Corporate Tax 2020

Last Updated January 15, 2020

Switzerland

Law and Practice

Authors



Lenz & Staehelin is the largest law firm in Switzerland, with more than 200 lawyers forming its legal staff. Internationally oriented, the firm offers a comprehensive range of services and handles all aspects of international and Swiss law. Languages spoken include English, French, German, Italian, Russian and Spanish. Lenz & Staehelin’s tax team is one of the largest among Swiss law firms, with more than 25 tax attorneys offering a full range of tax advice in its three offices in Geneva, Zürich and Lausanne. Tax practice areas include M&A; restructurings and buyouts; financing; financial products and derivatives; estate and tax planning for executives, including employee share and stock option plans; investment funds; private equity funds; property (acquisition and development); value added tax; internal investigations; and tax litigation.

Most businesses involving multiple individuals choose to adopt a corporate form. The most frequently used corporate forms are the company limited by shares (“société anonyme” or SA) and the limited liability company (“société à responsabilité limitée” or “Sàrl”).

The company limited by shares is best suited for major businesses requiring a large amount of capital contribution. Its share capital must amount to at least CHF100,000. Meanwhile, the limited liability company requires a minimum share capital of CHF20,000 and is more suited to small and medium-sized businesses.

Corporations are seen as separate legal entities, and are consequently taxed as such on their profits and their capital.

Transparent entities under Swiss law include the simple partnership (“société simple”), the general partnership (“société en nom collectif”), and the less popular limited partnership (“société en commandite”). Such partnerships are created for the sake of simplicity and flexibility.

Specific transparent entities exist under Swiss law for collective investment schemes, namely the open-ended investment company (“société d’investissement à capital variable” or SICAV) and the limited partnership for collective investment (“société en commandite de placements collectifs” or SCPC).

Transparent entities are taxed on their profits and their capital in the hands of the partners.

Corporations are considered to reside in Switzerland if their statutory seat or effective administration is in Switzerland. The statutory seat is determined by the place in which the company is registered, while the effective place of management is determined through the Supreme Court's case law and is considered to be where the company has its effective and economic centre of activity – ie, where its day-to-day management is.

Transparent entities are considered Swiss residents insofar as their partners are themselves residents in Switzerland.

The Confederation levies an annual income corporate tax on the corporation's net profits, whereas the canton and the commune in which the corporation has its residence levy corporate income tax as well as capital tax. The effective tax rate on the Confederation level is 7.83%. The effective tax rate of the cantons and communes varies depending on the location.

With the introduction of a new tax reform in 2020 – the Tax Project 2017, subsequently renamed Tax Reform and AHV Financing (TRAF) – accepted by popular referendum on 19 May 2019, the combined effective tax rates have dropped, and now vary between 12% and 18%. The capital tax rate depends on the canton and community of domicile but varies between 00.1% and 0.5%.

Profits and capital of partnerships are taxed in the hands of the partners, meaning that the tax rates will depend on the personal tax rate of each partner. Such tax rate varies according to their total income and wealth, as well as their place of residence.

Taxable profits are based on the accounting profits, specifically the balance of the profit and loss account. This tax base is subject to a few adjustments, specifically the following three for tax purposes:

  • adjustments to ensure compliance with Swiss mandatory accounting rules;
  • adjustments to ensure compliance with the periodicity principle; and
  • adjustments aimed at preserving the system when Switzerland loses its taxing rights – for example, in the case of a transfer abroad.

Finally, corporations are taxed on their profits on an accruals basis.

With the introduction of TRAF in 2020, a mandatory patent regime has been introduced at a cantonal level, as well as optional R&D super deductions. More precisely, in the patent box regime, the net profits from domestic and foreign patents as well as similar rights are taxed separately, with a maximum deduction of 90%. The deduction rate varies depending on the canton. As far as the optional R&D super deduction, the cantons may choose to introduce and apply a maximum deduction of 50% to personnel expenses for R&D plus a flat rate surcharge of 35% for other costs and 80% of expenses for domestic R&D carried out by third parties or group companies.

Until recently, other special tax incentives included a privileged regime of taxation of profits for holding companies, domiciliary companies, mixed companies, principal companies, and Swiss finance branches. However, the Tax Project 2017 has abolished such regimes: as of 2020, all companies are subject to ordinary corporate income and capital tax. Among the measures taken in order to compensate for the loss of these tax privileges, most cantons have lowered their tax rates.

