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-4th-edition/
How often is tax law amended and what are the processes for such amendments?
Swiss tax laws are not required to be updated or replaced at predetermined intervals. However, almost every year, the Swiss Parliament adds or amends individual provisions of the Swiss Federal Income Tax Act. At a cantonal level, tax laws are also regularly amended by the different cantonal parliaments.
Amendments can be introduced by the Parliament, the Federal Council, the cantons, the associations and by the Swiss people. Indeed both at the federal and the cantonal level, amendments can be introduced by popular initiative or parliamentary motion.
Significant amendments are published in draft form for consultation and include a comment period. The consultation process for tax law amendments usually includes the cantons, political parties, associations, cities, as well as the affected economic sectors. Generally, anyone can express his or her view during the consultation period, even if that person has not been specifically requested to provide an opinion
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 an annual tax return. Customarily, individuals must file it by 31 March of the following calendar year. Companies file following the approval of their statutory financial statements, but no later than six months after the closing date of the financial statements. Extensions can be requested. Taxpayers are usually required to pay their taxes in monthly instalments.
Ordinarily, 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 regulatory authorities for direct taxes (income tax, capital tax and wealth tax) are the relevant cantonal tax authorities and the Federal Tax Administration ("FTA"). The FTA is also competent for other federal taxes, such as value-added tax ("VAT"), withholding tax and stamp duties. Moreover, the Federal Customs Administration is in charge of customs duties.
Taxpayers may request a tax ruling to clarify the tax consequences of a planned structure or transaction. While Swiss law does not expressly refer to tax rulings, this possibility stems from the practice of the tax authorities.
The length of time needed to resolve tax issues varies greatly and depends on the complexity of the issues at stake. There is no standard amount of time that a tax dispute will take to resolve. While the vast majority of tax disputes are settled prior to litigation, those that go to litigation can sometimes 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 usually start, prior to any litigation, by a formal complaint addressed to the tax authority that issued the tax decision. The decision is then re-examined by the tax authority. If no settlement is reached, the taxpayer can challenge the tax assessment before the cantonal courts and federal courts, which are independent from the tax authorities. Ultimately, an appeal may be filed in front of the Swiss Federal Supreme Court.
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?
When taxpayers file a tax return, they have to make instalments that are supposed to cover their taxes for the current year. The following year, taxpayers receive tax slips based on the items indicated in their tax return. These slips tell you the difference between the deposits you have paid and the actual amount of your tax: if the difference is in your favour, the tax authorities will refund you with interest within 30 days; otherwise, you have 30 days to pay the balance of your tax.
Except before the Swiss Federal Supreme Court, taxpayers do not need to pay the disputed amounts in advance of litigation.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? 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?
Swiss tax legislation provides for strict confidentiality and non-disclosure rules regarding taxpayer information. However, in some cases other Swiss authorities can receive taxpayer information.
Switzerland has entered into numerous tax treaties and tax information exchange agreements under which it will exchange tax information on a government-to-government basis in certain situations.
Switzerland is a signatory to the Multilateral Competent Authority Agreement and the Common Reporting Standard (‘CRS MCAA’), therefore committing to implement the OECD’s standard for automatic exchange of information. The appropriate legal basis have been introduced into Swiss law, and the first automatic exchanges of information took place in autumn 2018.
Switzerland has responded to calls to increase company transparency with the Federal Act for Implementing the Revised FATF Recommendations 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 an entity’s share capital or voting rights (whether held by bearer shares or registered shares) is required to be identified to the company or to an appointed financial intermediary. The information will be made available to the Swiss authorities, which increases the transparency of Swiss companies.
What are the tests for residence of the main business structures (including transparent entities)?
Swiss law contains two alternative tests to determine if an entity has a place of residence in Switzerland; these are the statutory seat and the effective place of management. The effective place of management is the place where the entity has its effective and economic centre of existence, the place where the company is effectively managed on a daily basis (day-to-day business).
Swiss partnerships without legal personality are not tax subjects. Taxation therefore takes place in the hands of the partners. In other words, since the partnership is considered transparent, fiscally speaking, the liability will depend on the position of the partners. A transparent entity is considered a Swiss resident only if its members are also Swiss residents.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Lately, cross-border transactions within international groups of companies have come under increasing scrutiny from the tax authorities. Transfer prices between related entities are thoroughly assessed to make sure that they are consistent with the arm’s length principle. Offshore entities are closely inspected as well, and may be considered as Swiss residents if their effective place of management is in Switzerland (see 7 above).
