The world of taxation is in turmoil. Led by non-governmental organisations such as the Tax Justice Network or platforms such as the International Consortium of Investigative Journalism (Offshore Leaks) the public view not only on tax evasion but also on tax avoidance and to a certain extent tax optimisation has changed dramatically recently.
Other bodies such as the OECD and the EU are looking into harmful tax practices, base erosion and profit shifting. Moreover, because of budget deficits, governments are making use of the increasing public pressure and knowledge on corporate tax structures of multinationals – sometimes legitimately, sometimes rather hypocritically. Switzerland is adapting to these changes.
While most of Europe seemed to be sailing in stormy waters in the recent years, Switzerland has been able to manage its economy as well as its currency in a remarkable way. Often, Switzerland is wrongfully mistaken for a typical offshore location with little real economy. However, besides a globally important trading and financial services industry, including banking and insurance, it is a cluster for life science (pharmaceuticals, chemicals, medicine and biotech), power and automation technologies, mechanical engineering, and precision instruments.
Only because of a very competitive economy, the country's GDP still shows growth and a low unemployment rate of less than 3%. With its export-oriented economy, it is crucial for a country such as Switzerland to not only have a good network of free trade agreements but also a vast investment protection and double tax treaty network. In turn, this makes Switzerland very attractive as a business and holding location.
Taxation principles of Swiss holding companies at a glance
Income and net wealth tax
General comments and conditions
The holding tax regime, which exempts typical holding companies from cantonal and communal income taxes, leaving an effective tax rate of 7.83%, is most likely to be abolished in the near future (see below under Swiss corporate tax trends). For the time being, this status still applies. However, other regimes are in discussion with working groups at federal as well as cantonal levels.
The participation reduction applies on:
- Dividend income: either a participation of at least 10% in a company's equity or a fair market value of at least CHF1 million ($1.05 million) is required. No minimum holding period applies.
- Capital gains: the sale of a participation of at least 10% of a company's equity that has been held for a minimum holding period of one year is required. The CHF1 million threshold also applies provided at least 10% of the share capital has been held once in the past. The participation reduction applies on the gain exceeding the acquisition costs (recapture of previous value adjustments do not benefit from the reduction).
- 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).
Controlled foreign company (CFC) rules
Switzerland does not have any CFC legislation. Thus, income from foreign subsidiaries is never subject to tax in Switzerland before actual distribution, provided the effective place of management of the subsidiary is not in Switzerland.
Deductibility of capital losses/goodwill treatment
Amortisations on participations (that is, unrealised 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.
Deduction of costs
Acquisition costs and costs on disposal are deductible for income tax purposes. Interest payments can be deducted as long as they are at arm's-length.
Switzerland does not apply tax consolidation or loss relief for income tax purposes.
Switzerland has no specific transfer pricing rules. There is no specific documentation legislation and, as a general rule, the arm's-length principle in line with OECD guidelines applies.
Net wealth tax
Swiss holding companies are subject to an annual net wealth tax ranging between 0.001% and 0.176% of the equity at year end, depending on the location.
Dividend distributions, including ordinary dividends, liquidation proceeds, dividends in kind and deemed dividend payments are subject to withholding tax at a domestic rate of 35% and include any benefit of a financial nature received by a shareholder (other than the repayment of share capital). A relief at source is granted for dividend distributions from qualifying investments under all double tax treaties, provided that some formal requirements are met (an advance request has to be filed with the Swiss tax authorities and the declaration forms have to be filed on time).
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, irrespective of whether the lender is resident in Switzerland or abroad. Interest payments on Swiss bonds and on accounts/deposits at Swiss banks are subject to withholding tax. According to the 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, the 10/20 rule). An exemption to this rule applies to group internal financing activities. In such a case, no withholding tax on interest is due even if the conditions for qualifying as a bank are met.
Royalties, management fees, service fees, and technical assistance fees are not subject to Swiss withholding tax.
Stamp duties on issuance and securities transfers
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 or group reorganisations can be mitigated within the reorganisation exemption.