Moreover, with the entry into force of TRAF, hidden reserves (including goodwill) at the moment of migration to Switzerland or the moment of transition from a privileged regime to ordinary taxation are confirmed by the tax authorities. In the case of migration, a step-up plan will be applied, while a two-rate system will be applied in the case of transition.

Losses from the seven financial and tax years preceding the current tax period can be deducted to the extent they could not be included in the computation of taxable net profit of those years.

Swiss tax law does not allow losses to be carried back.

Interest payments are considered as a business expense deductible from the corporation's taxable income. Interest payments to related parties (shareholders or affiliates) must respect the fair market rate set out annually by the Federal Tax Administration. In addition, thin capitalisation limitations apply; the relevant debt-to-equity ratio depends on the class of assets (eg, 100% of cash, 85% of receivables, etc). A deviation from these safe harbour rates may be accepted if the company can prove that the rates used are at arm’s length.

It should be noted that Switzerland has not taken any measures to implement the recommendations of BEPS action n° 4; see 9 BEPS for full details.

Separate entity taxation applies for tax purposes. There are no tax consolidation rules, and none are expected to be introduced in the near future.

While mergers and other transactions of two or more companies lead to the consolidation of the tax base of the companies involved, such reorganisations are disregarded if the only goal is to combine the tax base of the companies involved and to set off taxable profits with losses of other companies.

Gains on the sale of assets (capital gains) are generally subject to income taxes at the federal, cantonal and communal levels. Two exceptions to the general rule exist: (i) participation reduction and (ii) the replacement of certain assets. Moreover, depending on the canton and/or the municipality, gains from the sale of real estate can be exempt from the cantonal and/or communal income taxes, but will be subject to cantonal and/or communal real estate gains taxes.

Participation Reduction

Companies holding at least 10% of the share capital of another company or the rights to at least 10% of the profits and reserves of another company, for at least one year, are entitled to a participation relief on the capital gains realised on the sale of such participation.

The corporate income taxes due are first calculated in the usual way, and are then reduced by the ratio of net earnings on participations (gross earnings minus financial and administrative expenses) to the total net income. For example, if the net capital gains amount to 50% of the company's total net income, corporate income taxes will be reduced by 50%.

Replacement Relief

The replacement relief further allows a company to defer taxation of profits from the sale of fixed assets used in connection with its business, if such profits are reinvested within a reasonable time in the replacement of fixed business assets located in Switzerland. Consequently, the corporate income taxation of unrealised gains can be deferred. This also applies to real estate if the legal requirements above are fulfilled. Thus, if participations are sold by a company and the proceeds of sale are reinvested in other participations within a reasonable time (that is, within one to three years), no corporate income taxes will be due on the unrealised gains.

Corporate income taxes on capital gains resulting from the sale of shares can be further minimised by using a holding company to acquire the shares. If this acquisition is financed with debt, no push down on the target company is possible, as each entity is considered separately under Swiss law. In addition, a merger between the holding company and the target company would be viewed as abusive. Therefore, the share price is generally kept as low as possible at acquisition (for example, by distributing dividends before the transaction or by reducing the capital of the target company).

Stamp duty is generally levied on shareholders’ contributions to a company and on the transfer of securities. However, certain transactions are exempt, such as certain restructurings.

The Securities Issuance Stamp Tax is a stamp duty tax that is levied on the issue (primary market) of certain Swiss securities (shares, similar participating rights, etc) and on equity contributions to such corporate entities. The taxable person is the company or the person issuing the securities or benefiting from the equity contribution. The tax rate is 1% of the capital contribution. It should be noted that capital created or increased by a corporation or a LLC is exempt from the issuance stamp tax, up to the amount of CHF1 million.

The Securities Transfer Stamp Tax is levied on the transfer of certain Swiss and non-Swiss securities, if a Swiss stockbroker is involved as a party or an intermediary to the transaction. Stockbrokers are mainly banks, companies holding taxable securities with a book value above CHF10 million, etc. The tax rates applicable on the purchase price are 0.15% in respect of Swiss securities and 0.3% in respect of foreign securities.

Certain transactions require a notarial deed, for which fees are payable (eg, the incorporation of a corporation or limited liability company, or the transfer of real estate). Land register charges are due on selling, acquiring or transferring real estate located in Switzerland.

