2022 Swiss Tax trends and developments
1. Swiss withholding tax practice
The Swiss Federal Tax Administration (SFTA) has a wide range of tools at its disposal to combat tax evasion of Swiss dividend withholding tax. One of these rules applies to the financing of acquisitions allowing a foreign investor to obtain funds from a Swiss company without having to pay Swiss dividend withholding tax if a regular dividend distribution to such foreign investor were to be subject to non-refundable withholding tax.
For example, if investors are subject to a 5% non-refundable withholding tax, acquisitions of a Swiss target are usually structured through the interposition of a Swiss holding company financed by nominal share capital, capital contribution reserves or debt, all of which can be repaid without Swiss withholding tax. In these cases, the SFTA will levy withholding tax if a Swiss target makes distributions to the intermediate holding company to ensure that the funds cannot be repaid tax-free solely through the interposition of a Swiss vehicle. This is known as the international transposition theory. While this rule makes sense if the main objective is to avoid taxation on exit from Switzerland, the SFTA now applies this approach even in cases where companies relocate functions to Switzerland or acquire Swiss targets and aim to ensure tax-free repatriation of funds to foreign shareholders. The fact that a transaction can be structured in a different way with the same result apparently no longer convinces the Swiss tax authorities to allow a distribution of funds without paying Swiss withholding tax.
With respect to Swiss dividend withholding tax, acquisitions of Swiss targets should be carefully structured to ensure efficient profit repatriation.
2. The Swiss corporate tax reform: preferential taxation of equity.
With the latest tax reform, the cantons may introduce a capital tax reduction for equity capital attributable to qualifying participation rights, intercompany loans, patents and comparable rights (Privileged Assets). This leads to a considerable decrease of the capital tax burden compared to regular taxation. As the law does not contain specific rules about the reduction mechanism, there have been different cantonal systems for the equity capital reduction introduced.
3. Outlook Swiss withholding tax reform
As for Geneva, part of the equity capital attributable to Privileged Assets will be taxed at a reduced capital tax rate, namely 0.0005% instead of the regular rate of 0.401%. In Zug, the capital tax rate remains unchanged but only 2% of the equity capital attributable to Privileged Assets will be included in the taxable equity base at 2%.
As the calculation of the capital tax reduction varies from canton to canton, detailed assessment is recommended to fully take into account cantonal particularities when filing the tax return.
Interest payments on Swiss issued bonds are subject to a withholding tax of 35%, with no immediate exemption-at-source mechanism available. As a consequence, Swiss companies regularly issue bonds through foreign group companies. Current withholding tax rules may even re-qualify a foreign issued bond as Swiss issued in certain cases. The complex withholding tax rules in place have so far prevented the situation where Switzerland develops as a hub for debt financing activities.
The Swiss Federal Council published draft legislation on the Swiss withholding tax reform earlier this year. The reform will largely abolish withholding tax on interest payments, with the exception of interests on Swiss bank deposits paid to Swiss resident individuals.
Once enacted, the reform will strengthen the domestic debt capital market and group financing activities considerably. The new withholding tax rules will enter into force on 1 January 2024 at the earliest.
4. Abolishment of stamp taxes
Switzerland levies several stamp taxes at federal level, including a 1% stamp tax on equity contributions and a securities transfer stamp tax of up to 0.3% on the transfer of certain securities such as shares and bonds.
In recent years, the Swiss parliament has discussed several proposals to abolish these stamp taxes, either fully or partially. On 30 September 2021, the Swiss parliament decided not to pursue the proposed abolishment of the security transfer stamp tax on domestic securities. Abolishment of the equity stamp tax is likely to face a public referendum vote with a possible entry into force in May 2022.
5. Tonnage tax
Switzerland intends to introduce a tonnage tax system for shipping companies. Tonnage tax is an alternative method of determining profit tax, generally resulting in a lower tax burden for profitable shipping companies. It is widely accepted internationally. The OECD in particular has confirmed that tonnage tax systems are generally permissible by international standards and such systems are applied by various countries in Europe, such as Germany, the UK, the Netherlands, France and Spain. Current draft legislation foresees that the profit tax assessment basis would not be the actual profit generated, but the net tonnage (cargo volume of the seagoing vessels) multiplied by a degressive tariff. The amount thus determined is then multiplied by the number of operating days and taxed at the ordinary profit tax rate. Switzerland is a shipping country. In terms of tonnage, Switzerland has ranked among the top 5 in Europe in recent years. The introduction of a tonnage tax system in Switzerland should further strengthen Switzerland’s attractiveness in an increasingly competitive international context. The Swiss Federal Council should present the second draft legislation for approval to the Swiss parliament in 2022.