This country-specific Q&A provides an overview to tax laws and regulations that may occur in Switzerland.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax
How often is tax law amended and what are the processes for such amendments?
There is no set time at which amendments to the Switzerland tax laws are made. However, almost every year the Swiss Parliament adds or amends individual provisions to the Swiss federal law on direct tax (“DBG”). At a cantonal level, tax laws are also amended on a constant basis by the different cantonal Parliaments.
The Swiss process for legislative amendments typically include various actors that can initiate the legislative process such as the Swiss people, the Parliament, the Federal Council, the Cantons and also associations. At a federal and cantonal level, such amendments can be initiated for example by a popular initiative or a motion from the Parliament.
Significant amendments are published in draft form for consultation and include a comment period. Consultation in relation to the amendment of tax laws will usually include cantons, political parties, associations, cities as well as the economical areas concerned. Anybody can generally express his opinion regarding a project in consultation, even without being requested first.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Taxpayers are required to file tax returns each year. Tax returns are generally due by March 31st of the following calendar year for individuals, and for corporations following the approval of the statutory financial statements but at the latest 6 months after the financial statements closing date. Extensions of time to file a return are available. Companies and individuals generally are required to make monthly payments of their estimated tax liability.
Typically, taxpayers are required to maintain adequate records for at least ten years.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The relevant cantonal tax authorities as well as the Federal Tax Administration (“FTA”) are the regulatory authorities for Swiss direct taxes (income tax, capital tax, wealth tax). The FTA is also competent for the Swiss federal taxes, such as the value added tax (“VAT”), the withholding Tax and stamp-duties taxes. In particular, the Federal Customs Administration is in charge of the customs duties.
The length of time to resolve tax issues varies greatly and depends on the complexity of the issues. There is no standard amount of time that a tax dispute will take to resolve. Although the vast majority of tax disputes are settled prior to litigation, some disputes, especially those that go to litigation, can take years to resolve.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Tax disputes can be resolved administratively or judicially. Within the relevant cantonal tax authority and federal authority, the taxpayer can resolve tax disputes without litigation. If no settlement is reached, the taxpayer can dispute the tax in cantonal courts and federal courts independent from the tax authorities. Cases can be brought up to the Federal Supreme Court of Switzerland.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Generally taxpayers do not need to pay disputed tax in advance of litigation in cases before the cantonal and federal courts, except for the Federal Supreme Court.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
The Swiss tax legislation provides for strict confidentiality and non-disclosure rules for taxpayer information. With regards to exchange of information, other Swiss authorities can receive taxpayer information in certain situations.
Switzerland has entered into numerous tax treaties and Tax Information Exchange Agreements under which Switzerland will exchange tax information on a government to government basis in certain situations.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Switzerland is a signatory and has introduced the legal foundations to the Common Reporting Standard. Data can then be gathered from 2017, and the first exchange of data can take place from 2018.
Switzerland has responded to calls to increase the transparency of companies with the Federal Act of the Implementation of the Revised Recommendations of the Financial Action Task Force of 2012. Whilst this Act has brought a number of changes and obligations, it also included some very important updates to the requirements around beneficial ownership. Any individual who owns or controls over 25% of the entity’s shares capital or voting rights (whether held by bearer shares or registered shares) is required to be identified to the company or an appointed financial intermediary. The information will be made available to the Swiss authorities, which goes someway to increase the transparency of Swiss companies.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
The Federal Council adopted the dispatch on the multilateral agreement on the exchange of country-by-country reports and the federal act required for its implementation. Switzerland is currently implementing the minimum standard of the OECD BEPs recommendations that could enter into force at the end of 2017.
As a result, multinationals in Switzerland would thereby be obliged for the first time to draw up a country-by-country report for the 2018 tax year. The exchange of country-by-country report between Switzerland and its partner states could therefore take place in 2020.
Is there a GAAR and, if so, how is it applied?
In Switzerland, GAAR are not contained in a specific act. The Federal Supreme Court developed through the years a general tax avoidance theory, in principle applicable to all Swiss taxes. The application of this theory, applied by all Swiss courts and tax authorities, has for consequence that tax authorities get the right to tax the taxpayer’s legal structure based on its economic substance in certain situations.
