland.
Deductibility of capital losses/goodwill treatment
Amortisations on participations (that is, unrealised capital losses)
are deductible as long as they are commercially justified and booked in
the financial statements of the company. Realised capital losses on the
sale of participations are deductible for income tax purposes.
Deduction of costs
Acquisition costs and costs on disposal are deductible for income tax
purposes. In terms of interest deduction, the maximum permitted amount
of debt financing is according to the safe-haven practice rules of the
tax authorities defined per asset evaluated at market value. For
example, shares quoted on the stock exchange may be debt financed at a
maximum 60% whereas the threshold for other shares and investments in
companies amounts to 70%. A company may have a higher debt financing as
long as the arm's-length nature can be proven.
Tax consolidation
Switzerland does not apply tax consolidation or loss relief for income tax purposes.
Transfer pricing
Switzerland has no specific transfer pricing rules. There is no
specific documentation legislation and as a general rule, the
arm's-length principle in line with OECD guidelines applies.
Net wealth tax
Swiss holding companies are subject to an annual net wealth tax
ranging between 0.001% and 0.176% of the equity at year end, depending
on the location.
Withholding tax
Dividend
Dividend distributions, including ordinary dividends, liquidation
proceeds, dividends in kind and deemed dividend payments are subject to
withholding tax at a domestic rate of 35% and include any benefit of a
financial nature received by a shareholder (other than the repayment of
share capital). A relief at source is granted for dividend distributions
from qualifying investments under all double tax treaties (a very broad
treaty network of more than 90 treaties is available), provided that
some formal requirements are met (an advance request has to be filed
with the Swiss tax authorities and the declaration forms have been filed
on time).
Interest
Swiss law differentiates between ordinary loans of a Swiss borrower
and bonds (for example, cash bonds or money market instruments) issued
by Swiss residents or accounts/client deposits at a Swiss bank.
Arm's-length interest payments on ordinary loans are not subject to
withholding, irrespective of whether the lender is resident in
Switzerland or abroad. Interest payments on Swiss bonds and on
accounts/deposits at Swiss banks are subject to withholding tax.
According to the tax authorities, the definition of Swiss banks also
include any Swiss companies that have more than 10 or 20 different
non-bank interest-bearing creditors (depending on the loans terms and
conditions, so called 10/20 rule). An exemption to this rule applies to
group internal financing activities. In such case, no withholding tax on
interest is due even if the conditions for qualifying as a bank are
met.
Royalties
Royalties, management fees, service fees, and technical assistance fees are not subject to Swiss withholding tax.
Stamp duties (on issuance and securities transfers)
Issuance stamp duty is due at an ordinary rate of 1% on the fair
market value of capital contributions. Various statutory exemptions are
available and generally stamp duty in connection with the set-up of
holding companies or group reorganisations can be mitigated within the
so-called reorganisation exemption.
For the purpose of stamp duty on securities transfer, banks but also
entities that report assets in the form of taxable securities with a
value of more than SFr10 million are – among others – treated as
registered securities dealers. Securities on the transfer of which duty
is assessed include bonds, shares, partnerships and investment units of
domestic issuers, among others. Certificates issued by a Swiss resident
are assessed at 0.015% of the transaction price and at 0.03% if released
by a non-resident.
Recent and upcoming amendments
The following recent changes effective from January 1 2011 will
directly or indirectly affect the attractiveness of Swiss holding in the
next years:
- Introduction of the capital contribution principle replacing the nominal value principle
Capital contributions made by shareholders are no longer subject to
withholding tax at the time of the actual repatriation. This amendment
offers interesting planning opportunities especially in terms of foreign
group relocations to Switzerland. At the time of the relocation, the
group assets (participations, IP, etc) can be contributed to the Swiss
(holding) company at fair market value against high equity value (share
capital and share premium). This allows the Swiss company distributing
future dividend payments out of the equity created at the time of the
contribution in a withholding tax free way. Although this solution is
limited in time, contributions of high value offer a pretty long term
perspective in terms of withholding tax free dividend repatriations.
- From a VAT perspective Swiss holding companies are newly
regarded as subject to VAT. Dividend income and sales of investments do,
in most cases, not result in a reduction of the input tax deduction. In
addition, a holding company can take the business activities of its
subsidiaries into account in order to determine its own input VAT
relief. This rule serves as simplification for the calculation of the
input VAT and has a high potential to optimise the input VAT quota.
- Reduction of thresholds for the application of the participation reduction
The thresholds required for the application of the participation
exemption has dropped from 20%/SFr 2 million to 10% participation/SFr1
million fair market for dividend payments and to 10% participation from
20% for capital gains.
In the framework of the Corporate Tax Reform III, the following major amendments are being discussed at political level:
- Amendment of the participation reduction system It is
envisaged to switch from the indirect exemption system to a direct
exemption of participation income. This would mean a significant
improvement of the system as existing tax losses carry forward would no
longer be reduced by the indirectly tax-exempt participation income. In
addition, acquisition costs would no longer need to be tracked, which
would result in less administrative burden for the companies. The
deduction of allocated financing and administrative expenses should also
be abolished. Finally, the abolishment of the minimum shareholding
quote as well as the required holding period (for capital gains) is also
being envisaged.
