International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Swiss rules on withholding tax securities – discrimination of foreign investors?

Switzerland has been known for a long time as a popular location for international trading companies. Due to its business-friendly environment it has hosted all types of trading companies, from headquarters of multinationals to small trading offices with only one employee, for decades. Such companies may face a serious withholding tax risk, write Rolf Wüthrich and Noëmi Kunz-Schenk of burckhardt.

Often, the origin, the purchaser as well as the transporter of goods traded by Swiss companies are outside of Switzerland. In such situations, the inventory of Swiss trading companies is normally not stored in Swiss warehouses, but anywhere in the world, and the receivables from the sales by the Swiss trading company are to a large extent receivables against non-Swiss domiciled parties.

One might intentionally establish a Swiss trading company or one might take over such a company in the course of an acquisition. Various articles described the advantages of Swiss trading companies, be it for taxes, employment, legal certainty, living standard for the employees, etc., but also all kind of pitfalls (partial liquidation, transposition, etc.) to be avoided not to trigger Swiss income taxes, withholding tax or stamp duties. Not often described, however, was a Swiss measure under which a Swiss company may be forced to provide a security for possible future withholding taxes by means of a cash payment to or a guarantee on behalf of the Swiss Federal Tax Administration (SFTA). This article describes the situation in which a non-Swiss controlled Swiss company can be forced to grant a security for Swiss withholding taxes due in the future. We are of the opinion that – in a non-Swiss parent – Swiss subsidiary situation – a decision of the SFTA to provide a withholding tax security results in a breach of the non-discrimination clause similar to Art. 24 para. 5 OECD Model Convention (OECD MC) as contained in the Swiss tax treaties. The SFTA should therefore consider its treaty obligations when applying the domestic legislation on providing withholding tax securities not to breach the applicable non-discrimination clauses and refrain from requesting a withholding tax security.

Let's assume the following example: A Swiss trading company (SwissCo) has assets of $1,000: Cash at Swiss bank of $100, receivables against non-Swiss resident clients of $600 and goods at warehouses outside of Switzerland of $300. On the liabilities side it has a formal capital of $100 and profits carried forward of $900. SwissCo does not distribute any dividends as it needs its cash to finance its ongoing business activity.

SwissCo is now sold from SwissHoldCo, a Swiss holding company to USHoldCo, a US holding company.

Swiss dividend withholding tax of 35%

In Switzerland, dividend distributions are, in principle, subject to dividend withholding tax of 35%. To domestic intragroup dividend distributions the reporting procedure can be applied and the Swiss withholding tax is not levied. Furthermore, if a non-Swiss parent company holding a qualifying participation in a Swiss subsidiary is located in a state with which Switzerland has concluded a tax treaty, then the Swiss subsidiary may be allowed to apply directly the reduced treaty tax rate (normally 0% or 5% for dividends from qualifying participations) if the reporting procedure is approved by or at least the request to apply the reporting procedure is filed with the SFTA within 30 days following the shareholder meeting deciding the dividend. Thus, as a principle, Switzerland still knows a dividend withholding tax of 35% and the reporting procedure, which (partially) releases a company from the levy of the withholding tax in a parent – subsidiary situation, must still be considered the exemption from the levy of the withholding tax.

If said withholding tax principles are applied to our example then the following results: In principle, SwissCo has retained earnings of $900 and must pay Swiss withholding tax of $315 (35% of $900) in case of distribution of the retained earnings or in case of liquidation of SwissCo. As USHoldCo can apply the tax treaty with Switzerland, the Swiss withholding tax is reduced from 35% to 5% and SwissCo must pay a withholding tax of $45 if the reporting procedure is approved in advance by the SFTA. If the reporting procedure does not apply (e.g. because no request was filed in advance or because the US parent does not qualify for the reporting procedure as it is treated as an S corporation for US tax purposes), the full withholding tax of 35% will be levied.

Obligation to provide withholding tax security

Art. 47 of the Swiss federal law on withholding taxes (WHTL) states that the SFTA can ask a corporate taxpayer to provide a security for withholding taxes, interest and further expenses, even if such withholding taxes, interest or expenses are neither assessed nor due but solely as the collection of the future withholding tax seems to be at risk. Irrespective of the possibility of appealing against a decision of the SFTA to provide a withholding tax security, such a decision of the SFTA is immediately enforceable and the amount to be secured can be enforced by the SFTA against the Swiss company. By application of Art. 47 WHTL the SFTA may therefore request from SwissCo a security of $315 (35% of $900). As the US-Swiss tax treaty previews a reduced dividend withholding tax of 5% SwissCo may, in practice, request that the security shall be reduced to $45 (5% of $900) instead of $315. Such a reduction of the security will only be granted if SwissCo disposes of a permission issued by the SFTA to apply directly the reduced dividend withholding tax under the tax treaty. If such permission is not issued, then no reduction will be granted and the security equal to 35% of the distributable retained earnings will be due. The amount of the security to be provided will be reviewed and adopted on an annual basis by the SFTA based on the effective facts and circumstances.

