Switzerland edges closer to reforming withholding taxes

The report aims to strengthen the Swiss debt capital market and securing tax compliance. It rests on two main pillars:

1. The abolishment of WHTs on interest paid to Swiss corporate and to foreign investors; and
2. he introduction of a paying agent model and expansion of the WHT regime to include income that Swiss resident individual investors receive from foreign investments.

The WHT regime in Switzerland currently follows the debtor principle. This sees the Swiss payer of interest or dividends deduct a WHT of 35%. This is then deposited with the Swiss Federal Tax Administration, and 65% of the net amount is then credited to the investor.

Abolishment of WHTs on interest paid to Swiss corporate and to foreign investors

Interest paid to Swiss corporate and to foreign investors will no longer be subject to the Swiss WHT. This measure would make it more attractive for investors to purchase Swiss bonds and for Swiss companies to perform cash pooling and treasury functions domestically.

Introduction of paying agent principle

For payments that fall under the paying agent system for a Swiss resident individual investor, as listed below, the Swiss paying agents (i.e. the Swiss banks), would deduct the WHT and deposit it with the Swiss Federal Tax Administration, which in principle is similar to how the US withholding agent regime works.

The following types of income fall under the paying agent system:

• Interest from Swiss and foreign bonds;
• Dividends from foreign stocks or similar equity instruments; and
• Interest from domestic bank accounts.

Under the report, the following will remain subject to the debtor principle:

• Dividends from Swiss stocks and similar equity instruments;
• Domestic lottery wins; and
• Domestic insurance benefits.

Indirect investments will generally be treated as direct investments. This means that their income will fall under the paying agent principle, except for the share of income allocable to dividends from Swiss stocks and similar equity instruments.

The suggestions by the expert board report addresses a long-standing backlog of reforms, and an urgent concern of capital market participants.

Many aspects of the proposal are undoubtedly appealing and support the intended objective. However, the suggested reform lacks any positive features for wealthy Swiss resident individuals who already declare all of their investments and related income.

Furthermore, the planned 35% WHT on foreign dividend and interest income, coupled with liquidity implications around year-end, would be a clear disadvantage.

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