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Switzerland has been undergoing a total reform of its corporate tax system with a view to harmonising its federal, cantonal and communal tax laws as well as to render Switzerland more attractive to foreign investors.These developments are indeed very encouraging for foreign investment in Switzerland.
I. Stamp Duty and Capital Tax
Stamp duty is levied on share issues and other contributions to Swiss corporations. The stamp duty is levied at a rate of 1% on share issues and capital increases in excess of CHF 250,000. No stamp duty is levied on the first CHF 250,000 of share capital regardless of the amount and the timing of the investment.
In addition to stamp duty, an annual Cantonal capital tax is levied on the share capital, retained earnings and open reserves existing at the end of the financial year.
II. Corporate Income Tax
Under Swiss domestic law, corporate income tax is levied on net worldwide income generated by Swiss resident companies, with the exception of income attributable to subsidiary companies, foreign enterprises, permanent establishments, real estate or restrictions based on international treaty law.
In order to determine net taxable income, the gross income generated during any given financial year is reduced by justifiable expenses. These include interest payments (unless the interest due is recharacterised as a hidden profit distribution-see thin capitalisation rules hereafter), appropriate capital depreciation as well as losses carried forward from the preceding 7 years.
For Swiss Federal tax purposes, a flat rate of 8.5% was introduced on 1 January 1998. This rate is applicable to all corporations.
Cantonal and communal tax rates vary depending on the canton and community. On average, they are generally twice as high as federal rates.
III. Special Tax Exemptions and Tax Relief
Although these rules are applicable to most operational companies in Switzerland, various types of tax relief are available to Swiss and foreign investors alike. The following is a summary of the most common tax exemptions:
1. Tax holidays for newly established corporations
These incentives include exemptions from federal and cantonal (including communal) taxes for a period of up to ten years after inception of business. They depend upon the type and amount of investment, the number of jobs created, the regional economic planning aspects, etc.Companies not receiving the maximum relief can expect tax reductions of 30-40% over varying periods of up to 10 years.
2. Relief on qualifying dividend income and capital gains
Qualifying dividend relief is available to all Swiss corporations regardless of their activity. The ownership threshold to qualify for this relief is however limited to 20% of the capital in another company for as long as the participation has been held for more than a year. Losses incurred as a result of the sale of qualifying participations remain tax deductible.
3. Holding companies
Holding companies may take advantage of a special ruling for cantonal and communal tax purposes. There is no special relief from federal tax (except the above mentioned general exemption).
Holding companies are companies whose main purpose and activity is to manage long-term financial investments in affiliated companies. They may not be actively engaged in business within Switzerland. At least two-thirds of the assets (or income) must be derived from long term financial investments. Long term financial investments include direct share holdings as well as long term loans.
Holding companies are completely exempt from tax on income from dividends, capital gains any other income derived from financial participations. They are also exempt on all forms of interest income.
4. Domiciliary companies
Companies which are primarily engaged in activities abroad may take advantage of tax relief for cantonal and communal tax purpose. Again, there is no relief from federal tax. This special tax ruling aims at attracting foreign investors interested in sales, financing, intellectual property or other operations outside Switzerland. The Cantonal tax privileges take the form of substantially reduced or zero tax rates, depending on the Canton.
5. Reinvoicing and Licensing companies
The so called 50/50 ruling is available for companies wishing to route their income through Switzerland, i.e. reinvoicing companies or intermediate licensing companies. It is applicable for both federal and cantonal tax purposes.
In order to qualify for the 50/50 ruling, the Swiss company may not have any commercial or technical organisation in Switzerland. Its activities should be managed from abroad. Under this ruling a company is entitled to deduct 50% of its gross profits in the form of a management fee or a royalty to a non-resident entity. This payment will not be subject to any Swiss withholding tax. From the remaining income, only administrative expenses limited to a maximum of Sqr. 10,000 as well as direct taxes can be deducted.
The taxable income is subject to ordinary federal rates. However, additional relief is also granted for cantonal and communal tax purposes as per the above mentioned rules governing Domiciliary companies. The net income must be distributed in the form of a dividend annually.
6. Service companies
In the case of Swiss resident companies providing co-ordination or management services to a multinational Group (technical, administrative or scientific assistance including research and promotion activities), Swiss tax law requires that a share of profit accruing to the group be assessed at the level of the Swiss corporation. It is not feasible in many cases to determine the extent of the contribution of the Swiss resident company to the total profits of the group.
The profit assessable in Switzerland is therefore generally considered to be 5% of the total overhead expenses of the Swiss management or service company. Additional relief is also granted for cantonal and communal tax purposes as per the above mentioned rules governing Domiciliary companies.
