Swiss withholding tax and stamp duty reform strengthens the debt capital market
Manuel Angehrn and Steven Gruendel of Deloitte Switzerland explain why Switzerland’s withholding tax and stamp duty reform is making the debt capital market even more attractive.
The Swiss parliament on December 17 2021 approved a revision of the Swiss Withholding Tax Act and the Swiss Stamp Duties Act with the intent to make the Swiss debt capital market even more attractive for both domestic and foreign companies.
The reform aims at excluding bond interest payments from Swiss withholding tax and the trading of Swiss bonds from securities transfer tax.
The reform approved by the Swiss parliament would considerably strengthen the Swiss debt capital market, however it may become subject to a referendum and may have to pass the test with the Swiss voter before coming finally into law.
Swiss withholding tax
The reform addresses the Swiss withholding tax of 35% currently levied in Switzerland on income from movable assets, in particular on income from:
Bonds, serial mortgage certificates, and debt register credits issued by a Swiss resident person;
Units in collective investment schemes issued by a Swiss resident or by a non-Swiss resident person in conjunction with a Swiss resident person; and
Customer deposits with domestic banks and savings banks.
Refund of Swiss withholding tax
A Swiss resident beneficial owner may reclaim withholding tax based on the Swiss Withholding Tax Act, and a non-Swiss resident beneficial owner may reclaim the Swiss withholding tax based on an applicable double tax treaty between Switzerland and the beneficial owner’s country of residence – provided the requirements as set forth by either the Swiss Withholding Tax Act or the applicable double tax treaty are met.
In general, to the extent withholding tax on interest is concerned, a majority of Swiss tax treaties provide for a full reclaim of Swiss withholding taxes on interest.
Swiss withholding tax on interest: An administrative burden with limited value
The purpose of the Swiss withholding tax is both, the safeguarding of tax on movable income insofar as the foreign or domestic beneficiaries are entitled to a full refund and the generation of tax revenues to the extent non-Swiss resident beneficiaries are not fully treaty protected and suffer a residual withholding tax.
Even if the withholding tax can be entirely reclaimed, both the issuer of the security and the receiver of the interest subject to Swiss withholding tax are dealing with a considerable administrative burden in reclaiming the withholding tax. Owing to this fiscal and/or administrative burden depending on the case, caused by the withholding tax many potential foreign and domestic companies chose not to issue their debt in Switzerland and to issue their debt abroad instead.
Swiss securities transfer tax
Swiss securities transfer tax is generally due if a Swiss securities dealer is involved either as party to or intermediary of a transfer of taxable securities against consideration.
Taxable securities are bonds, shares, cooperative shares, participation certificates of cooperative banks, participation certificates, dividend-right certificates, and units in collective investment schemes issued by a Swiss resident person or their non-Swiss equivalent. The securities tax amounts to 0.15% for securities issued by a Swiss resident person and 0.3% for securities issued by a non-Swiss resident person.
Reform to strengthen the Swiss debt capital market
The Swiss government has provided multiple ideas to reform the Swiss withholding tax system since 2010. A first draft bill sought to introduce a paying agent system (which should have replaced the debtor system) to Swiss withholding tax, which was criticised in the consultation procedure as to burdensome with little to no added value.
The final bill, which passed the Swiss parliament, keeps the current debtor system but, considering the widespread availability of an international automatic exchange of information, introduces the following:
General abolishment of Swiss withholding tax on interest payments;
Exemptions of returns of a collective investment schemes receive from bonds;
Abolishment of Swiss securities transfer tax on the transfer of bonds issued by Swiss residents; and
Abolishment of Swiss securities transfer tax on the transfer of qualifying participations.
Changes to the Swiss Withholding Tax Act
While the tax reform provides for a general abolishment of Swiss withholding tax on interest payments as of January 1 2023, there is one notable exemption: interest payments with regard to bank deposits held by individuals that exceed CHF 200 ($216) will remain subject to a Swiss withholding tax.
Swiss withholding tax and bond interest payments
According to the current law, Switzerland has a far-reaching definition of bonds. Withholding taxes on interest payments are not only levied on bonds and respective interest payments but notes reclassified as bonds under the so-called 10/20 non-bank rules.
In addition, syndicated debt could have violated the 10/20 non-bank rule and – even though a Swiss debtor entered into a debt instrument with a single bank lender (not subject to Swiss withholding taxes), syndication of such debt imposed a risk of withholding taxes on interest payments by the Swiss debtor.
However, in order to mitigate the immediate effect of decreasing tax revenue, the Swiss legislator has imposed a transition period and application of the abolishment to domestic instruments issued after the law enters into force. Hence, interest components of domestic bonds issued prior to January 1 2023 will remain subject to Swiss withholding taxes.
“The reform aims at excluding bond interest payments from Swiss withholding tax and the trading of Swiss bonds from securities transfer tax”.
Accordingly, the abolishment of Swiss withholding tax on bond interest payments with regard to bonds issued after January 1 2023 will no doubt increase the attractiveness of the Swiss debt capital market significantly.
In addition to the eased issuance of Swiss debt, Swiss companies that guarantee a foreign issued bond (through a non-resident group entity) will no longer need to adhere to the ‘use of proceeds’ rule (even if the bond is issued before January 1 2023).
According to this rule, bonds issued by non-Swiss resident persons did qualify as Swiss domestic bond (the interest on which is subject to Swiss withholding tax) if the amount is guaranteed by a Swiss top holding company and flows directly or indirectly back to this Swiss top holding company.
