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-second-edition/
How often is tax law amended and what are the processes for such amendments?
There is no set time at which amendments to tax law are made. However, almost every year, the Swiss Parliament adds or amends individual provisions to the Swiss Federal Income Tax Act. At a cantonal level, tax law is also regularly amended by the different cantonal parliaments.
The Swiss process for legislative amendments typically includes 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 parliamentary motion.
Significant amendments are published in draft form for consultation and include a comment period. Consultation in relation to the amendment of tax law will usually include cantons, political parties, associations, cities as well as the affected economic areas. Anybody can generally express their opinion regarding a project in consultation, even without being asked 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 a tax return each year. Tax returns of individuals are generally due by March 31st of the following calendar year, and those of corporations, following the approval of the statutory financial statements but at the latest six months after the closing date of the financial statements. An extension of time to file the return can be requested. Taxpayers are generally required to pay their taxes through monthly instalments.
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 direct taxes (income tax, capital tax and wealth tax). The FTA is also competent for federal taxes such as the value-added tax (‘VAT’), the 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 refer to tax rulings, this possibility derives 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, disputes 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 way of a formal complaint with the tax authority that issued the tax assessment decision. The decision is then re-examined by the tax authority. If no settlement is reached, the taxpayer can dispute the tax assessment in cantonal courts and federal courts, which are independent from the tax authorities. Ultimately, an appeal may be filed in front of the 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?
Generally, taxpayers do not need to pay the amounts in dispute 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?
Swiss tax legislation provides for strict confidentiality and non-disclosure rules regarding taxpayer information. However, 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 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 foundations have been introduced into Swiss law, and the first automatic exchanges of information will take place in 2018.
Switzerland has responded to calls to increase the transparency of companies 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 an appointed financial intermediary. The information will be made available to the Swiss authorities, which goes someway to increase 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 the residence of an entity, which 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.
A transparent entity is considered a Swiss resident only to the extent that its members are Swiss residents as well.
Can 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 (see 9. below). Offshore entities are closely inspected as well, and may be considered a Swiss resident 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 operate a CFC regime. However, according to the case-law of the Federal Supreme Court, profits of companies formally domiciled abroad with little or no local substance that are effectively managed in Switzerland may be subject to Swiss income tax.
b. Thin Cap regime
Swiss federal and cantonal income tax rules provide for thin capitalisation safe harbour rules (or, more precisely, a maximum debt rule per asset class) as follows:
Accounts receivable 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%
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 amounts of 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. As a consequence, 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 the 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
Swiss codified tax law contains very few rules relating to transfer pricing questions. As a general rule, Swiss law states that (i) expenses of a company must be commercially justified and (ii) 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 which are not 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 haven interest rates for loans and advances between related parties, in various currencies. This publication provides 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 advance 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 negotiated with the involvement of the FTA.
Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied 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. The Federal Supreme Court developed through the years 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, tax authorities have 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 contains specific anti-avoidance provisions.
Regarding the specific issue of treaty shopping, Switzerland signed on June 7, 2017 the OECD’s Multilateral Instrument (‘MLI’), that introduced a ‘principle purpose test’, according to which a benefit under a tax treaty shall not be granted if obtaining that benefit was one of the principal purposes of an arrangement or transaction.
Are there any plans for the implementation of the OECD BEPs recommendations 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 for the automatic exchange of Country-by-Country reports (‘CbC MCAA’). As a result, multinationals in Switzerland may have to draw up a country-by-country report starting from 2018, and the first automatic exchanges of country-by-country reports could take place starting from 2020.
Switzerland is also a signatory to the MLI (see 10. above).
In addition, Switzerland had elaborated the Corporate Tax Reform Act III. The reform aimed to adapt the Swiss tax system to the standards of the OECD and the EU, by repealing special tax regimes. However, the Reform project was rejected by Swiss voters on February 12, 2017. A replacement project, called ‘Projet fiscal 17’, is currently under development.
How will BEPS impact on the government’s tax policies?
As stated previously (see 11. above), the Swiss government has taken very seriously the BEPS recommendations and is actively working on implementing them into Swiss law.
However, it should be noted that Swiss voters have the power to oppose changes to legislation through a referendum. This ability means that the government’s plans are sometimes thwarted due to popular sovereignty, such as what happened regarding 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?
The various tax treaties that Switzerland negotiates 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:
- Ticino: 20.67%
- Zurich: 21.15%
- Zug: 14.60%
- Vaud: 22.09%
- Geneva: 24.16%
The tax is levied on the basis of the company’s 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 highest marginal 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 choices for individuals that allow to reduce the rates. Generally speaking, the level of tax deduction is quite the same in all 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 please note that the rate of social contributions may vary from one 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%. Basic commodities are subject to VAT at the rate of 2.5%. Lodging services are subject to VAT at the rate of 3.8%.
Following the dismissal of the pension reform project “Prévoyance 2020” by Swiss voters on September 24, 2017, VAT rates will decrease starting from January 1, 2018. The standard rate will drop to 7.7%, and the lodging services rate to 3.7%. The reduced rate will remain 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 such 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 particular 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 capital gain on real estate depends on how long the asset has been owned and also varies from one canton to another.
f. Taxation of capital gains
For an individual, the capital gain realised on the sale of 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 that is subject to ordinary corporate income tax on all its profits, including capital gains). This applies in all cantons.
The capital gains realised by a corporation 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 valuable 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 regarding the first CHF 1 million of the share capital of the company. Moreover, 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 CO differ significantly from generally recognized 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, 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 provides for the possibility to include ‘commercially unjustified expenses’ in the 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 corporations (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 of the partnership and taxed at their level.
It is not possible to establish a trust under Swiss law. As a consequence, Swiss tax law recognises trusts as independent entities in limited circumstances only. As a general rule, assets (and income derived from those assets) contributed to a trust by a Swiss resident are still be attributed to said Swiss resident for Swiss tax purposes.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is 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 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, described below. However, Switzerland has formally made a commitment towards the European Union to abolish those regimes currently in place. Their elimination, along with a series of replacement measures, was part of the proposed Corporate Tax Reform Act III. However, the Reform project was dismissed by Swiss voters on February 12, 2017. A replacement project, called ‘Projet fiscal 17’, is currently under development. In the meantime, we expect that the tax regimes described below will stay in force until 2020 at least.
For cantonal 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 must be participations or two thirds of its investments’ revenues must stem from participations. Holding companies are exempt from cantonal income tax and only pay federal 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 and employees of its own), it may qualify as a domicile company. Similarly as with 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 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 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. 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 profits in its tax base for income tax purposes.
- 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.
Furthermore, 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 for up to ten years from cantonal and communal 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 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.
The ‘Projet fiscal 17’ (see 11. and 17. above) includes a patent box, mandatory for all cantons, as a replacement measure after 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 the subsidiary of a Swiss entity falls below its tax book value, a depreciation reducing ordinary profits is available.
Are there any withholding taxes?
Switzerland does levy a 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 on 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 interest received if the property in question is located in Switzerland. In such case 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 foreign recipients may do so only if they fall under the relevant provisions of an applicable tax treaty.
Are there any recognised environmental taxes payable by businesses?
Switzerland does not currently levy any environmental taxes payable by businesses.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
At a 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 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 a non-resident company.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
Advantages to re-locating activities in Switzerland include overall business-friendly and modern regulations, a 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 granted to non-EU nationals.