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
a. CFC regime
Switzerland does not have a CFC regime. However, according to the case law of the Swiss Federal Supreme Court, companies with statutory seats located abroad withlittle or no local substance in Switzerland but are effectively managed from Switzerland can be subject to Swiss income tax.
b. Thin Cap regime
Swiss federal and cantonal income tax rules contain thin capitalisation safe harbour rules (or, more precisely, a maximum 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 their total assets.
In addition, the FTA publishes annually safe harbour interest rates for loans granted to related parties.
Interest paid on debt exceeding the maximum debt allowed and interest rates exceeding the safe harbour interest rates are requalified as a hidden dividend if paid to a shareholder or a related party. Consequently, such interest is not a deductible expense for federal and cantonal income tax purposes and is subject to withholding tax at a rate of 35% (which may be reduced under a relevant tax treaty).
However, the rules set out above are merely safe harbour rules and allow the taxpayer to prove that different arm’s length debt-to-equity ratio and interest rates apply.
c. Transfer pricing regime
Switzerland does not have transfer pricing regulations in its domestic law. As a general rule, Swiss law states that (i) the expenses of a company must be commercially justified and (ii) the profits not shown in the profit and 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 that are not made at arm’s length. In determining whether an intra-group transaction is at arm’s length or not, the Swiss administrative practice generally follows the OECD transfer pricing guidelines.
As previously mentioned, the FTA publishes yearly rules regarding safe harbour interest rates for loans and advances between related parties, in various currencies. These publications provide for maximum rates regarding loans from the shareholders or related parties to the company, and minimum rates regarding loans from the company to shareholders or related parties.
It is possible to obtain an advanced pricing agreement ("APA") with the Swiss tax authorities. In general, the cantonal tax authorities are competent for granting unilateral APAs, whereas bi- or multilateral APAs, as well as unilateral APAs regarding Swiss withholding tax, are to be negotiated with the involvement of the FTA.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
In Switzerland, GAARs are not contained in a specific act. Through the years, the Swiss Federal Supreme Court has developed a general principle of abuse of law or tax avoidance, applicable to all Swiss taxes. In accordance with this principle, applied by all Swiss courts and tax authorities, in certain situations, tax authorities have the right to tax a taxpayer’s structure based on its economic substance, rather than its legal structure.
In addition, Swiss tax authorities generally apply the arm’s length principle and follow the OECD transfer pricing guidelines. Swiss regulation also contains specific anti-avoidance provisions.
With regard to treaty shopping, on 7 June 2017, Switzerland signed the OECD’s Multilateral Instrument (‘MLI’), which introduced a ‘principalpurpose test’. According to this test, a benefit provided under a tax treaty shall not be granted if obtaining that benefit was one of the principal purposes of the arrangement or transaction.
Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?
Switzerland is a signatory to the CRS MCAA (see 6 above), as well as to the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country reports (‘CbC MCAA’). As a result, starting from 2018, multinationals in Switzerland have to draw up country-by-country reports; the first automatic exchanges of country-by-country reports are scheduled to take place in 2020.
Switzerland is also a signatory to the MLI (see 10 above). On 22 March 2019, the Swiss Parliament approved the ratification of the MLI and on the 29 August Switzerland deposited its instrument of ratification for the Multilateral BEPS Convention. The MLI will enters into force for Switzerland on the 1 December 2019.
In addition, Switzerland drafted the Corporate Tax Reform Act III to bring the Swiss tax system in line with OECD and EU standards by repealing special tax regimes. However, the bill was rejected by Swiss voters on February 12 2017 which led the Federal Council to draw up a new package of measures under the name of Tax Proposal 17. The Federal Parliament then decided to link this project with the one on old age and survivors pension (AHV) and adopted on September 28 2018 the Federal Law on Tax Reform and AHV Financing ("TRAF").
In your view, how has BEPS impacted on the government’s tax policies?
As previously stated (see 11 above), the Swiss government has taken BEPS recommendations very seriously and is actively working on implementing them into Swiss law.
However, it should be kept in mind that Swiss voters have the power to oppose changes to legislation through a referendum. This means that the government’s plans are sometimes thwarted by popular vote, like with the Corporate Tax Reform Act III.