For withholding tax security purposes Art. 9 of the ordinance to the WHTL (WHTO) contains a special provision applicable to non-Swiss controlled entities. The provision states that the collection of the withholding tax may be deemed to be at risk if:

  • More than 80% of the capital in a Swiss company is directly or indirectly held by persons with residence outside of Switzerland,

  • More than 50% of the assets of the company are located outside of Switzerland, and

  • The Swiss company does not distribute on an annual basis an adequate dividend.

For the purpose of Art. 9 WHTO receivables or rights against non-Swiss resident persons are considered assets located outside of Switzerland. A dividend distribution is deemed to be adequate if at least 6% of the distributable profits of the Swiss company are distributed every year.

If the three abovementioned conditions are met, the collection of the Swiss withholding tax may be deemed to be at risk by the SFTA and the SFTA may assess the provision of a security by the Swiss company. This security must be paid immediately and can be provided either by cash payment or by bank, insurance or third party guarantee on behalf of the SFTA. It should be noted that board members of a company may, under certain circumstances, be kept personally liable for withholding taxes, including the providing of a security.

Art. 9 WHTO is drafted as a 'can', and not as a 'must' provision. If the requirements of Art. 9 WHTO are fulfilled the SFTA can, but does not absolutely have to ask for a security. There is room for discretion for the SFTA when taking a decision. As there is room for discretion the effective situation of a company must be considered taking into account all facts and circumstances when deciding whether or not a security is justified. It must especially be judged whether or not there is a real danger that the future collection of the withholding tax is at risk. Therefore, even if the before cited three conditions of Art. 9 WHTO are met, the necessity of providing a security should not automatically be deemed to be fulfilled. This is, also according to Swiss literature, the reason why the legislator drafted Art. 9 WHTO as a 'can' provision.

In practice, however, it looks like tax inspectors in charge do not often make use of their freedom of discretion, when the three requirements are met, but rather threaten taxpayers with the obligation to either provide a security or to distribute an adequate dividend. Normally, the concerned group will solve the problem by deciding a dividend distribution of at least 6% of the distributable equity. Especially if the 0% withholding tax rate under a tax treaty is applicable, dividends can be distributed without any Swiss withholding tax consequences. There are, however, also situations, under which the Swiss dividend withholding tax is not reduced to 0%, as it is, as mentioned here before, the case under the US-Swiss tax treaty. Furthermore, such forced dividends are normally contrary to the business plan of a company. Instead of having the possibility to build up a solid equity basis the SFTA forces companies to reduce their Swiss equity basis by dividend distributions and to lend debt capital resulting in a lower Swiss profit due to deductible interest paid and in a lower taxable equity. One might think that it should also be in the interest of the SFTA to build up Swiss equity investments by non-Swiss investors. However, practice shows a different face and an implementation of Art. 9 WHTO without considering the freedom of discretion as well as without taking into account collateral damages caused by the SFTA for the business location Switzerland.

Art. 9 WHTO breaching non-discrimination according to Art. 24 para. 5 OECD MC

Art. 47 WHTL is applicable to SwissCo owned by USHoldCo as the 3 requirements of Art. 9 WHTO are fulfilled. As a consequence, SwissCo must either distribute an adequate dividend or must provide a security.

Let's assume that SwissHoldCo did not sell SwissCo. Under this assumption, more than 50% of the assets of the company are still located outside of Switzerland (which is the justification to request a security due to the fact that the Swiss withholding tax might be in danger). Differently from our basic example is the fact that the shareholder, SwissHoldCo, is still a Swiss resident, i.e. there is Swiss control, and not a non-Swiss resident person, i.e. non-Swiss control. As a consequence of the Swiss control Art. 9 WHTO does not apply, opposite to the non-Swiss controlled situation to which Art. 9 WHTO applies. Thus, Art. 9 WHTO states an obligation which distinguishes between Swiss controlled and non-Swiss controlled and which only applies to the non-Swiss controlled Swiss company, and not to Swiss controlled Swiss companies.

The obligation to provide a security to the SFTA according to Art. 9 WHTO results in a financial obligation for the Swiss company as either the Swiss withholding tax security must be paid to the SFTA or (bank, insurance or other) fees for a guarantee will be due and other disadvantages may result from granting a guarantee (impact on credit liability of a company) or making a cash payment. The granting of a security results in a cash drain and, as a consequence, in a competitive disadvantage for the non-Swiss controlled company.