In addition, Swiss tax authorities generally apply the arm’s length principle and follow the OECD transfer pricing guidelines. Swiss regulation also contain anti avoidance provisions.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
The various tax treaties that Switzerland negotiates broadly follow the principles described in the OECD Model.
a. Taxation of business profits
In Switzerland, operating income consolidated tax rates (i.e. including Federal Direct Tax, Cantonal and Communal income tax) vary from a canton to another:
- Ticino: 20.67%
- Zurich: 21.15%
- Zug: 14.60%
- Vaud: 22.09%
- Geneva: 24.16%
Operating income is taxed at rates varying between 24.17% (Geneva) and 14.6% (Zug).
The tax is levied on the basis of the net income, i.e. gross income minus all commercially justified expenses.
b. Taxation of employment income and pensions
Ordinary taxpayers are subject to Swiss income taxes on their worldwide income (except for income from real estate abroad and income from business enterprises undertaken directly by the taxpayer). The ordinary income tax rate applies to all types of income, such as employment income and pensions.
The top income tax rate varies significantly from canton to canton such as:
- Ticino: 41.70%
- Zurich: 41.90%
- Zug: 23.70%
- Vaud: 41.50%
- Geneva: 46.00%
In addition, there are various filing status for individuals that permit to graduate the rates. Generally speaking, the level of tax deduction is quite the same in all cantons.
Employment income is subject to Swiss social security contributions levied at the rate of approximately 15% (where basically 50% of which is withheld from the person’s salary and the other 50% is borne by the employer), but please note that the rate of social contributions may vary from a canton to another.
c. VAT (or other indirect tax)
Proceeds of sales and services conducted in Switzerland are subject to VAT at the standard rate of 8%. Goods for basic needs are subject to VAT at the rate of 2.5%. These rates include a temporary increase that went into effect on 1 January 2011 and will remain applicable until 31 December 2017. On 1 January 2018, if no extension or change is enacted, the rates should decrease from 8% to 7.6%, and from 2.5% to 2.4%. Services in connection with the provision of lodging are subject to VAT at the rate of 3.8% (limited until 31 December 2017).
d. Taxation of savings income and royalties
Both savings income and royalties are taxed as ordinary income.
Interest and royalties (and dividends) are taxable to non-residents where those income streams have a Switzerland source. To ensure the collection of those taxes, Switzerland uses a withholding tax that will apply to those types of payments unless an exemption applies (eg an exemption under an international tax treaty).
The withholding tax is levied at a flat rate of 35%. This rate may also be reduced for particular countries under the operation of an applicable tax treaty.
e. Taxation of income from land
Income from land is taxed either as a capital gain on real estate or ordinary income. Capital gain on real estate depends on how long the asset is owned and also varies from a canton to another.
f. Taxation of capital gains
For an individual, the capital gain realized on the sale of controlling or non-controlling participation is exempt from all Swiss taxes provided that the seller qualifies as a “private investor” (as opposed to a professional securities dealer that is subject to ordinary corporate income tax on its profits (including capital gains). This applies in all cantons.
A corporation’s capital gains are taxed at the same rates as ordinary income if no exception applies (eg the so-called “participation reduction”).
g. Stamp and/or Capital duties.
In Switzerland, the federal tax administration levies stamp duties on certain transfers of certain taxable instruments, such as shares bond, notes and similar equity and debt securities, for valuable consideration, when a so-called “Swiss Securities dealer” participates in the transaction either as a party or as an intermediary/broker. Generally, the full transfer tax rate amounts to 0.15% of the consideration in the case of Swiss securities and 0.30% in the case of foreign securities.
A capital duty on the issuance and the increase of the equity of Swiss corporations is levied at the rate of 1% on the fair market value of the assets contributed, with an exemption on the first CHF 1 million of capital paid in, whether it is made in an initial or subsequent contribution. A multitude of transactions qualify for an issuance stamp tax exemption.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
As a general rule, the taxable profit subject to Swiss corporate income tax is determined on the basis of the annual account statements prepared in accordance with the accounting rules set out in the Swiss Code of Obligations ("CO").
However, the accounting rules of the Swiss CO differ significantly from generally recognized international accounting standards (e.g. IFRS/US GAAP). In contrast to the prevailing true and fair view principle of the international accounting standards, the accounting rules of the Swiss CO are largely shaped by the principle of prudence (in particular, the formation of hidden reserves is allowed to virtually unlimited extent).
For this reason, Swiss federal/cantonal tax codes provide for the possibility to include "unjustified commercial expenses" to the taxable profit (cf. also question 19, below).