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?
Tax treaties negotiated by Switzerland broadly follow the principles described in the OECD Model.
a. Taxation of business profits
In Switzerland, consolidated income tax rates (i.e. including federal, cantonal and communal income tax) vary from one canton to another, for example (highest marginal tax rate):
- Ticino: 20.67% -> At the moment 20.95%, expected rate 17.01%
- Zurich: 21.15% -> At the moment 21.96% expected rate 18.19%
- Zug: 14.60% -> At the moment 15.19%, expected rate 12.30%
- Vaud: 22.09% -> 13.79% as of January 1st 2019
- Geneva: 24.16% -> At the moment 24.39%, expected rate 13.99%
Tax is levied on the company’s net income, i.e. gross income minus all commercially justified expenses.
It should be kept in mind that the soon implementation of TRAF will change these significantly.
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 companies and permanent establishment abroad ). The ordinary income tax rate applies to all types of income, such as employment income and pensions.
The highest marginal tax rate varies significantly from canton to canton, such as:
- Ticino: 41.70%
- Zurich: 41.90% -> 41.5%
- Zug: 23.70%
- Vaud: 41.50%
- Geneva: 46.00%
In addition, there are different filing status for individuals that allow them to reduce the tax rate. Generally speaking, the deduction level is the same in all the cantons.
Employment income is subject to social security contributions levied at the rate of approximately 15% (50% of which is withheld from the person’s salary, and the other 50% is borne by the employer), but that rate may vary from one canton to another.
c. VAT (or other indirect tax)
Following Swiss voters’ rejection of the pension reform bill ‘Prévoyance 2020’ on 24 September 2017, VAT rates decreased (as of 1 January 2018) from 8% to 7.7%. VAT on accommodation decreased from 3.8% to 3.7%. The reduced rate charged on basic commodities remains unchanged at 2.5%.
d. Taxation of savings income and royalties
Both savings income and royalties are taxed as ordinary income.
Interest and royalties (as well as dividends) paid to non-residents are taxable if the source of such income is in Switzerland. To ensure the collection of those taxes, Switzerland levies a withholding tax on these distributions, unless an exemption applies (e.g. 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 specific countries under an international tax treaty.
e. Taxation of income from land
Income from land is taxed either as a capital gain on real estate or as ordinary income. The taxation of real estate capital gains depends on how long the asset has been owned and varies from one canton to another.
f. Taxation of capital gains
For individuals, the capital gain realised on the sale of a controlling or non-controlling interest is exempt from all Swiss taxes, provided that the seller qualifies as a ‘private investor’ (as opposed to a professional securities dealer subject to ordinary corporate income tax on all profits, including capital gains). This applies in all cantons.
Capital gains realised by a company are taxed at the same rates as ordinary income if no exception applies (e.g. the so-called ‘participation reduction’).
g. Stamp and/or capital duties
In Switzerland, the FTA levies stamp duties on certain transfers of instruments such as shares, bonds, notes and similar equity and debt securities against consideration, when a so-called ‘Swiss securities dealer’ participates in the transaction either as a party or as an intermediary or broker. Generally, the full transfer tax rate amounts to 0.15% of the consideration in the case of Swiss securities, and to 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 a flat rate of 1% of the fair market value of the transferred assets, with an exemption for the first CHF one million of company share capital. Moreover, many 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 CO differ significantly from generally recognised international accounting standards (e.g. the IFRS or the US GAAP). In contrast with the prevailing true and fair view principle of international accounting standards, the accounting rules of the CO are largely shaped by the principle of prudence (in particular, the formation of hidden reserves is allowed to a virtually unlimited extent).
For this reason, Swiss federal and cantonal tax law can reclassify ‘commercially unjustified expenses’ as taxable profit.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Only companies (the most common type being the company limited by shares) are treated as taxable entities separate from their shareholders.
Partnerships are treated as transparent for tax purposes. Profits and capital of Swiss partnerships are directly attributed to the partners, who are subject to income and wealth tax on said profits and capital.
It is not possible to establish a trust under Swiss law. Consequently, Swiss tax law recognises trusts as independent entities only in limited circumstances. As a general rule, if a trust is settled by a Swiss resident, the assets (and income derived from those assets) are attributed to said Swiss resident for Swiss tax purposes.
Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?