Non-discrimination under tax treaties

Art. 24 para. 5 of the OECD MC states that enterprises of a contracting state, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other contracting state, shall not be subjected in the first-mentioned state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned state are or may be subjected.

In its tax treaties Switzerland normally includes a provision similar to Art. 24 para. 5 OECD MC. From a Swiss perspective Art. 24 para. 5 OECD MC therefore reads:

"Swiss enterprises, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other contracting state, shall not be subjected in Switzerland to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of Switzerland are or may be subject."

The non-discrimination clause of Art. 24 para. 5 OECD MC shall, notwithstanding the provisions of Art. 2 of the OECD MC, apply to taxes of every kind and description (Art. 24 para. 6 OECD MC).

The object of Art. 24 para. 5 OECD MC is to ensure the equal treatment for taxpayers residing in the same state, i.e. to ensure that all resident companies are treated equally regardless of who owns or controls their capital. The non-discrimination provision according to Art. 24. para. 5 OECD MC is also applicable to the Swiss withholding tax regulations and, as a consequence, to the rules regarding the provision of a security according to Art. 47 WHTL in connection with Art. 9 WHTO.

Tax treaty law overrules domestic law

When applying domestic tax law then prevailing provisions, including non-discrimination clauses of Swiss tax treaties must be applied by the Swiss tax authorities. The rules on provision of a security by Swiss companies controlled by non-Swiss entities according to Art. 47 WHTL and Art. 9 WHTO cannot, therefore, result in a breach of Art. 24 para. 5 OECD MC or the respective non-discrimination clause is a Swiss tax treaty, but must be in accordance with the obligations Switzerland entered into by signing tax treaties with such a non-discrimination clause.

A breach of Art. 24 para. 5 OECD MC is, in our opinion, given if a withholding tax security is requested by the SFTA from a Swiss company in case of non-Swiss control, but no security is requested in case of Swiss control. The SFTA must treat non-Swiss controlled entities similar to Swiss controlled entities. A breach of Art. 24 para. 5 OECD MC is not only given if the tax burden by a non-Swiss controlled company is higher than the tax burden carried by a Swiss controlled company. A breach of Art. 24 para. 5 OECD is also given if the non-Swiss controlled company is subject to obligations deviating from the obligations applicable to the Swiss controlled entity.

Of course, it is at the discretion of the Swiss legislator to include in Art. 9 WHTO rules regarding the provision of a security by non-Swiss controlled entities. It is also at the discretion of the legislator to stipulate discriminatory regulations as long as such regulations do not result in a breach of treaty obligations. Has Switzerland, however, concluded a tax treaty with a provision similar to Art. 24 para. 5 OECD MC, then Switzerland is bound to its treaty obligations not do discriminate against non-Swiss controlled entities for Swiss withholding tax and security purposes. Otherwise such entities suffer a disadvantage opposite Swiss controlled entities as the provision of a security leads to a cash drain for the non-Swiss controlled entities resulting in an economic disadvantage. The triggering of such a disadvantageous position by the SFTA for the non-Swiss controlled entity clearly results in a breach of the non-discrimination clause according to Art. 24 para. 5 OECD MC.

The SFTA, as many other states as well, still struggles with the practical implementation of non-discrimination clauses. The understanding of non-discrimination as well as the importance of applying tax law in a non-discriminatory manner is an ongoing development. This gives us hope that the day will come when tax administrations accept and implement the non-discrimination obligations applicable to them by virtue of signed tax treaties.



Rolf Wüthrich

burckhardt Ltd.

Mühlenberg 7

4010 Basel, Switzerland

Tel: +41 61 204 01 00

Rolf Wüthrich is an international tax lawyer with particular expertise in domestic and international tax planning andinbound and outbound transactions, especially between the USA and Switzerland. He also has strong experience in corporate restructuring and acquisitions as well as general corporate secretarial services.



Noëmi Kunz-Schenk

burckhardt Ltd.

Mühlenberg 7

4010 Basel, Switzerland

Tel: +41 61 204 01 70

Noëmi Kunz-Schenk's areas of expertise are domestic and international tax issues and tax planning, particularly in corporate reorganisations, restructurings, structured finance, financial products, acquisitions and divestments andhigh net wealth individuals.

burckhardt Ltd. provides its clients and their businesses with comprehensive, tailored advice on national and international tax planning issues and structuring, offers corporate secretarial and notary service, supports clients with professional expertise and broad international experience on restructurings, mergers and acquisitions as well as joint ventures, corporate financing, advises on inbound and outbound investments and in all matters related to employment, trade and transport law as well as to private clients.

more across site & bottom lb ros

More from across our site

ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.
Karl Berlin talks to Josh White about meeting the Fair Tax standard, the changing burden of country-by-country reporting, and how windfall taxes may hit renewable energy.
Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.