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

Corporate tax: Is Swiss corporate tax system still attractive despite EU pressure?

Sustainable tax planning and a harmonious relationship between the tax authorities and taxpayers mean that Switzerland retains an attractive corporate tax system, believe Pascal Hinny and Jean-Blaise Eckert of Lenz & Staehelin.

For many years, the European Commission has criticised the Swiss tax treatment of holding and mixed companies which it considered a violation of their free trade agreement as well as of the EU's Code of Conduct for Business Taxation, though Switzerland is not an EU member state. Switzerland refuted the allegations on legal grounds. For political reasons, it started negotiations with the European Commission last summer. Simultaneously, Switzerland entered into discussions regarding several measures to increase its tax appeal as a business destination.

EU pressure

On February 13 2007 the European Commission criticised the Swiss tax treatment of holding, mixed and domiciliary companies as a violation of the free trade agreement of 1972 (FTA) between the European Community and Switzerland. By de facto application of EC State Aid standards (Article 107 Treaty for the Functioning of the EU [TFEU]), it considered this treatment to be incompatible with the FTA state aid provisions laid down in Article 23(I)(ii) FTA.

Switzerland has refuted these allegations in a detailed statement. The European Commission 's arguments were surprising, considered that the now-challenged tax treatment (as well as the FTA) had already existed for decades and had previously never raised any concerns. Therefore Switzerland has up to now refused to formally negotiate with the commission. On May 25 2012 the Conference of Cantonal Finance Directors formally consented to a tax dialogue of the Federal Council with the EU. First results of these negotiations are expected by mid-2013. On December 6 2012, the European Commission issued recommendations to EU member states that included the blacklisting of and termination of tax treaties with non-EU countries that do not comply with the EU internal Code of Conduct on Business Taxation guidelines (2012/772/EU).

Taxation of holding and mixed companies

In a nutshell, the tax regimes of holding and mixed companies applicable at the cantonal level only (at the federal level ordinary corporate income tax at the effective rate of 7.8% is levied) can be described as follows:

Holding status applies to companies that perform no commercial activity in Switzerland and of which the corporate purpose and effective activity is to hold participations in affiliated companies. To benefit from the tax status as a holding company, one of these two conditions must be met:

  • At least two-thirds of its asset value must consist of participations; or

  • At least two-thirds of the income of the company is derived from such financial participation in the form of dividend income.

Holding companies are fully exempted from cantonal and communal taxes except for income derived from real estate located in the respective canton. As a result of this tax treatment and the federal participation exemption, income from participations (capital gains and dividends) is largely tax exempt. All non-participation income (interest, royalties and management service fees [insofar as they are compatible with the holding status of the company]) is taxed at an effective tax rate of 7.8%.

A company qualifies as a mixed company if it its business income is predominantly realised abroad (at least 80%). Profits realised by a mixed company on these foreign activities are effectively taxed at substantially reduced rates, since only that part of foreign source income attributable to management activities in Switzerland will be taxed. As a result, between 75% and 90% of foreign source income may be exempted, depending on the substance of the company in Switzerland.

The legislature justifies the exemption because of the fact that these corporations are primarily active abroad (comparable to the tax exemption due to a foreign permanent establishment) and therefore only make a minimal use of Swiss infrastructure. Any Swiss source income realised by the company, however, is taxed at ordinary rates.

The status of mixed company is widely used for Swiss based trading companies conducting international trading activities. The effective tax rate on pre-tax income of mixed companies is between 8.5% and 12%, depending on the extent of activities performed in Switzerland and the canton in which the company is domiciled. Normally taxed companies are subject to an effective tax rate of between 12% and 24%.

Swiss tax rules on holding and mixed companies, which are applied to thousands of companies, have to be seen as one of the key features of the attractiveness of the Swiss tax system. Accordingly, the issue ranks high on the Swiss political agenda. However, the involvement of various stakeholders including the powerful Swiss cantons (since cantonal and not federal tax rules are at stake) and the complicated system of financial equalisation among the cantons make the finding of a consensus on the issue a difficult task. Not to mention that the Swiss people will most likely have the last say on any changes to these rules.

Financial latitude for compensatory measures

As elsewhere, the economic climate and outlook means Switzerland's traditionally strong financial market is facing turbulent times, with a resulting fall in future tax intake. Even so, compared to other countries Switzerland seems less affected by the global crisis and the federal government as well as the cantons have mainly managed to stay in the black not least because of balanced-budget amendments introduced some years ago. Furthermore, only a relatively small amount of public money has been employed to bail out suffering industries.