IV. Thin capitalisation rules
A company is considered to be thinly capitalised when it's equity capital is too small in comparison to its debts. If this is the case, any interest payments on the excess debts shall be disallowed as a tax deduction for corporate income tax purposes and recharacterized as hidden dividend distributions which are subject to the 35 % Swiss withholding tax.
With regard to financial companies, the debt-to-equity ratio is generally fixed at 1 : 6. However, other Swiss companies should not have a debt that exceeds a certain percentage of the market value of its assets.
If a Swiss company has debt in excess of these percentages, it shall be deemed to be thinly capitalised unless it can be proved that the debt has been provided by independent third parties and that neither the shareholders, nor/or any person who is close to the shareholders, have guaranteed the loan.
V. Witholding tax on income distributions
A 35 % withholding tax is levied on profit distributions made by Swiss companies. Profit distributions include ordinary dividend distributions, liquidation proceeds, stock dividends and constructive dividends (hidden profit distributions). Withholding tax is levied in the hands of the Swiss company making the distribution regardless of the State of residence of the beneficiary.
Interest income accruing on inter-company loans is not subject to withholding tax unless the loan is recharacterised as a bond or bank deposit or unless the interest due is recharacterised as a hidden profit distribution (see thin capitalisation rules above). In addition, there is no withholding tax on royalty payments made by Swiss corporations.
For Swiss resident shareholders, withholding tax is a means to enforce compliance with Swiss income tax reporting requirements. Withholding tax is reimbursed by way of cash refunds (corporate tax payers) or as a credit against income tax payable (individual tax payers). This is subject to the condition that the assets and the income derived there from are correctly reported for income tax purposes by the beneficiary and that the reimbursement does not lead to an abuse of law.
Foreign shareholders of a Swiss company, on the other hand, may only obtain a full or partial reimbursement of the withholding tax by virtue of a tax treaty (see treaty relief hereafter).
VI. Value Added Tax
Swiss Value Added Tax (VAT) is a multistage consumption tax levied at every stage of production on the value added to taxable supplies. The amount of tax due by VAT registered persons corresponds to the difference between the tax charged on sales of goods or services (output tax) and the tax payable on purchases (input tax).
Taxable transactions include the supply of goods or services within Swiss territory, self supply, the acquisition of services from abroad and the import of goods.
VAT is calculated on the basis of the consideration or price paid for the supply of goods or services at a standard rate of 7.6 %. However, certain goods and services, such as food, medicine, books and newspapers, are taxed at the more favourable rate of 2.4%. Others, including hospital treatment, insurance and certain banking operations, are exempt but the input tax cannot be recovered, i.e. exempt without credit.
As a rule, anyone who makes, in a regular and independent manner, taxable transactions in Switzerland in excess of CHF 75'000 must register for VAT in Switzerland.
Switzerland's VAT system follows the destination principle where by the supply of goods and services is taxed in the country of consumption. The import of goods and services is therefore usually fully taxed. Conversely, exports are generally zero-rated, i.e. exempt with credit.
VII. Transfer tax on securities
The transfer of ownership of certain specific securities which involve Swiss securities dealers are subject to a transfer stamp tax at a rate of 1.5 o/oo on securities issued by Swiss resident companies and 3 o/oo on securities issued by non-resident companies.
Swiss securities dealers include banks and bank-like financial institutions as defined by Swiss banking law as well as investment fund managers. They also include individuals, companies, partnerships and branches of foreign companies whose essential activities consist of trading or acting as intermediaries in deals involving taxable securities.
Swiss tax law has recently extended the definition of securities dealers to include companies which are not predominantly in the securities trading business. Indeed, companies who own taxable securities with a book value in excess of CHF 10 Million also qualify as securities dealers.
VIII. International Tax Treaties
Switzerland has a large treaty network with over 40 comprehensive tax treaties. For the most part, they follow the general principles of the OECD model treaty. Prior to obtaining relief on the basis of a tax treaty, there are certain anti-abuse rules which must be respected.
For more information about personal taxation in Switzerland, contact Henley & Partners. Through our offices in Zurich and Zug, we are in the best position to advise and assist you with all matters regarding Switzerland and Swiss taxation.
Some of the many advantages of Switzerland include:
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Political, social and economic stability |
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Multi-lingual, highly qualified and motivated workforce |
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First-class infrastructure, excellent banking facilities |
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Very attractive life style and healthy environment |
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Efficient and reliable public services |
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Possible fiscal incentives for substantial investments |
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Favourable taxation system with moderate tax rates |
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