For the purpose of stamp duty on securities transfer, banks but also entities that report assets in the form of taxable securities with a value of more than CHF10 million are – among others – treated as registered securities dealers. Securities on the transfer of which duty is assessed include amongst others bonds, shares, partnerships and investment units of domestic issuers. Certificates issued by a Swiss resident are assessed at 0.015% of the transaction price and at 0.03% if released by a non-resident.
Recent and upcoming amendments
The following recent changes effective January 1 2011 directly or indirectly affect the attractiveness of Swiss holding companies in the next years:
- Capital contributions made by shareholders are no longer 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 (participations, 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 pretty long-term perspective in terms of withholding tax free dividend repatriations;
- Swiss holding companies are newly regarded as subject to VAT. Dividend income and sales of investments do not in most cases result in a reduction of the input tax deduction. In addition, a holding company can take the business activities of its subsidiaries into account to determine its own input VAT relief. This rule serves as a simplification for the calculation of the input VAT and has a high potential to optimize the input VAT quota;
- The threshold required for the application of the participation exemption has dropped from 20%/CHF2 million to 10% participation/CHF1 million fair market for dividend payments and to 10% participation from 20% for capital gains.
In the framework of the corporate tax reform III, the following major amendments are being discussed at political level:
- It is envisaged to switch from the indirect exemption system to a direct exemption of participation income. This would mean a significant improvement of the system as existing tax losses carry forward would no longer be reduced by indirectly tax-exempt dividend income. In addition, acquisition costs would no longer need to be tracked, which would result in less administrative burden for the companies. The deduction of allocated financing and administrative expenses should also be abolished. Finally, the abolition 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 and net wealth tax.
Swiss corporate tax trends
OECD and EU on tax regimes
Should the OECD and its member states, in particular also the G20, really be serious about applying respective measures to avoid harmful tax competition, this could actually increase the attractiveness of Switzerland. Unlike other jurisdictions, headquarters of multinationals in Switzerland usually dispose of real substance, that is qualified personnel, respective premises, etcetera. Swiss tax regimes in place are in general far less aggressive than respective regimes applied in certain EU member states or elsewhere. Meanwhile, it is public knowledge that multinationals get offered effective tax rates far below 3% while benefiting from tax regimes applied in the Netherlands, Luxembourg, Ireland, and Singapore. Thus, while effective tax rates in Switzerland are generally higher, also by applying Swiss tax regimes it shows that the effective income tax rate alone is not always decisive when choosing a holding or headquarter location.
In 2007 Switzerland has been put under pressure by the EU with respect to its tax regimes. According to the European Commission, certain cantonal tax regimes – such as the holding or mixed company regimes – are viewed as a selective advantage financed through state resources leading to distortion of competition which is incompatible with the proper functioning of the free trade agreement concluded between the European Economic Community and Switzerland in 1972.
The negotiations between Switzerland and the EU are still going on. In May 2013, the Swiss government published a report which states between the lines that the perceived harmful tax regimes will likely be abolished. In the same report, the government clearly commits to proceeding to the necessary changes in the domestic tax law to remain one of the most attractive business locations.
Certain elements of the Swiss tax regulations will certainly remain and may even be enhanced within the corporate tax reform III. Thus, regardless of the outcome of these discussions, the holding location Switzerland will in any case remain attractive for the following reasons:
- The most attractive aspects of Switzerland in terms of holding location – a very favorable participation exemption, no CFC rules and one of the most extensive treaty networks – are not affected by the discussions with the EU. Indeed, these discussions only concern the applicable income tax rate on the cantonal/communal tax level for non-participation income. Hence, the core beneficial aspects of the holding company regime – if at all – will not be affected by these negotiations;
- The experience with respect to other countries (see Luxembourg's 1929 holding regime or Belgium coordination centers) shows that a grandfathering period of, for example, 10 years is not unlikely;
- Because of this pressure, Switzerland is forced to seek alternative solutions to remain competitive in the long run. In reforming certain elements of its corporate tax legislation under consideration of attractive solutions applied in EU member states (Luxembourg, Netherlands), Switzerland may not only be able to reengineer its tax system to EU compatibility but actually outrun its competition within Europe. A series of measures including the introduction of tax incentives for innovative business activities (IP box and R&D incentives) or of a notional interest deduction on equity might be introduced.