As a result, there is still room to manoeuvre. This room for new initiatives at the corporate tax level has, nevertheless, been narrowed by two measures:

1) Switzerland implemented the capital contribution principle in 2011 – which allows the tax exempt repatriation of capital contributions brought in by shareholders – with a (perhaps too) generous retroactive effect; and

2) The introduction of an up to 60% (at the federal level) and 50% tax relief (in most cantons) on individuals' receipt of dividend income from Swiss and non-Swiss shareholdings of more than 10% capital participation in 2009 (see also below). Dividends are therefore subject to a maximum tax rate of between 8.7% and 24% instead of the normally applicable maximum income tax rates of between 19% and 46%.

Switzerland's direct reaction to EC pressure: Proposed tax treatment for holding and mixed companies

In December 2008, the Swiss government unilaterally announced that it may be willing to give up special tax treatment for domiciliary companies, basically mixed companies in terms of pure letter box companies. It also proposed to change holding company treatment in two ways:

1) Any business activity – until now permitted for holding companies if carried out outside of Switzerland – should be disallowed under this regime; and

2) Non-participation income of holding companies (often interest and royalty income) should not be entirely tax free at the cantonal level. Non-participation income is only subject to the federal income tax at a rate of 7.8%.

Regarding mixed companies, the Federal Council proposed to increase the tax rates applicable to non-Swiss sourced income from about 9% to about 11%.

This proposal has been welcomed by the European Commission, with the hopeful consequence of the dissolving of the FTA infringement debate. However, some EU member states (Italy in particular) have vetoed this agreement so that no amicable solution has been found up to now. The EU Commission and Switzerland are expected to agree on some principles by mid- 2013 and it may be assumed that any future change to the tax regimes would come with a generous grandfathering of the existing set-ups, at least similar to those granted to EU member states if code of conduct or state aid standards have been infringed.

Corporate tax reform 2011

Unrelated to these discussions with the European Commission, this new legislation was introduced from 2011 to increase the attractiveness of the Swiss corporate tax law:

  • Tax-free repatriation of all shareholders' capital contribution has been eased as an important feature for inward investment. This measure has, in no time, turned out to be an attractive element of the Swiss corporate tax law and has prompted the relocation of numerous foreign corporations, often with foreign shareholders, to Switzerland. Whereas, only the formal share capital – excluding any paid in capital surplus – could be taken out of a Swiss corporation without triggering 35% withholding tax (WHT), the introduction of the capital contribution principle allows the repatriation of any capital contribution without triggering WHT (and with no Swiss income tax consequences for Swiss resident individuals). By mid-2012, about 2,900 Swiss companies had reported capital contribution reserves amounting to Sfr800 billion ($859 billion).

  • The application of the tax-free replacement of business assets allowing for tax neutral transfer of untaxed (hidden) reserves on sold and replaced business assets has been broadened. Such replacement is then possible for any business asset (regardless of its similarity in function) and any 10% shareholdings.

  • The threshold for the application of the participation exemption on dividend income and capital gains from participations is reduced from the now 20% to 10% shareholdings or – in the case of dividend income – from shareholding's fair market value (FMV) Sfr2 million to Sfr1 million.

  • The WHT on intra-group interest payments has been abolished, which significantly enhances the attractiveness of Switzerland as a location for group financing (including cash pooling).

  • The canton of Nidwalden introduced a licence box regime which allows the separate taxation of Swiss and non-Swiss income from the right to use intellectual property rights at an effective corporate income tax rate of 8.8%. This rule applies on normal taxed companies and presents a real alternative to the mixed company status. Since these companies generally possess a good deal of substance, their international recognition should not be a problem.

  • Since Switzerland withdrew its reservation to Article 26 of the OECD Model Convention, more than 40 tax treaties have been renegotiated. At the same time, Switzerland has managed to reduce the maximum withholding tax on dividends, interest and royalty in many treaties. Numerous tax treaties also now contain arbitration clauses to resolve transfer pricing issues faster and to prevent double taxation more reliably.

Other measures put forward by the Swiss government

Along with proposed changes to the tax treatment of holding, mixed and domiciliary companies, the Swiss government has proposed these significant additional changes to the Swiss corporate tax law:

  • Abolition of 1% issuance stamp tax on equity contributions to Swiss corporations;

  • Enhancement of participation exemption by means of switching from the system of indirect relief to a direct relief, which is more attractive in a loss situation;

  • Unlimited loss carry-forward, which today is limited to seven years;

  • Loss transfer within a group of companies including losses suffered in foreign entities;

  • Permission is given to the cantons to entirely abolish annual capital tax on corporations' equity (up to now the cantons were only allowed to credit the income tax against the capital tax).

