Within the realm of international bond markets, investors
generally do not accept a deduction in withholding taxes (WHTs)
on interest. Bond issuers in jurisdictions where a WHT applies
may therefore suffer a competitive disadvantage, as they may
either have to increase interest rates in order to guarantee an
attractive yield (net of WHT), or face limited demand for their
offering due to its reduced attractiveness. Both situations
lead to an increase in the issuer's costs.
While many industrialised countries have abolished WHTs on
bonds issued to international investors (ultimately maintaining
the competitiveness of their domestic issuers), Switzerland
still levies a 35% federal interest WHT on certain types of
collective debt issues.
Withholding taxes in Switzerland
Unlike many other countries, no WHT is levied in Switzerland
on interest paid on private and commercial bilateral loans.
However, since the WHT definition of 'bond' and 'debenture' is
broader than the definition used by Swiss civil law or in
financial markets, certain bilateral loans (particularly if
syndicated), may fall under the definition of a bond or
debenture, triggering WHT.
Due to the WHT on interest, Swiss-based borrowers tend to
raise debt capital through foreign subsidiaries that are
established in jurisdictions where no WHT applies to such debt
instruments. Generally, these issues need to be guaranteed by
the Swiss parent companies in order to benefit from the
parent's issuer credit rating.
While there are sound commercial reasons for foreign issues
with a Swiss parental guarantee, the Swiss Federal Tax
Administration (SFTA) has defined criteria under which it
considers the use of a foreign issuer as abusive, and
assimilates the debt instrument as a Swiss issue, potentially
subject to WHT. A recent change of the SFTA's practice has
brought a welcome relaxation of the conditions under which this
assimilation takes place.
The definitions of bond, debenture and bank, as well as the
conditions under which a bond is issued by a foreign issuer
under a Swiss parental guarantee are critical in order to
determine whether the raising of debt capital is subject to
Bond and debenture definitions
Swiss withholding tax practice defines bonds or debentures
as written debt acknowledgments for fixed amounts that are
issued in multiple tranches for the purpose of collective
financing, and which allow the investor to evidence, reclaim or
transfer its receivable claim.
A bond is defined as the issue of written debt
acknowledgments over a fixed amount to more than 10 non-bank
lenders at identical conditions (in terms of interest rate,
lending period, repayment conditions, etc.), provided that the
total amount of issued debt amounts to at least CHF 500,000
A debenture is defined as the issue of written debt
acknowledgments over fixed amounts to more than 20 non-bank
lenders at variable conditions, provided that the total amount
of issued debt amounts to at least CHF 500,000.
As the above definitions suggest, Swiss and foreign banks
(as defined by the Swiss Federal Banking Act or comparable
foreign banking legislation at the place of establishment of
the lender) are not counted as lenders, unless the debt
acknowledgements are securitised (e.g. in the form of bearer
bonds, so that the issuer would not know whether the bond is
held by a bank or a non-bank).
Furthermore, following a legal amendment a few years ago,
companies under common consolidation with the issuer are no
longer counted as lenders under the aforementioned definitions.
However, as bond issues are rarely subscribed by group
companies of the issuer, this amendment is of minor relevance
in the context of international bond issues.
In order to avoid WHT applying to the borrower, Swiss
issuers who raise debt capital from international investors
therefore seek to observe the number of lenders specified under
any debt issue. This is done by introducing contractual
transfer restrictions in the credit agreements, which aim to
restrict the transferability of the debt instruments.
The transfer restrictions can disallow any transfer, or
transfers to non-bank lenders. It is also common to seek
consent from the issuer for any transfer. The transfer can then
be denied by the issuer if the number of lenders exceed 10 or
Since lenders generally want to be able to transfer their
receivables to third parties, such contractual transfer
restrictions may make the offering less attractive to
investors. Swiss issuers therefore regularly issue debt
instruments through their foreign subsidiaries.