A withholding tax of 35% is levied on income derived from movable capital assets (eg, interest on bonds and dividend payments). The tax must be deducted by the debtor from the amount due to the recipient. In certain circumstances, a partial or total refund of the tax withheld can be obtained.

Corporations are subject annually to capital tax, which is levied at a cantonal and communal level, and is based on the corporation net equity – ie, its paid-in capital, opened reserves and retained profits. The amount subject to tax may also be increased by the debt re-characterised as equity in the application of the Swiss thin capitalisation rules. The tax rate depends on the canton and the community of domicile, varying between 00.1% and 0.5%. As of 2020 with the introduction of TRAF, the cantons have the option to allow capital tax relief. Specifically, the canton may reduce the capital tax base relating to patents and similar rights, qualifying participations and intra-group loans.

Moreover, excise taxes are levied, such as VAT on the supply of goods or services and the import of goods or services. The standard rate is 7.7%, the reduced rate (eg, for medicine, newspapers, books and food) is 2.5% and the lodging services rate is 3.7%.

Other taxes may also be payable, depending on the canton. For example, certain cantons may levy tax on real estate situated in such cantons, or may charge "professional tax", which is calculated as a percentage of the turnover, rent paid and number of employees.

Most closely held local businesses operate in a corporate form. Only very small businesses generally operate in a non-corporate form.

Individual professionals are generally taxed as self-employed physical persons, on their income and wealth. The taxation of self-employed individuals is the same as that of salaried individuals.

However, they may also operate through an entity subject to corporate taxes, in which case the entity pays a salary and/or dividends to the individual, which are then taxed as income respectively as the wealth of the physical person. In such a case, the sum of the taxes paid by the entity and the taxes paid by the physical person on the dividends received amounts to a total rate similar to that a self-employed individual would pay.

There are no rules to prevent closely held corporations from accumulating earnings for investment purposes, and particularly no dividend acceleration rules.

Income Tax

Swiss income tax is levied on any distribution of profits qualifying as a dividend and paid to individuals holding shares in closely held corporations. The tax is levied on the gross amount received. Individuals holding at least 10% of the nominal value of the share capital of a company can obtain a reduced tax base.

With the introduction of TRAF, adjustments to the rates have been made. In this respect, individuals holding shares as private asset are only taxable, depending on the canton, on 50-70% of the dividend received. Individuals holding shares as a business asset are only taxable on 50% of the dividend received. To be more precise, at the Confederation level, the tax rate will increase for both dividends received as private assets and business assets, to a standard rate of 70%. At the cantonal level, a minimum taxation rate of 50% has been introduced.

If the threshold of 10% of shareholding is not reached, individuals are taxable on the gross dividend payment.

The tax treatment of gains obtained on the sale of shares depends on whether the shares are held as a private asset or as a business asset. The sale of shares held as a private asset is exempt from taxation, unless they are held as a business asset or the shareholder qualifies as a professional trader.

The definition of a professional trader is not specified under Swiss law. The Swiss tax authorities must examine each case individually to determine whether someone qualifies as a professional trader, generally assessing the following criteria: a shareholding that has lasted less than one year, the frequency of transactions, the necessity to obtain such gains to ensure someone’s lifestyle, etc.

Swiss law provides other exceptions to the general principal of gain exemption. In particular, income tax may be levied on the sale of shares by an individual where:

  • the shareholder sells at least 20% of its shares to a company and the purchaser uses the assets of the purchased company to finance the sales price;
  • the shareholder sells its shares to a company controlled by the same shareholder – such transaction qualifies as a taxable “transposition”; and
  • a company purchases its own shares and the maximum percentages of ownership (10% or 20% under certain conditions) provided by Swiss corporate law are not observed, or the purchase is related to a capital reduction.

Withholding Tax

Dividend distributions made by Swiss corporations are subject to WHT. The applicable WHT rate is 35%, whether paid to a Swiss-resident or a non-resident recipient. Swiss resident recipients may obtain a full refund of the dividend WHT if they have properly reported the gross amount of dividend received as taxable income and claim the refund within a period of three years. Non-resident recipients may apply for a full or partial refund of the dividend WHT, pursuant to the provisions of an applicable tax treaty. Otherwise, the tax is considered as final.