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
Only corporations (the most common type being the Swiss Aktiengesellschaft/Société Anonyme) are treated as taxable entities for carrying on a business.
Swiss partnerships (carrying out a business or not) are treated as tax transparent for Swiss tax purposes. Profit and capital of Swiss partnerships is directly attributed to the partners of the partnership and taxed at level of the partners.
Swiss civil/commercial law does not provide for the possibility to establish a trust under Swiss law. As a consequence, Swiss tax law only recognizes trusts as independent entities in limited circumstances. As a general rule, assets (and income derived from these assets) contributed to a trust by a Swiss resident are still be attributed to such Swiss resident for Swiss tax purposes.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
A company is liable for Swiss federal/cantonal corporate income tax and cantonal capital tax on its worldwide profit (excluding profit/capital allocated to permanent establishments and real-estate located abroad) if either its statutory domicile or it effective place of management is located in Switzerland.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Currently, Swiss tax law provides for several different special taxation regimes. However, Switzerland has formally made a commitment towards the European Union to abolish the special taxation regimes currently in place and described below. The abolishment of these special taxation regimes along with a series of replacement measures were part of a proposed Federal corporate income tax reform that was however rejected in a popular vote on February 12, 2017. The Swiss Federal parliament will most likely resolve on a revised corporate tax reform that is however unlikely to come into effect before 2020. Accordingly, we expect that the below described tax treatment will stay in force for so long.
For cantonal corporate income tax purposes only, the following special taxation regimes are currently in place:
- Holding Company: Generally, a company qualifies as a Holding Company if its purpose is the ongoing management of investments in other companies and the company itself does not conduct any business activities in Switzerland. Additionally, either two thirds of its assets are participations or two thirds of its investments revenues stem from participations. Holding Companies are tax exempt from cantonal corporate income tax and only pay federal corporate income tax at an effective rate of 7.8%.
- Domicile Company: If a company merely has its statutory place of domicile in Switzerland (without having offices/employees of its own) it may qualify as Domicile Company. Similarly as with Mixed Companies (cf. below), only a percentage of a domicile company's foreign sourced income is included in its Swiss tax base for cantonal tax purposes. Depending on the canton, the effective tax rate of a Domicile Company is around 8% – 10%.
- Mixed Company: Companies may qualify as mixed companies if there business activity is primarily related to business abroad (i.e. typically 80% of gross profit and expenses are foreign sourced) and thus any business activity in Switzerland itself is of a secondary nature. For cantonal tax purposes, Swiss sourced income is fully taxed, whereas foreign sourced income is only partially included in the taxable base for Swiss income purposes (depending on the extent of the business activities in Switzerland). The effective tax rate of mixed companies is (depending on the canton) between 9% - 12%.
Furthermore, both at level of federal and cantonal tax law, Swiss administrative tax practice provides for the following special taxation regimes:
- Principal Company: A company may qualify as Principal Company if it meets certain substance and margin requirements. The profit of a Principal Company is partially allocated abroad (depending on the nature of its activity) hence only including a portion of the overall profit in its tax base for corporate income tax purposes.
- Swiss Finance Branch: A Swiss permanent establishment of a foreign company may qualify as a Swiss Finance Branch if it's annual average balance sheet amounts to at least CHF 100m, at least 75% of the average total asset amount and gross income concern finance services and the amount of loans/advances to Swiss group companies does not exceed 10% of the total assets. Swiss Finance Branches may deduct deemed interest expenses from their Swiss federal/cantonal corporate income tax base.
Furthermore, the Swiss Federal Law of Regional Development provides for tax incentives for creating/preserving jobs in certain regions of Switzerland. Following a recent reform, such tax relief is limited to an annual amount of CHF 95'000 per job created or CHF 47'500 per job preserved for a maximum of ten years. The companies profiting from such tax relief and the number of jobs to be created/preserved are made public. In addition, most Swiss Cantons may provide for full or partial tax holiday for up to ten years from Cantonal and communal corporate income tax for newly established businesses creating a certain amount of work-places.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Currently, only the Swiss Canton of Nidwalden has introduced a special IP box regime. In practice, often Mixed Companies (with an effective tax rate of between 9% - 12%) are used for the exploitation of IP in Switzerland. Even Holding Companies (with an effective tax rate of 7.8%) may be used if the exploitation of IP does not qualify as a business activity.
