From January 1 2005 the Swiss government has introduced changes to the payment of withholding tax on dividends. Now a Swiss corporation will not be obliged to deduct and pay to the tax authority the whole of the withholding tax of 35%.

Switzerland has a 35% withholding tax on the payment of dividends by Swiss corporations. Where the shareholder is a Swiss resident, the withholding tax paid is credited against the direct tax to which they are liable. In addition, payment of dividends within a group of Swiss corporations may benefit from a payment being replaced by a declaration.

If the shareholder lives abroad, the withholding tax is a final liability in Switzerland. Most of the double taxation treaties (DTT) for the avoidance of double taxation on income which Switzerland has entered into with third-party countries reduce the rate of withholding both for shareholders who are individuals as well as shareholders that are legal entities. What is more, a number of such DTTs provide for an additional reduction where a shareholder that is a legal entity holds a qualifying participation in the Swiss corporation (for instance 25% of the share capital).

When Swiss corporations pay a dividend to a foreign shareholder they must as a general rule withhold 35% of the said amount and pay it over to the federal tax authority independently of a DTT applying. It is then for the shareholder residing abroad to make a claim under the DTT made between Switzerland and the country of their residence in order to obtain a reimbursement (without interest) of the difference between:

• the tax withheld; and

• the rate applicable by virtue of the DTT.

In spite of a relatively speedy reimbursement procedure, in the case of a substantial dividend, this procedure constitutes an obstacle to rapid payments being made within a group of corporations.

As an exception to the principle stated above, Switzerland has for many years provided a different system for shareholders - legal entities that are German-resident or US-resident. Indeed, in accordance with the order of June 15 1998 regarding the American-Swiss Double Taxation Treaty of October 2 1996 and with the order of April 30 2003 regarding the German-Swiss Double Taxation Treaty of August 11 1971, shareholders who are US-resident or German-resident legal entities that hold substantial participations in Swiss corporations may benefit from the rate provided by the treaties reduced directly at source.

As a result, the Swiss corporation withholds from the dividend paid the amount equal to the rate provided in the applicable treaty and not at the rate of 35%.

Since January 1 2005 Swiss subsidiaries may use the declaration procedure for dividends they pay to their parent companies abroad in order to pay the withholding tax and may thus pay to the federal tax authority only the net amount at the reduced rate provided by the DTT.

When the declaration procedure applies

The declaration procedure can apply if the foreign corporation that is to receive the dividend is a corporation with share capital that is resident in a country with which Switzerland has entered into a DTT or another international treaty to the extent that such corporation has a right to enjoy the dividends received.

The participation amount

The foreign corporation that is to receive the dividends must hold a participation which, according to the DTT or another international treaty, entitles it to an additional reduction of the withholding tax. Numerous treaties do in fact provide for a more substantial reduction of withholding tax where a shareholder holds a substantial percentage of the capital of the Swiss corporation (for instance 25%).

If the treaty in question does not provide for an additional reduction but one sole reduction irrespective of the size of the participation, then the shareholder must hold directly at least 20% of the Swiss corporation in order to be able to use the declaration procedure.

Permitted dividend distributions

The declaration procedure may be used for ordinary or extraordinary distributions of dividends from the Swiss corporation to the foreign corporation. According to the initial indications received from the federal tax authority, the declaration procedure will also apply in case of dividends being paid in-kind or in the case of other pecuniary benefits. This last point should, however, be checked in each case pending clear practice here.

The procedure

The Swiss corporation with a share capital or the Swiss cooperative that pays dividends shall send to the federal tax authority a request for authorization on form 823B before the dividends are due in order to be able to use the declaration procedure.

This form must contain information on the corporation that is to receive the dividend and on the corporation that is to pay the dividend, on the size of the participation, the date it was acquired. It must first be signed by both the authorized signatories of the corporation that is to receive the dividend and the corporation that is to pay the dividend. It must also be initialled by the tax authority of the country where the corporation that is to receive the dividend is resident.

If a request for authorization has not previously been filed, it may be filed at the same time as the payment of the dividend is declared to the federal tax authority. In such case, the payer of the dividend will nevertheless be authorized to withhold the tax directly at the usual reduced rate. To the extent, however, it subsequently transpires that the benefit of the DTT should not be granted, the balance of the withholding tax will have to be paid and default interest will be due on the amounts which should have been withheld.

Declaration on payment of the dividend

Swiss corporations that pay a dividend must declare such payment on ad hoc forms. If payment is made to a foreign corporation that benefits from reduction at source, the Swiss corporation must return form 108 at the same time as the usual declaration form.

Jean-Blaise Eckert (jean-blaise.eckert@lenzstaehelin.com), Geneva