Capital gains resulting from the sale of private shares by individuals are also exempt from Swiss WHT. If the qualification of an exempt capital gain is challenged by the Swiss tax authorities, a Swiss WHT of 35% may apply. As for dividends, a full or partial refund may be applicable.

Transaction Stamp Duty

A transaction stamp duty may be levied on the transfer of certain Swiss and non-Swiss securities – mainly shares or similar participation rights in corporate entities, if a Swiss security dealer is involved in the transaction. This duty is calculated at 0.15% on Swiss securities and 0.30% on non-Swiss securities sold/purchased during the year.

Individuals that receive dividends from publicly traded corporations are treated identically to those that receive dividends from closely held corporations for Swiss income tax, withholding tax and transaction stamp duty purposes. The reduced tax rate based on a 10% ownership may be more difficult to reach from an income tax perspective.

Withholding Tax

Swiss WHT may be levied on interest from bonds issued by a Swiss resident issuer, on dividends paid by a Swiss company to a foreign entity or investor, or on interest paid to Swiss or foreign creditors on bonds or similar debt instruments issued by Swiss resident issuers, such as loans. However, Switzerland does not levy any WHT on interest from private and commercial loans (including inter-company loans).

WHT on interest is only levied for companies that qualify as being tax resident for withholding tax purposes. The application of the WHT only arises if the payment comes from a Swiss tax resident company; the residence of the creditor is irrelevant.

Moreover, profit distributions made by a Swiss corporation are subject to WHT (please see 3.4 Sales of Shares by Individuals in Closely Held Corporations).

Furthermore, Switzerland does not levy WHT on royalties, whether they are paid to a resident or non-resident person. It should be noted that if the royalties paid do not respect the “arm’s length principle”, they can be requalified as hidden dividends if paid to a shareholder or a related party to the shareholder.

The Swiss WHT rate of 35% applies to such interest, dividends and other costs that are economically equivalent, or to hidden dividends. Without the application of an income tax treaty, such tax is considered as final and no reimbursement is allowed by the Swiss tax authorities.

Tax at Source on Mortgage Secured Loans

A tax at source may be levied on interest paid on a loan that is secured by Swiss real estate. Individuals who are not domiciled or resident in Switzerland for Swiss tax purposes are also subject to a specific withholding tax levied by the canton where the property is located, which may vary from 13% to 21%.

Foreign investors tend to use double tax treaties concluded with Switzerland where full tax relief can be granted. This includes France, Germany, the UK and the USA for the withholding tax paid on interests. However, most of the countries provide for a Swiss residual withholding tax from 5% to 15%.

With regards to dividends, double tax treaties are usually used within the EU, and in particular Luxembourg, where investors can be granted full tax relief based on a 10% ownership.

In 1962, the Swiss Federal Council introduced a Decree imposing measures against the abusive use of double tax treaties concluded by Switzerland (“ACF 1962”). Among other aims, this Decree seeks to restrict the right of Swiss resident companies to benefit from double tax treaties. It contains a number of tests that must be fulfilled by every Swiss-resident company in order to be eligible for treaty benefits.

A case of abusive claims is recognised if most of the direct or indirect shareholders of a Swiss company do not benefit from the double tax treaty, provided that the Swiss company does not proceed to appropriate dividend distributions. Another case of abuse is also recognised when an essential part of income benefiting from a double tax treaty is used to directly or indirectly compensate counterparts that do not themselves benefit from the double tax treaty. The compensation can, for example, relate to interest, royalties or any other type of expenses paid to such counterparts.

According to the Swiss tax authorities, a foreign entity claiming a refund of the Swiss WHT must fulfil all the mandatory requirements. In particular, the tax authorities review whether the company requesting a refund is the real beneficiary of the income and is entitled to such refund. The tax administration also has an economic approach to the facts and reviews the structure to determine if it has been arranged with the sole purpose of obtaining a full or partial refund of WHT.

In such cases, the refund of the withholding tax withheld may be denied by the Swiss tax authorities.

Swiss domestic law does not provide any specific transfer pricing rules or regulations. As such, Switzerland applies the OECD guidelines to transfer pricing issues, and is participating in the BEPS project.

There are no specific rules with respect to the use of related party limited risk distribution arrangements in Swiss tax law. However, the Swiss tax authorities may review the structure with regards to safe harbour rules and the “arm’s length principle” to challenge an abusive use of such related party limited risk distribution arrangements.