Bank interest and withholding taxes
In addition to interest on bonds and debentures, bank
interest is also subject to WHT. Like for bonds and debentures,
the WHT definition of a 'bank' is broader than the notion
generally used in banking or financial markets. In addition to
banks being subject to the Swiss Federal Banking Act, any Swiss
resident person or company qualifies as a bank for WHT purposes
(if it holds interest-bearing customer deposits from more than
100 depositors whereby the aggregate amount is at least CHF 5
For bonds and debentures, Swiss and foreign banks (as
defined by applicable banking legislation) and companies under
common control with the issuer are not counted as
lenders/depositors towards the 100 lenders.
The basket counting method
In practice, whether the allowed number of 10, 20 or 100
lenders is respected remains of utmost importance when
assessing the WHT consequences of debt capital raising.
According to the practice developed by the SFTA, the debt
instruments can be divided into different categories (or
'baskets'), and counted separately (basket counting method).
- Short-term debentures (fixed term debt of
no more than one year);
- Long-term debentures (fixed-term debt of
more than one year);
- Debentures related to guarantee or
security deposits such as cash-collaterals in securities
lending or repo transactions; and
- Customer deposits related to current
accounts (debt without any fixed time limit).
A debt instrument is only counted in one basket at a time.
In particular, where a debt issue qualifies as a bond (because
the number of lenders exceeds 10), the same issue is not
counted in the short-term debentures (if the term of the issue
is no more than one year) or long-term debentures basket (if
the term of the issue exceeds 12 months).
If the number of permitted lenders is exceeded in one of the
baskets, WTH is due only on interest paid on debt within that
basket. There is no contamination of the debt instruments
pertaining to the other baskets.
Foreign issuers and Swiss parental guarantee
Interest on bonds/debentures of non-Swiss issuers is
generally not subject to WHT, regardless of the number of
lenders under such debt instruments. However, under certain
circumstances, bonds/debentures issued by a non-Swiss issuer
may be likened to Swiss bonds/debentures for WHT purposes, and
therefore WHT may have to be deducted on the interest
Firstly, a foreign issuer may be a Swiss tax resident for
WHT purposes if it is effectively managed in Switzerland and
carries out business activity. Under domestic tax residency
rules, such a foreign issuer would be considered a Swiss issuer
and the bond/debenture would therefore be classed as a Swiss
Secondly, the foreign issuer may be considered a special
purpose vehicle (SPV) whose only purpose is the issue of a
bond/debenture on behalf of the Swiss parent. Under the general
anti-avoidance rule in Swiss tax law, such an issue would be
deemed to have been directly made by the Swiss parent company,
thereby disregarding the foreign SPV.
In light of the above two scenarios, it is critical to
ensure that a foreign subsidiary of a Swiss multinational
issuing debt instruments has the necessary financial, physical
and/or operational substance to ensure that the issue can be
considered as a genuine non-Swiss issue. For example, this
would be the case if the foreign issuer carried out a proper
finance function at its place of establishment, taking care of
activities such as capital raising, inter-company funding or
liquidity management for the group.
Thirdly, under a long-standing SFTA practice, the issue of
debt instruments by a foreign issuer may be subject to WHT even
if the foreign issuer has the necessary substance, provided
that the issue is made under a formal guarantee from a direct
or indirect Swiss parent company and the proceeds of the issue
directly or indirectly flow back to the Swiss parent company or
another Swiss affiliate. In such a case, the SFTA deems the
issuance to be economically similar to a direct issuance by the
Swiss parent company, based on the general anti-avoidance
As the parameters of this 'assimilation rule' are well
established, it can be used as a safe-haven rule when
structuring debt capital of Swiss-headquartered groups. If
there is either no guarantee by a Swiss parent company, or no
flow-back of the issue proceeds to Switzerland, the debt
instrument of the foreign issuer is not subject to WHT.