In addition, the 10/20 non-bank rule on syndicated debt will cease to apply and allow for more freedom with regard to debt instruments issued by Swiss debtors.
Finally, interest payments with regard to debt guaranteed by domestic real-estate remains subject to a taxation at source. Such taxation at source, should however not impact lenders resident in a jurisdiction with treaty protection. In case a treaty protected lender meets the requirements (residence and allocation of the sole right of taxation of interest in his jurisdiction), no residual taxation at source should remain.
Swiss withholding tax and bank deposits
Comparable to bonds, Switzerland has known a far-reaching definition of bank deposits as well. The definition has extended beyond regulated entities and – with the 100 non-bank rule – captured every entity that entered into more than 100 debt relations with third parties.
This far-reaching definition imposed withholding taxes on interest paid not only in case of bank deposits but a asset managers etc. The tax reform however, provides for a narrow definition of bank deposits, i.e. capturing only regulated banks and insurance companies. The exemption of interest income below CHF 200 known in the current law already, will continue to apply in the future.
Exemptions for collective investment schemes
While a domestic collective capital investments scheme remains in principle subject to Swiss withholding taxes, a Swiss collective capital investment scheme is exempted to apply a Swiss withholding tax on the distribution of returns linked to bonds, provided such returns are accounted for separately.
The respective exemption allows the collective capital investment scheme to exempt income from both a domestic and a foreign issued bond from Swiss withholding taxes but continuous to deny an exemption for other foreign income.
Swiss withholding tax on structured products
It has been a long-standing practice of the industry to avoid issuance of structured products from Switzerland in order to circumvent withholding taxes on interest components (i.e. reverse convertibles). While the reform levels the playing field for Swiss issued products and does not provide for a Swiss withholding tax on the interest components, a potential forwarding of dividend components could remain subject to a withholding tax in accordance with the current practice of the Swiss Federal Tax Administration.
Swiss withholding tax on compensatory payments (manufactured dividends)
Compensatory payments (manufactured dividends) have been subject to Swiss withholding tax in line with a practice of the Swiss Federal Tax Administration. In absence of a legal basis for the respective practice, the Swiss Supreme Court did end the application of the practice.
While the tax reform provides for a translation of the past practice into law and allows for a continuous application, it remains uncertain how the Swiss Federal Tax Administration will apply the wording of the law, in particular, whether non-Swiss custodians of Swiss securities must apply Swiss withholding tax on manufactured payments if the return of the Swiss security is subject to Swiss withholding tax.
The tax reform contains new provisions which explicitly state that no Swiss withholding tax shall be levied, and no refund of Swiss withholding tax shall be denied purely because of formal mistakes, provided the taxpayer can prove that the violation of the formal provision has led to no tax loss for the federation.
Changes to the Swiss Stamp Duties Act
Abolishment of Swiss securities transfer tax on the issuance of domestic bonds
The tax reform no longer qualifies a domestic issued bond as a taxable security. Hence the taxation right ceases to exist. Contrary to the withholding tax law, the requalification is not subject to a transition period.
Abolishment of Swiss securities transfer tax on the transfer of bonds issued by Swiss resident persons
Like Swiss withholding tax on bond interest payments, Swiss securities transfer tax of 0.15% on the transfer of Swiss bonds is abolished. Contrary to initial plans, the securities transfer tax on foreign issued bonds of 0.3% remains in case a Swiss securities dealer or intermediary is involved.
Abolishment of Swiss securities transfer tax on the transfer of certain qualifying participations
Swiss securities transfer tax is due on the transfer of taxable securities against consideration, provided a Swiss securities dealer is involved in the transaction either as a party or as an intermediary. Under the current Swiss stamp duty rules, any company that holds taxable securities in excess of CHF 10 million qualifies as securities dealer for Swiss securities transfer tax purposes.
A significant amount of holding companies qualify as securities dealer. To ease the application of securities transfer taxes, the current law provides for an exemption in case at least 20% of a qualifying participation is transferred to a group entity. In addition, a new provision will allow for an exemption of securities transfer taxes in case the Swiss securities dealer transfer at least 10% of a qualifying investment (i.e. investment considered as financial investment in accordance with the Swiss code of obligation) regardless of the counterparty. Hence, intercompany transactions should in principle be exempt as soon as a 10% qualifying investment is transferred.
Evaluation and outlook
In times of ever-increasing administrative burdens in the matter of taxation and cross-border taxation, it is a welcoming sign by the Swiss legislator to provide for a simplified application of the Swiss withholding tax law and securities transfer taxes in relation to debt instruments.
The tax reform will significantly strengthen the Swiss debt capital market and Switzerland as a location for group financing activities as Swiss-based companies will likely begin to issue their bonds in Switzerland rather than abroad. Further, the tax reform should ease administrative burdens for banks and other financial institutions.
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Manuel Angehrn is a senior manager in the international tax practice of Deloitte Switzerland.
Manuel has more than nine years of experience providing Swiss and international tax advisory and compliance support to multinational enterprises across a spectrum of industries including the life science, consumer business, financial services and manufacturing.
T: +41 58 279 60 00
Steven Gruendel is a senior consultant in Deloitte Switzerland’s corporate tax team with a focus on financial services providers.
Steven advises both domestic and multinational clients such as banks, asset managers and insurance companies on all kinds of Swiss and international tax matters.