- In addition, the general trend in terms of corporate income tax in Switzerland is a decrease of the applicable rates. Various cantons have already undertaken reforms of their tax law and lowered the corporate income tax. The canton of Neuchâtel has decided a decrease of the corporate income tax over five years, ending in 2017 with an overall ordinary effective tax rate of 15.6%. The canton of Lucerne has modified the cantonal tax law as of January 1 2012, resulting in an ordinary effective tax rate of 12.1%. These rates are ordinary effective rates and therefore not subject to any special conditions as it would be the case for a special regime. They include federal, cantonal and communal taxes. There are various other signs of awaking in terms of income tax rates as various cantons prepare significant tax reforms behind the scenes.
International tax, free trade agreements and investment protection treaties
Switzerland has more than 120 investment protection agreements worldwide and therefore has – after Germany and China – the third largest investment protection agreement network worldwide. Further, the Swiss government is highly active in entering into free trade agreements. On July 16 2013, Switzerland signed as the first continental European state a free trade agreement with China. Furthermore, Switzerland has one of the largest double tax treaty networks with more than 90 double tax treaties in force or signed. In the few last years, the following developments were notable:
- A double tax treaty was signed with Hong Kong in late 2011 and has entered into force as of January 1 2013. It offers interesting planning opportunities between Switzerland and China since it provides for 0% withholding tax on dividend and interest payments and 3% withholding on royalty payments between a Swiss and a Hong Kong company, provided of course the specific conditions are met;
- The new double tax treaty with Japan, which entered into force as of January 1 2012, offers very favourable tax planning opportunities. It especially provides a 0% withholding tax rate on royalty as well as dividend payments, provided of course the specific conditions are met;
- Other recently signed double tax treaties are with Turkey, Columbia, Peru and Turkmenistan;
- Switzerland is one of the few countries that has a private double tax treaty with Taiwan.
A changing world
The tax world is changing. The developed economies are stagnating, leading to unemployment, social unrest and loss of tax revenue. Thus, governments are desperately trying to find ways on how to tackle their budget deficits. Meanwhile, Switzerland has proven itself as being able to handle the economic turmoil. All the pressure put on Switzerland in recent years constitutes a challenge for this country but has the positive effect to force Switzerland to be pro-active, which will result in higher competitiveness.
Although the awaking process might have been hard at the beginning, there are clear signs that show this process is now accelerating and going into the right discussion. All these discussions along with various recent and planned amendments of the tax rules as well as the foresight of the Swiss government will lead to improved attractiveness of Switzerland, not only as a holding but also as a general business location.
Tel: +41 58 249 54 14
Stefan looks back at almost 17 years in tax law. 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 in 2000. Stefan joined KPMG in October 2006 and became a partner in 2008.
Stefan's area of work covers in particular international tax structuring and M&A transactions. He has a vast experience in consulting multinationals as well as private equity investors in Swiss and international tax law. Further, Stefan is frequent lecturer at the Swiss Tax Academy and the University of Applied Sciences in Zurich.
Tel: +41 58 249 53 77
After a master's degree in law, Sébastien started his professional career in January 2003 with KPMG in Zurich. In 2006 he became a Swiss Certified Tax Expert. In 2007 and 2008, Sébastien has been working in-house with an airline catering and logistics provider with dual headquarters in the US and Switzerland. After rejoining KPMG, he worked from January 2010 through July 2011 with the US firm where he headed up the Swiss Tax Center of Excellence in New York.
Since his relocation to Switzerland, he is a member of the international corporate tax team based in Zurich, he provides tax advice to various corporate clients regarding international as well as Swiss tax matters, focusing on Swiss inbound business. Sébastien is fluent in French, German and English.
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