A company is liable for Swiss federal and cantonal income tax and cantonal capital tax on its worldwide profit (excluding profit and capital allocated to permanent establishments and real estate located abroad) if either its statutory seat or its 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 still provides for several different special taxation regimes, described below. However as these arrangements for cantonal status companies are no longer accepted internationally they will be abolished as of January 1st 2020 pursuant to TRAF.
For cantonal income tax purposes only, the following special taxation regimes are still 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 consist of participation in other companies or two thirds of its investments revenue must stem from participations. Holding companies are exempt from cantonal income tax and pay only federal income tax at an effective rate of 7.8%.
- Domicile company: If a company only has its statutory seat in Switzerland (without having offices and employees of its own), it may qualify as a domicile company. As for mixed companies (see 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 to 10%.
- Mixed company: Companies may qualify as mixed companies if their business activity is primarily related to business abroad (i.e. typically 80% of gross profit and expenses are foreign-sourced) and any business activity in Switzerland 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 tax 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 and 12%.Furthermore, both at a federal and cantonal level, the Swiss administrative tax practice provides for the following special taxation regimes:
- Principal company: A company may qualify as a principal company if it meets certain substance and margin requirements. Part of the principal company’s profits are allocated abroad (depending on the nature of its activity), hence only a portion of the overall profits are included in its Swiss tax base.
- Swiss finance branch: A Swiss permanent establishment of a foreign company may qualify as a Swiss finance branch if its annual average balance sheet amounts to at least CHF 100 million, at least 75% of the average total assets amount and gross income is related to financial services and the amount of loans and 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 and cantonal income tax base.
Moreover, the Swiss Federal Act on Regional Policy provides for tax incentives for creating or 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 or preserved are made public. In addition, most Swiss cantons may provide for full or partial tax holidays from cantonal and communal income tax for newly established businesses creating a certain amount of work places; these can last up to ten years.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Currently, only the canton of Nidwalden has introduced a special IP box regime. In practice, mixed companies (with an effective tax rate between 9 and 12%) are often used for the exploitation of IP in Switzerland. Holding companies (with an effective tax rate of 7.8%) may be used as well, if the exploitation of IP does not qualify as a business activity.
TRAF (see 11 and 17 above) includes a patent box, mandatory for all cantons, as a replacement measure for the elimination of the various special taxation regimes.
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?
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 allowed.
Are there any withholding taxes?
Switzerland levies withholding tax, at a rate of currently 35%, on profit distributions made 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 and money market papers, are also subject to withholding tax at a rate of 35%. The same applies for interest paid on savings accounts of banks resident or domiciled in Switzerland. No withholding tax applies to interest paid on ordinary loans.
Furthermore, the creditor of a loan which is secured by a mortgage pledge may be liable for Swiss federal and cantonal income tax on interests received if the property in question is located in Switzerland. In such cases, the Swiss debtor would be required to withhold the federal and cantonal income tax due and remit the amount to the competent Swiss tax authorities.
Swiss-resident recipients can normally obtain a full refund of withholding tax, whereas a non-resident recipient may apply for a full or partial refund of dividend only if the provisions of an applicable tax treaty so provide. Otherwise, the tax is considered as final.
Are there any recognised environmental taxes payable by businesses?
Businesses in Switzerland are not currently subject to any environmental taxes.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?
For companies, the participation reduction regime applies at the federal and cantonal level, meaning 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. To qualify for the participation reduction, the Swiss company must hold at least 10% of the participation or participation rights with a market value of at least CHF one million. As a result, such dividend income is usually virtually tax exempt.
The participation exemption applies irrespective of whether the dividends are paid by a resident or non-resident company.
For individuals, regulations provide for partial taxation of dividends. For federal taxation, dividends are taxable at 60% (if part of private assets) and at 50% (if part of business assets), when these participation rights are equivalent to at least 10% of the shares. The partial taxation at the cantonal level varies from a canton to another.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
Advantages to re-locating activities in Switzerland include overall business-friendly and modern regulations, strong political and financial stability, efficient and accessible authorities (including tax authorities, with the possibility to request a tax ruling to clarify the tax consequences of a planned structure or transaction), multiple favourable tax regimes (see 17 above) and quality infrastructure.
Some disadvantages include the high cost of doing business in Switzerland, as well as strict regulations in some areas of law such as immigration law, particularly regarding work permits for non-EU nationals.