Thanks to numerous amendments, Switzerland is quickly becoming the preferred choice for holding companies

A number of criteria determine the attractiveness of a potential holding location. The importance of the various criteria depends on the main goals an international operating group wants to achieve by setting up a holding company in a certain location. Switzerland has long been regarded as an attractive business location, either for a pure holding company or for a regional or even global headquarters. The reasons for its attractiveness include not only its ideal location in the heart of Europe and other factors such as high living standards, economic stability, a highly educated workforce, liberal labour laws and beneficial disclosure requirements for listed companies, but also Switzerland's attractive taxation system.

The Swiss taxation system offers moderate taxation of income and wealth, not only for companies but also for individuals. This comparably low taxation becomes even more attractive with regard to separate, specific tax treatment of companies such as headquarters, financing, or intellectual IP companies. Hence, the combination of holding and managing participation functions with other functions through additional Swiss companies makes Switzerland a highly attractive business location.

Taxation of Swiss holding companies

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);

• 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 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.

The participation reduction applies on:

• Dividend income: either a participation of at least 20% in a company's equity or a fair market value of at least Sfr2 million (€1.4 million) is required. No minimum holding period applies. As of January 1 2011 the holding quote required will drop to 10% and the minimum fair market to Sfr1 million (€700,000)

• Capital gains: the sale of a participation of at least 20% of a company's equity that has been held for a minimum holding period of one year is required. The participation reduction applies on the gain exceeding the acquisition costs (recapture of previous value adjustments do not benefit from the reduction). As of January 1 2011 the holding quote required will drop to 10%.

• 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 allocable administration and financing expense).

Switzerland does not have any CFC legislation. Furthermore, no change of ownership rules apply.

Amortisations on participations (unrealized 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.

Acquisition costs and costs on disposal are deductible for income tax purposes. In terms of interest deductions, the maximum permitted amount of debt financing is defined per asset evaluated at market value according to the safe-haven practice rules of the tax authorities. For example, shares quoted on the stock exchange may be debt financed at maximum 60% whereas the threshold for other shares and investments in companies amounts to 70%. A company may have higher debt financing as long as its arm's length nature can be proven.

Switzerland has no specific transfer pricing rules, meaning that there are no specific documentation requirements. However, as a general rule, the arm's length principle applies and upon request, certain documentation may have to be provided.

Swiss companies are subject to an annual net wealth tax. Holding companies benefit from a privileged rate which significantly varies from canton to canton and currently ranges between 0.001% (Canton Obwalden) to 0.176% (Canton Vaud) of the equity at year end.

According to domestic law, Swiss withholding tax rate amounts to 35%.

Royalties, management fees, service fees, and technical assistance fees are not subject to Swiss withholding tax.

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 tax, irrespective of whether the lender is a resident of Switzerland or not. Interest payments on Swiss bonds and on accounts/deposits at Swiss banks are subject to withholding tax. According to the current practice of 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). However, these rules are about to change with relevant upcoming amendments.

Dividend distributions are subject to withholding tax and include any benefit other than the repayment of share capital as well as any paid-in capital as of January 2011.

From a procedural perspective, relief at source is granted for dividend distributions from qualifying investments under all double tax treaties ("DTT") provided that a prior request has been filed with the Swiss tax authorities.

As of January 1 2010 Switzerland has a treaty network of about 90 DTT with foreign countries, and Swiss holdings are eligible for treaty benefits if they have their corporate residence in Switzerland and are recognised as a beneficial owner.

The bilateral agreement with the European Union (Article 15 Savings Agreement) allows Switzerland de facto access to the parent/subsidiary and royalty/interest EU directives.

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 can be mitigated.

For the purpose of stamp duty on securities transfers, banks but also entities that report assets in the form of taxable securities with a value of more than Sfr10 million (€7 million) are treated as securities dealers for tax purposes and may have to pay 0.015% to 0.03% securities transfer tax on certain transactions. However, intercompany transactions are typically tax exempt.