As mentioned previously, Switzerland applies the OECD standards for transfer pricing issues.

Compensating adjustments are allowed when a transfer pricing claim is successfully settled.

The State Secretariat for International Finance has published a specific form for mutual agreement procedures (MAPs) in the case of transfer pricing, thereby facilitating MAPs in such cases.

Local branches and local subsidiaries of non-local corporations are similarly taxed in Switzerland for corporate income tax purposes. For withholding tax purposes, however, subsidiaries are subject to withholding obligations, while branches are not.

Capital gains of non-residents on the sale of stock in local corporations are not subject to tax in Switzerland, unless it is a gain derived from the sale of a Swiss real estate company.

If a double taxation treaty corresponding to the OECD Model Tax Convention applies in the case at hand, such real estate gain would typically only be taxable in Switzerland.

A change of control in a non-local corporation may trigger taxes/duty charges exclusively for real estate companies. The specifics will depend on the canton’s legislation.

There are no specific formulas recommended by law or in the Administration’s published practice. Nevertheless, all transactions with a Swiss related entity must be carried out at arm’s length.

Deductions are allowed in Switzerland, including expenses paid to related parties, as long as such expenses are commercially justified.

Management and administrative services provided by a non-local affiliate to a Swiss company are often remunerated based on a cost-plus method in practice. As per this method, the costs incurred by the supplier of services to an affiliate enterprise serve as the basis to determine the income to be allocated to said service provider. An appropriate mark-up – typically oscillating between 5% and 15% – is then added to these costs, resulting in an appropriate profit in light of the functions performed and the market conditions.

Borrowings from a non-local affiliate to a Swiss foreign-owned affiliate must be remunerated by interest paid at an “arm’s length rate”, published yearly by the Federal Tax Administration. Such interest is typically not subject to Swiss withholding tax (35%), unless it is characterised as bonds.

Corporations that are resident in Switzerland are subject to Swiss tax on an unlimited basis – ie, on their worldwide profits (including foreign income) and capital, except income that is attributed to a foreign permanent establishment or immovable property.

The implementation of TRAF has abolished cantonal tax privileges for certain businesses predominantly oriented abroad.

The expenses proportionally attributable to foreign income that is not subject to Swiss tax are not deductible in Switzerland. However, special rules apply with respect to the debt loss carry over of foreign permanent establishments of local corporations.

At a federal and cantonal/communal 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 CHF1 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.

TRAF has abolished a specific cantonal holding tax privilege.

So far, Switzerland has not introduced specific provisions with regard to the taxation of intangibles. The deriving incomes are therefore subject to profit taxes.

With the introduction of TRAF, as mentioned above, a patent box with a maximum relief of 90% has been introduced at the cantonal level, with the cantons having the option to apply R&D super deductions of 50% maximum and a capital tax relief on patents and similar rights. The overall tax relief is 70%.

Switzerland does not have a CFC regime. However, according to the case law of the Federal Supreme Court, the profits of companies formally domiciled abroad with little or no local substance that are effectively managed in Switzerland or have a permanent establishment in Switzerland may be subject to Swiss income tax.

To consider that a company is effectively managed in Switzerland, the local tax authorities (including tax administrations) follow a case-by-case approach, aimed at determining the location of the economic centre of the company’s existence. They weigh the different relevant factual elements, but the key element used to determine the location of the effective management is the place where the management is exercised – ie, the day-to-day actions required to realise the statutory purpose. By contrast, the place where the fundamental decisions are taken or the place where the simple administrative work (accounting, correspondence) is done can only be taken into account as secondary elements. Other secondary elements used to determine the location of the effective management are the residency of the managing bodies, the place where the operational contracts are executed or the place of storage of the documents and archives.

Particular attention should be given to the following elements, which must be avoided so as to limit any requalification of the non-local seat as a pure formal seat (and, as the case may be, recognition of a place of effective management in Switzerland): domicile and location, infrastructure/employees, professional qualifications of employees, contracts, banking operations, book-keeping, the board of directors, and the annual shareholders' meeting.