It is widely expected that the revised corporate tax reform (see 15. Above) will again include the introduction of a patent box regime following the OECD principles and possibly also an R&D expense super deduction of up to 150%.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
No, Switzerland does not provide for fiscal consolidation. However, if the fair market value of a subsidiary of a Swiss entity falls below its tax book value a depreciation reducing ordinary profits is available.
Is there a CFC or Thin Cap regime?
Switzerland does not operate a CFC regime. However, according to federal supreme court jurisprudence, profits of companies formally domiciled abroad with little or no local substance that are effectively managed in Switzerland may be subject to Swiss federal/cantonal corporate income tax.
Swiss federal and cantonal corporate income tax rules provide for thin cap safe harbour rules (or, more precisely, a max debt rule per asset class) as follows:
Cash 100% Accounts receivable 85% Inventory 85% Other current assets 85% Bonds in CHF 90% Bonds in foreign currency 80% Quoted shares 60% Non-quoted shares 50% Investments in subsidiaries 70% Loans 85% Furniture and Equipment 50% Property, plant (commercially used) 70% Other real-estate 80% Intellectual property rights 70%
For finance companies, the maximum debt allowed is 6/7 of total assets.
In addition, the Swiss federal tax administration publishes annually safe harbour maximum interest rates applicable on related party lending.
Interest paid on amounts of debt exceeding the maximum debt allowed and / or interest rates exceeding the safe harbour interest rates are requalified as a hidden dividend if paid to a shareholder or related party. As a consequence, such interest is not a deductible expense for federal/cantonal corporate income tax purposes and is subject to Swiss withholding tax at a rate of 35% (subject to reduction under and applicable double taxation treaty).
However, the rules set out above are safe harbour rules and permit the tax payer to prove that different arm's length debt-to-equity ratio and interest rates apply.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Swiss codified tax law only contains very few rules relating to transfer pricing questions. As a general rule, the Swiss federal and cantonal tax codes state (i) that expenses of a company must be commercially justified and (ii) profits not shown in the profit & loss statement of a company must still be included in its taxable profit.
Based on these general rules, Swiss tax authorities can correct intra-group transactions which were not at arm's length. In determining, whether an intra-group transaction is at arm's length or not the Swiss (federal and cantonal) administrative tax practice generally follows the OECD Transfer Pricing Guidelines.
With respect to inter-company loans, the Swiss Federal Tax Administration publishes yearly rules regarding safe haven interest rates on loans and advances (in various currencies) between related parties. This publication thus provides for maximum rates regarding loans from the shareholders/related parties to the company and minimum rates regarding loans from the company to shareholders/related parties.
Yes, it is possible to obtain an advance pricing agreement ("APA") with the Swiss tax authorities. In general, the cantonal tax authorities are competent for granting unilateral APAs, whereas the bi- or multilateral APAs (or unilateral APAs regarding Swiss withholding tax) are negotiated with the involvement of the Swiss Federal Tax Administration.
Are there any withholding taxes?
Yes, Switzerland levies a withholding tax at a rate of currently 35% on dividends paid by Swiss resident companies. Swiss sourced interest payments on specific debt instruments, i.e. bonds and similar instruments such as serial mortgage notes, serial promissory notes, deposit certificates, commercial papers, money market papers are subject to Swiss withholding tax at a rate of 35%. The same applies for interest paid on savings accounts of Banks resident or domiciled in Switzerland. No Swiss withholding tax applies on interest paid on ordinary loan relationships.
Furthermore, the creditor of a loan which is secured by a mortgage pledge may be liable for Swiss federal and cantonal corporate income tax on interest received if the respective property is located in Switzerland. In such case the (Swiss) debtor would be required to withhold the federal and cantonal corporate income tax due and remit the amount to the competent Swiss tax authorities.
Are there any recognised environmental taxes payable by businesses?
Switzerland does not presently impose any Environmental Taxes for businesses.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Yes, at federal and cantonal level the participation reduction regime applies, so that the effective tax rate applicable to the dividends received is proportionately reduced as per the ratio of the net dividend income over the total net taxable income, provided that the Swiss company holds at least 10% of the participation or participation rights with a market value of at least CHF 1 Mio. As a result, such dividend income is usually virtually tax exempt.
The participation exemption applies irrespective whether dividend income is paid by a resident or a non-resident company.