However, if the preferred tax regimes (especially the mixed company regime) are abolished, these measures alone will be insufficient to preserve the attractiveness of Switzerland for these kinds of business activities. For this reason, the cantons are considering substantially reducing the ordinary corporate income tax rate for all companies so that the ordinarily applicable corporate income tax rate would be within the range of the tax rates applicable to mixed companies. This adjustment will however scarcely be bearable for the central cantons (Zurich, Geneva and Basle). Accordingly, an adjustment to the equalisation system among the Swiss cantons is considered as well.

A moderate increase in the VAT rates (which are, at 8%, very low on an international scale and to a great extent benefit the non-Swiss importers) and a subsequent reduction of both the individual and corporate income tax rates would also be conceivable but has only been little discussed up to now.

A general reduction in corporate income tax rates would accentuate the problem of the income of Swiss group companies being attributed to the foreign parent because of the CFC rules that apply in the country of domicile of the foreign parent. It would therefore be necessary that an agreement with the EU clarifies that CFC rules are no longer applicable. In doing so, the EU Commission would also have to guarantee the mandatory implementation of the agreement throughout the EU member states.

Extensive thought has also been given to the creation of certain boxes, along the Dutch model, with a particular attention to the EU compatibility of such systems. Boxes could concern interest and/or IP revenues.

Competitiveness of corporate tax regime

As always, it is a matter of perspective to assess the attractiveness of a corporate tax system. Criteria usually mentioned are:

  • Low tax rates;

  • A small tax base;

  • No WHT on dividends; interest or royalties;

  • Unlimited loss carry-forward and transfer of losses;

  • Easy and flexible reorganisation exemption;

  • No exit tax;

  • No or generous thin-capitalisation rules; and

  • A good treaty network.

Starting with the corporate tax rates for ordinarily taxed companies, Swiss overall (federal, cantonal and communal) corporate tax rates vary between 11% (Cantons of Lucerne, Obwalden , Nidwalden and Appenzell) and 24% (Cantons of Vaud and Geneva). Participation income is virtually tax exempt. The attractive taxation of the foreign income of mixed companies possibly combined with special rules for principal companies (for so-called supply chain activities) have already been described.

Federal and cantonal tax rules also allow substantial tax breaks (tax holidays) of up to 10 years for newly created businesses in economically underdeveloped regions of Switzerland. These rates, along with an unchanged calculation of taxable income despite all major neighbours reducing tax rates, while broadening the tax base, seem quite competitive.

Less so are the canton's annual capital tax levied on corporations' equity of which rates vary significantly between 0.001% (Canton of Uri) and 0.525% (Canton of Basle). For holding and mixed companies significantly lower capital tax rates apply: between 0.001% (Cantons of Uri and Obwalden) and 0.175% (Canton of Vaud). Cantons, however, since 2009 are allowed to credit annual capital tax against corporate income tax so that profitable corporations do not owe annual capital taxes. However, only about half of the Swiss cantons have implemented such rules so far.

Regarding the determination of the tax base, Swiss corporate tax laws contain easy and flexible reorganisation exemptions (which generally allow tax exempt reorganisations), generous depreciation and provision rules (for example, the possibility of building a provision of up to one-third of the value of the inventory), relatively generous thin capitalisation rules (1:7 as a rule of thumb), generous rules on the tax free replacement of business and tax exemption of dividend income (holding treatment and participation relief). The seven-year loss carry forward is however a disadvantage.

Another problem of corporate tax law is the one-time 1% issuance stamp tax on equity contributions to Swiss corporations, which can only be avoided in the case of an equity contribution by means of a qualifying reorganisation.

Problematic (but now less so due to the 2011/2012 exemption of group internal financing and the abolition of issuance stamp tax on debt financing) are rules applicable to corporate finance referred to as the 10 non-bank rule and the 20 non-bank rule, now applicable to third-party lending only: In case: (i) a Swiss borrower's syndicate of lenders under one loan facility consists of more than 10 non-banks (10 non-bank rule), or where (ii) a Swiss borrower – overall – has more than 20 non-bank lenders (20 non-bank rule), interest is subject to 35% WHT. It makes third-party financing of Swiss (groups of) companies unnecessarily complicated and expensive. Switzerland does however not levy a WHT on interest under straight forward single loans.

Worth noting is, that Switzerland does not levy a WHT on royalty payments. Still, the major stumbling block for Swiss corporate taxation is the 35% WHT on dividend payments applicable also in case of a Swiss corporation's exit – by means of transfer of seat (or management and control) or formal liquidation – unless a tax treaty provides for a lower tax rate or exemption (Switzerland has a network of more than 90 tax treaties of which 25 provide for a full exemption from WHT for substantial corporate shareholdings). The Switzerland-EU taxation of savings income agreement follows the same purpose, allowing for similar benefits to the EC parent-subsidiary and the EC royalty and interest directives, though some EU member states refuse to apply the treaty correctly.