Under Swiss tax law, a foreign company is also subject to limited tax liability when it has a permanent establishment in Switzerland. Only the income derived from the permanent establishment is subject to tax in Switzerland. To constitute a permanent establishment, there must be (i) a place of business, (ii) which must be fixed, and (iii) from which business must be carried out. The interpretation of these conditions is wide, and it is considered that such place of business can be located in the premises of another company.

Furthermore, TRAF foresees that the Federal Council is competent to determine under what conditions Swiss permanent establishments of foreign companies should be able to claim withholding taxes on income from third countries with a flat rate tax credit.

Please see 6.5 Taxation of Income of Non-Local Subsidiaries Under CFC-Type Rules.

If a corporation realises a capital gain on the sale of a qualifying participation, it is entitled to a participation reduction. To qualify for relief on capital gains, a Swiss company must make a profit on the sale of a participation that represents at least 10% of the share capital of another company, which it has held for at least one year. Companies with qualifying capital gains may reduce their corporate income tax by reference to the ratio between net earnings on such participations and total net profit.

Losses incurred as a result of the sale of qualifying participations remain tax-deductible.

A capital gain is defined as the difference between the proceeds from the sale of a qualifying participation and the acquisition cost of the investment. Hence, any amount of previously tax-deductible depreciation or provision on the participation is not taken into consideration to calculate the amount of gain that can benefit from the relief. In addition, revaluation gains from participations do not qualify.

Favourable tax treatment is also available for qualifying participations transferred to group companies abroad; the group holding or sub holding company must be incorporated in Switzerland.

In Switzerland, general anti-avoidance rules (GAARs) are not contained in a specific act. Through the years, the Federal Supreme Court has developed a general principle of abuse of law or tax avoidance, which applies 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, on 7 June 2017 Switzerland signed the OECD’s Multilateral Instrument, which 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.

Swiss law does not outline the specifics of the tax audit process. After the filing of the tax return by the taxpayer, the tax authorities may request further information/documentation prior to issuing the tax assessment. The tax authorities are obligated and entitled to gather all necessary information to assess a taxpayer on a true and complete basis.

With regard to the resolution of tax disputes, Switzerland has a well-established and efficient practice. When confronted with an unlawful tax assessment, the taxpayer is generally not obliged to immediately challenge said assessment in court. Rather, the taxpayer may turn to the tax authority that issued the tax assessment decision being challenged, to force it to make a new decision. For the purposes of this chapter, this procedure will be called a formal complaint. A formal complaint is a quick and efficient procedure that allows numerous questions to be resolved with little cost, the majority of these being technical questions. This formal complaint procedure thus eliminates the need for court proceedings and generally takes a few months. However, for complicated issues, this way of appeal offers limited solutions. In such cases, tax authorities usually prefer to wait for a binding judgment made by a higher independent body (ie, a tribunal). It is very common for taxpayers to exercise their right to challenge the tax assessment decision of a tax authority. Tax authorities then issue a decision on the formal complaint.

Switzerland is actively participating in the BEPS project and, as such, has already implemented some of the project’s outcomes or is in the process of doing so. Switzerland intends to implement the minimum standard of the BEPS project. Few changes are needed in order to meet these minimum standards.

Multilateral Convention To Implement Tax Treaty Measures to Prevent BEPS (MLI)

On 7 June 2017, Switzerland signed the MLI, which will serve to efficiently amend double taxation agreements in line with minimum standards agreed upon in the BEPS project. Switzerland will implement these minimum standards either within the framework of the multilateral convention or by means of the bilateral negotiation of double taxation agreements. These include the modification of the preamble of Double Tax Agreements (DTA) and the prevention of treaty abuse via the principal purpose test. Switzerland has reserved the right not to apply the standards for transparent and dual resident entities (Articles 3 and 4), anti-abuse rules for permanent establishments situated in third jurisdictions (Article 10) and the artificial avoidance of permanent establishment status through commissionaire agreements (Article 12).

Switzerland announced that it would include only 14 tax treaties as covered taxed agreements, including the ones concluded with Argentina, Italy and Luxembourg. These 14 partner states have agreed to negotiate the precise wording for amending the tax treaties through the MLI instrument. A handful of countries, which are currently negotiating a DTA with Switzerland, will revise/adopt bilaterally the BEPS minimum standards. The MLI is currently undergoing the standard parliamentary approval process and will enter into effect in accordance with Article 35 of the MLI.