As to the guarantee, the assimilation rule only applies when
a (direct or indirect) Swiss parent company acts as a guarantor
to its foreign subsidiary (downstream guarantee). Guarantees by
Swiss subsidiaries or Swiss sister companies of the foreign
issuer (upstream and cross-stream guarantees) are generally not
considered harmful, as Swiss corporate law limits the validity
of such guarantees to the guarantor's freely distributable
Direct and indirect flow-backs
As to the flow-back of the issue proceeds to Switzerland,
this includes direct as well as indirect flow-backs. There is a
direct flow-back to Switzerland if the foreign subsidiary,
which issued the bond, lends funds to a Swiss group entity that
accounts for a corresponding liability on its balance
There is an indirect flow-back if the issuer lends the funds
to a foreign group entity, which accounts for a corresponding
liability on its balance sheet, or which in turn grants a loan
to a Swiss group company. Accordingly, flow-backs through
dividend distributions or capital contributions to a Swiss
entity are generally not harmful. Depending on the individual
case, this may also be the case for settlements of pre-existing
liabilities towards Swiss group entities.
Notwithstanding, and according to a recent loosening of the
SFTA's administrative practice as of February 5 2019, a
flow-back of issue proceeds to Switzerland is permitted in an
amount that corresponds with the sum of the combined accounting
equity of all non-Swiss subsidiaries directly or indirectly
controlled by the Swiss parent company (so-called equity
alternative), plus the aggregate amount of loans granted by the
Swiss parent and all its Swiss subsidiaries to its non-Swiss
affiliates (compensation alternative).
Under these new limits for flow-backs of proceeds to
Switzerland, many Swiss multinationals (in particular those
with substantial equity in its foreign subsidiaries) can
increase the volume of bond issues through their foreign
subsidiaries under a parental guarantee, reducing their
exposure to WHT. However, they need to closely monitor the
limits for flow-backs to Switzerland as exceeding the limits
would trigger WHT on the foreign debt issue.
Furthermore, the SFTA requests that the method for
calculating and documenting the flow-back limits available
under the equity alternative and the compensation alternative
are agreed in an advance tax ruling. This method, once agreed
with the SFTA, has to be maintained for continuity reasons.
In case of a bond issue by a non-Swiss subsidiary with a
guarantee from the Swiss parent company, the borrower must
undertake that the flow-back of proceeds from the bond issue to
Swiss affiliates will not exceed the amount available under the
equity alternative and the compensation alternative. If these
flow-back limitations cannot be respected, the discussed
transfer restrictions need to be introduced in the credit
agreement to avoid unwanted WHT consequences.
Withholding tax outlook
These new rules give Swiss multinationals more leeway in how
to use funds raised through bond issuances by their foreign
subsidiaries, and undertakings in credit agreements may be
relaxed going forward.
Bär & Karrer
Tel: +41 58 261 57 25
Christoph Suter heads Bär & Karrer's tax team
in Geneva. He advises corporate and private clients in
complex national and international tax matters.
Christoph has broad experience in corporate
taxation, in particular M&A, reorganisations,
corporate finance, national and international tax
planning, and tax litigation work. He is also an expert
in tax topics of the banking and asset management
industry, such as the taxation of financial
Christoph is a frequent lecturer at national and
international tax conferences and publishes articles on
relevant taxation topics.
Bär & Karrer
Tel: +41 58 261 52 12
Susanne Schreiber is a partner at Bär & Karrer
and co-heads the tax department.
Susanne has extensive experience in international
corporate tax matters, in particular in domestic and
cross-border M&A transactions and reorganisations.
She advises on tax aspects of financing, acquisition
structuring, and capital market transactions and
management incentive schemes.
She frequently works on vendor or buy-side
transactions for private equity clients, multinational
companies and individuals, covering due diligence,
pre-deal structuring carve-outs, and post-merger
integration from a tax perspective.
Susanne regularly supports Swiss multinationals in
their tax planning work, including tax advice on
restructurings, financing and tax litigation work.
Susanne is a German attorney-at-law and tax advisor,
and a Swiss certified tax expert. Before joining
Bär & Karrer she worked for an international
law firm in Germany and for one of the Big 4 firms in
Zurich where she last headed the Swiss M&A tax