According to a VAT law amendment effective on January 1 2010, Swiss holding companies are newly regarded as subject to VAT. Dividend income and sales of investments should 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.

Relevant upcoming amendments

Several changes in the tax law will directly or indirectly affect the attractiveness of Swiss holdings in the coming years. The following amendments have already been passed in the framework of the "corporate tax reform II" and will be effective from January 1 2011:

• Introduction of the capital contribution principle replacing the nominal value principle

Effective January 1 2011, capital contributions made by shareholders will no longer be 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 (for example, participations and IP) 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 long term perspective in terms of withholding tax free dividend repatriations;

• Reduction of thresholds for the application of the participation reduction

The thresholds required for the application of the participation exemption will drop to 10% participation/Sfr1 million fair market for dividend payments and to 10% participation for capital gains;

Another significant amendment concerns the practice of the Swiss authorities in terms of intercompany financing. The envisaged changes foresee that intra-group interest payments on loan and current accounts would not be subject to withholding tax even if the 10/20 rule applies. All companies that need to be fully consolidated according to the accounting rules would qualify as group companies. A hearing procedure was launched in December 2009 by the Federal Authorities and the change in the Authorities practice is expected to be effective very soon.

Finally, in the framework of the "corporate tax reform III", the following major amendments are being discussed and are likely to become effective in 2013:

• Amendment of the participation reduction system

A switch from the indirect exemption system to a direct exemption of participation income is being envisaged. 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 lead to less administrative burden for 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.

• Abolition of the issuance stamp duty

• Introduction of a minimum taxation at cantonal level and prohibition of business activities for holding companies

As a reaction to the pressure that the EU has put on Switzerland in terms of special taxation regimes, the Swiss authorities have proposed to introduce a minimum taxation of holding companies at the cantonal/communal level. It has also been proposed to introduce a general prohibition of business activities which is currently allowed abroad. The EU commission has not commented on the proposals yet.

Conclusion

Switzerland offers several advantages which makes the country an attractive holding location. Thanks to various upcoming amendments of the tax rules, the attractiveness will grow in the coming years. Soft factors such as economic stability, capacity for innovation or quality of life for employees should not be forgotten in the selection process. Furthermore, Switzerland also offers very attractive tax rates with regard to structures involving other activities such as trading, headquartering, financing or IP management, not to mention private individuals. As such, the combination of holding functions with other functions makes Switzerland even more attractive as a business location. Overall, Switzerland needs to be considered when assessing a new top holding or headquarter location and when considering an IPO.

Sébastien Maury
		KPMG Tax Senior Manager, Swiss Tax Center of Excellence New York Tel: +1 212 954 6090 eFax: +1 212 208 4539 Cell: +1 347 601 5230 Email: sebastienmaury@kpmg.com After a law degree at the University of St.Gallen, Sebastien Maury started his professional career in January 2003 with KPMG in Zurich. He became a Swiss certified tax expert in 2006. He provides tax advice to various corporate clients regarding international as well as Swiss tax matters, particularly related to real estate, supply chain management, group financing and international restructuring. In January 2010, he was assigned to the KPMG New York office where he heads the Swiss Tax Center of Excellence, focussing on Swiss inbound tax planning.

Stefan Kuhn
		KPMG Tel: +41 44 249 32 43 Mobile: +41 79 438 88 08 Email: stefankuhn@kpmg.com Stefan Kuhn is an international tax partner of KPMG in Zurich. He has been practising tax law for almost 15 years. After working for some years as scientific assistant in tax law at the University of St. Gallen he joined one of the large International accounting firms at the beginning of 2000. He joined KPMG in October 2006 and became a partner in 2008. Kuhn's area of work covers in particular international tax structuring and M&A transactions. He has vast experience in consulting for multinationals as well as private Equity investors in Swiss and International tax law. He is a frequent lecturer at the Swiss Tax Academy and the University of Applied Sciences in Zurich.