BEPS Action 5 (Counter Harmful Tax Practices and Patent Boxes)

With the implementation of TRAF in 2020, the privileged tax regimes for holding companies, domiciliary companies and mixed companies, and the existing allocation rules on principal companies, which are no longer acceptable as per international standards, have been abolished. Furthermore, a patent box regime has been introduced in accordance with the OECD standards and is mandatory for all cantons. The net profits from domestic and foreign patterns, as well as similar rights, are to be taxed separately, with a maximum deduction of 90%.

In order to counter further harmful tax practices and to promote transparency, Switzerland introduced the spontaneous exchange of information in tax matters through the adoption of the OECD Convention on Mutual Administrative Assistance in Tax Matters and the revision of the Swiss Federal Act and Ordinance on Tax Administrative Assistance Act. All the above entered into force on 1 January 2017. The first exchange of information took place on 1 January 2018 and included an exchange of information on tax rulings.

Finally, as of 2009 Switzerland no longer makes a reservation on Article 26 of the OECD Model Convention on Income and Capital in its double tax treaties on income and capital, and has therefore fully adopted the OECD standards in exchange of information in tax matters.

BEPS Action 6 (Prevention of Treaty Abuse)

With the entry into force of the MLI, Switzerland is expected to adapt the title and preamble of the Swiss tax treaties to the minimum standard. Further, it has opted for the Principal Purpose Test (PPT) rule alone, which provides that 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.

BEPS Action 13 (Country-by-Country Reporting)

The Swiss Federal Act on the International Exchange of Country-by Country Reports (CBCR) came into force on 1 December 2017.

BEPS Action 14 (Dispute Resolution Mechanism)

Switzerland chose mandatory MAP within the framework of MLI, with corresponding adjustment as well as mandatory arbitration. It should be added that Switzerland has more than 30 provisions that deal with arbitration in its treaty network, in the form of either arbitration clauses or most-favoured nations.

Switzerland has embraced the BEPS project from the beginning and is actively contributing to its development. The country is supporting the primary aim of the BEPS project, which is, in essence, the taxation of profits in the jurisdiction where the economic activity that gave rise to the profits took place. Switzerland’s goal remains to be compliant with the OECD recommendations and that is why it intends to implement the minimum standard of the BEPS project.

Switzerland has focused mainly on the following standards:

  • patent/IP boxes;
  • the spontaneous exchange of information on tax advance rulings;
  • preferential regimes;
  • dispute resolution mechanisms;
  • prevention of treaty abuse; and
  • country-by-country reports.

As has also been the case in other Western countries, over the last few years international tax policy has become more and more of a public debate in Switzerland. In June 2016, the Swiss Parliament passed the Corporate Tax Reform Act III, which aimed to strengthen the tax competitiveness of Switzerland and resolve the tax disputes it had with the EU by abolishing the privileged regimes and aligning with the standards resulting from the new OECD principles. The Reform Act, which was subjected to a popular vote, was rejected.

The measures provided in the Reform Act III included the patent box, notional interest deduction on excessive equity, the abolition of preferential regimes with the possibility of disclosing built-in gains without additional tax consequences, and the reduction of corporate tax rates. The popular belief at the time was that all the above measures would result in a heavier tax burden for individuals.

A replacement project, the Tax Project 2017, subsequently renamed Tax Reform and AHV Financing (TRAF), was introduced and entered into force in 2020. The project had the same purpose as the Corporate Tax Reform Act III, including the abolition of privileged regimes, the disclosure of hidden reserves and the introduction of higher taxation of dividends for qualifying shareholders. Moreover, various measures have been included to maintain the attractiveness of the Swiss tax system, such as the introduction of a mandatory patent box regime and the reduction of corporate tax rates.

As mentioned in 9.3 Profile of International Tax, TRAF includes various measures in order for Switzerland to maintain its attractive tax system.

The competitive tax system in Switzerland includes features such as privileged tax regimes and advanced tax rulings, both of which were highly criticised by the OECD and the EU. That is why Switzerland – wishing to be in line with the new OECD and EU principles – abolished the privileged tax regimes, and made tax rulings subject to the spontaneous exchange of information.

With the implementation of TRAF and the BEPS recommendations as analysed in 9.1 Recommended Changes, Switzerland should not have any "vulnerable" areas in its tax regime.