As a result, if (and to the extent) the proposed corporate income tax measures are implemented, the Swiss corporate tax regime's competitiveness will remain intact, in particular for holding, financing, trading, licensing and supply chain companies. Besides, soft factors such as reliable infrastructure (for example, transportation, housing and services), public safety and a spectacular natural environment (though admittedly high costs of living) also contribute to Switzerland's attractiveness.

Stable policy

There are two final points worth considering when assessing Switzerland's competitiveness on the corporate tax stage.

Firstly, Switzerland features a pluralistic, highly democratic and coalition-based political system. This results in relatively stable policy (and also law) making. The disadvantage of such a system is its inability to react quickly in the case of crisis which often is frustrating to the public and particularly disadvantageous in the economic situation now. New trends are sometimes missed or followed after everybody has done so. The advantage, however, is stability and foreseeability. New tax laws are usually introduced after years of public debate which allows for sustainable tax planning (an exception was the precipitous handling of the tax evasion of foreign people and Swiss banking secrecy).

Secondly, one of the real benefits of the Swiss tax system is the usually easy access to tax administrations, which allows taxpayers to get, within a few weeks, upfront information and binding tax rulings on the interpretation of the tax laws (to counter a widespread misunderstanding, a tax ruling does not provide for a deal to avoid a tax that is ordinarily due.) It is this feature, based on mutual trust between taxman and taxpayer – along with the underlying attitude that sees taxpayers as equal and grown-up partners rather than a potential tax evader – that allows for sustainable tax planning.

This article is an updated and redrafted version of Pascal Hinny, Das Schweizer Unternehmenssteuerrecht unter dem Druck der EU – Eine Analyse der Handlungsalternativen, in: Europäische Zeitschrift für Wirtschaftsrecht (EuZW) 2012 / Heft 22, 859ff. and Pascal Hinny, Is the Swiss corporate tax system still attractive despite EU pressure?, in: Tax Planning International Review, May 2010.

Pascal Hinny



Partner, head of corporate tax

Lenz & Staehelin Zurich

Tel: +41 58 450 80 00



Pascal Hinny is a partner in Lenz & Staehelin's Zurich office where he leads the corporate tax group. He is a specialist in the field of national and international tax planning for multinational groups of companies (M&A, restructurings, recapitalisation, financing, relocation, private equity). He regularly advises on international and domestic transactions including public tender offers and private equity buy-outs.

Pascal is a law professor, has an LLM in tax from the London School of Economics, is an attorney at law and a certified tax expert. Since 2002, Pascal has held the chair for tax law – since 2005 as a full (ordinary) professor – at the law faculty of the University of Fribourg.

Pascal is a member of the Tax Chapter of the Swiss Fiduciary Chamber, the direct tax group of Confédération Fiscale Européenne (CFE), Brussels and of the tax group Germany–Austria–Switzerland (D-A-CH), Berlin. He is the chairman of the Swiss Association of Tax Law Professors (SATLP). At the International Fiscal Association's 2008 Congress, he was the general reporter on the topic "New tendencies in tax treatment of cross-border interest of corporations".

Jean-Blaise Eckert




Lenz & Staehelin Geneva

Tel: +41 58 450 70 00



Jean-Blaise Eckert is considered as a leading lawyer in tax and private client matters in Switzerland. He's the co-head of the tax group of Lenz & Staehelin. He advises a number of multinational groups of companies as well as high-net-worth individuals.

Jean-Blaise studied law at the University of Neuchâtel and was admitted to the bar in 1989. He earned an MBA from the University of Berkeley in California, in 1991, received a diploma as a certified tax expert in 1994 and joined Lenz & Staehelin in 1991, becoming a partner in 1999. He has been nominated by Chambers in 2012 as a leading individual in tax.

Jean-Blaise is a frequent speaker at professional conferences on tax matters. He also teaches in the masters programs of the universities of Geneva and Lausanne. He is member of the executive committee and vice-president of the International Fiscal Association.

more across site & bottom lb ros

More from across our site

The Indian company, which is contesting the bill, has a family connection to UK Prime Minister Rishi Sunak – whose government has just been hit by a tax scandal.
Developments included calls for tax reform in Malaysia and the US, concerns about the level of the VAT threshold in the UK, Ukraine’s preparations for EU accession, and more.
A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.
With marked economic disruption matched by a frenetic rate of regulatory upheaval, ITR partnered with Asia’s leading legal minds to navigate the continent’s growing complexity.
Lawmakers seem more reticent than ever to make ambitious tax proposals since the disastrous ‘mini-budget’ last September, but the country needs serious change.
The panel, the only one dedicated to tax at the World Economic Forum, comprised government ministers and other officials.