- Abolishment of the issuance stamp duty and net wealth tax
Trends in Swiss corporate taxation
Discussions with the EU
Since 2005, Switzerland has been put under pressure by the EU about
its tax regimes. Indeed, according to the European Commission, certain
cantonal tax regimes – such as the holding or mixed company regime –
distort the proper functioning of the free trade agreement concluded
between the European Economic Community and Switzerland in 1972 (FTA)
and the EU Code of Conduct. In view of the European Commission, certain
tax benefits granted by Switzerland for these regimes qualify as harmful
state aid or are viewed as not being in line with the EU code of
conduct and therefore lead to a distortion of cross-border competition.
As a result, the European Commission is of the opinion that such tax
regimes have to be abolished or modified by Switzerland.
The negotiations are still going on. Although the outcome is entirely
uncertain, it is not unlikely that Switzerland will have to abolish
these tax regimes at some point.
Regardless of the outcome of these discussions, Switzerland will in any case remain attractive for the following reasons:
- A very favourable participation exemption, no CFC rules and one of
the most extensive treaty networks are not affected by the current
discussions with the EU. Indeed, these discussions only concern the
applicable income tax rate on cantonal/communal tax level for
non-participation income. Hence, the core beneficial aspects of the
holding company regime – if at all – will not be affected by these
negotiations.
- The experience for other countries (see Luxembourg 1929 holding
regime or Belgium coordination centres) shows that a grandfathering
period of at least 10 years is not unlikely.
- Due to this pressure, Switzerland is forced to seek for alternative
solutions to remain competitive on the long run. In reforming certain
elements in its corporate tax legislation under consideration of
attractive solutions applied in EU member states (such as Luxembourg and
Netherlands) Switzerland may not only be able to reengineer its tax
system to EU compatibility but actually outrun its competition within
Europe.
- The general trend in terms of corporate income tax in Switzerland is
a decrease of the applicable rates. Various cantons have already
undertaken reforms of their tax law and lowered the corporate income
tax. The Canton of Neuchatel has decided a decrease of the corporate
income tax rate over five years, ending in 2017 with an overall ordinary
effective tax rate of 15.6%. The Canton of Lucerne has modified the
cantonal tax law as of January 1 2012, resulting in an ordinary
effective tax rate of 12.1%. These rates are ordinary effective rates
and therefore not subject to any special conditions as it would be the
case for a special regime. They include federal, cantonal and communal
taxes. There are various other signs of awaking in terms of income tax
rates as various cantons prepare significant tax reform behind the
scenes. Although no concrete proposition is available yet, there have
already been political discussions to reduce the federal tax rate.
International tax and investment protection treaties
Switzerland has disposed of more than 120 investment protection
agreements worldwide and therefore has – after Germany and China – the
third-largest investment protection agreement network worldwide.
Further, Switzerland has one of the largest double tax treaty networks.
Highlights of the previous year include:
- The new double tax treaty with Japan offers very favourable tax
planning opportunities. It especially provides a 0% withholding tax rate
on royalty as well as dividend payments, provided of course the
specific conditions are met;
- A double tax treaty was signed with Hong Kong in late 2011. The
ratification is proceeding and the treaty should be in force as at
January 1 2013;
- A recently concluded private double tax treaty with Taiwan; and
- Recently signed double tax treaties with Turkey, Columbia and Peru.
Greater competition
All the pressure put on Switzerland in recent years has created a
challenge for the country but has had the positive effect of forcing
Switzerland to be more proactive in attracting international investment.
Although the process might have been hard at the beginning, there are
clear signs that show that this process is now accelerating and going
in the right direction. All these discussions along with various recent
and planned amendments of the tax rules as well as the foresight of the
Swiss government will improve the attractiveness of Switzerland, not
only as a holding but also general business location.
| Sébastien Maury
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KPMG
Tel: +41 44 249 2916
Cell: +41 79 693 4186
Email: smaury@kpmg.com
After a master's degree in law, Sébastien started his professional
career in January 2003 with KPMG in Zurich. In 2006 he became a Swiss
certified tax expert. In 2007 and 2008, Sébastien was working with an
airline catering and logistics provider with dual headquarters in the US
and Switzerland. After rejoining KPMG, he worked from January 2010
through July 2011, with the US firm where he headed up the Swiss Tax
Centre of Excellence in New York.
As a member of the international corporate tax team based in Zurich,
he provides tax advice to various corporate clients regarding
international as well as Swiss tax matters, focusing on Swiss inbound
business.
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| Stefan Kuhn
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KPMG
Tel: +41 44 249 32 43
Mobile: +41 79 438 88 08
Email: stefankuhn@kpmg.com
Stefan Kuhn has 16 years of tax law experience. After working as a
scientific assistant in tax law at the University of St. Gallen he
joined one of the large international accounting firms in 2000. Stefan
joined KPMG in October 2006 and became partner in 2008.
Stefan's area of work covers international tax structuring and
M&A transactions. He has a vast experience in consulting
multinationals as well as private equity investors in Swiss and
international tax law. Further, Stefan is frequent lecturer at the Swiss
Tax Academy and the University of Applied Sciences in Zurich.
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