As far as hybrid mismatch arrangements are concerned, the current Swiss tax law is sufficient to prevent any hybrid structures. Switzerland has adopted the common approach. The country's international tax policy has always supported the elimination of double non-taxation resulting in an unintended lack of tax co-ordination. It should be noted that the recommendations of the BEPS project are much wider, so any implementation by Switzerland would require a number of changes in Swiss tax domestic law.

Finally, Switzerland will apply the switch-over clause of Article 5 of MLI to its residents.

Switzerland applies a worldwide basis jurisdiction to tax, which is limited by the principle of territoriality in certain cases, such as foreign subsidiaries. For the time being, no interest deductions rules in line with action plan No 4 have been implemented or are expected to be implemented.

Switzerland has thin capitalisation rules that apply only to related parties. In the future, Switzerland may need to change its capitalisation rules in order to expand to the overall level of interest deductions in an entity, but no such motion has yet been put in place.

Switzerland does not have CFC legislation, as Swiss residents are not taxed on profits derived by foreign legal entities, such as foreign subsidiaries, up until they are distributed to the shareholder. Moreover, Switzerland provides for unconditional unilateral tax exemption that is not conditional on the payment of taxes abroad. The above is also reflected in its double tax treaties, as Switzerland favours the application of the exemption method. However, recent jurisprudence has allowed the taxation of passive income with insufficient nexus with a foreign country. As such, the corporate veil of a foreign legal entity may be pierced, and a broader interpretation of effective management may be admitted. Therefore, although the courts tend to adopt a position similar to the BEPS project principles, Switzerland for the time being does not intend to introduce any CFC legislation in its tax system.

Switzerland has accepted limitation of benefit articles in its DTAs only at the request of some of its treaty partners, namely the USA and Japan. Otherwise, Swiss treaty practice has never favoured such articles.

With the entry into force of the MLI, a general anti-avoidance rule (GAAR) in the form of the principal purpose test (PPT) will be applied. However, this GAAR is not new to Swiss law and policy – case law of the Swiss Federal Supreme Court (2005) recognises an unwritten GAAR that is conceptually similar to the PPT and is consequently implicitly included in every Swiss DTA. It should be pointed out that controversial issues might arise, as the scope of the PPT is much broader. The current unwritten GAAR is limited to dividends, interest or royalties, whereas the PPT will be applied to all provisions of a DTA.

Switzerland does not have any transfer pricing rules in its domestic law. The authorities are implementing the OECD guidelines. Furthermore, Switzerland does not plan to make transfer pricing documentation compulsory.

Parent entities of multinational enterprises residing in Switzerland with more than CHF900 million consolidation revenue in the financial year preceding the reporting year, or surrogate parent entities, must comply with the country-by-country reporting obligations and provide the Federal Tax Administration with the report.

The first financial year that CBCR is mandatory is on or after 1 January 2018, and the report will be exchanged with partner countries at the beginning of 2020. The submission of reports for the 2016 and 2017 tax years is still optional.

As far as transparency is concerned, Switzerland issues tax rulings including advanced tax rulings that clarify the tax consequences of a certain given transaction planned by the taxpayer. Tax rulings are a very important tool that facilitates the co-operation of the taxpayer with the authorities, rendering the Swiss tax system even more attractive. In order to be in line with BEPS action 5, as of 2018, tax rulings are subject to the spontaneous exchange of information.

Switzerland has not taken any unilateral action with regards to the taxation of the digital economy. The State Secretary for International Finance has been working intensively on the taxation of the digital economy, and has performed an analysis on the subject. Switzerland is of the opinion that it is necessary to favour multinational approaches, where tax profits are taxed in the jurisdiction where added value is generated and which do not cause double or overtaxation, and also that measures outside the scope of double taxation agreements are to be avoided.

As mentioned previously, Switzerland favours multinational approaches and, as such, has not taken any specific unilateral measure towards digital taxation. In light of OECD's "programme of work", on 31 May 2019 the State Secretary for International Finance updated his position regarding digital taxation, as follows: Switzerland wishes to ensure that further developments will not hamper innovation or competition, and has pronounced itself against the introduction of minimum tax rate. Switzerland favours taxation where value is created and supports a comprehensive review of whether the rules for a nexus and the allocation of profit should be adapted to digitalisation. Finally, Switzerland is not convinced by the digital tax proposed in the EU, given that measures based solely on turnover in market areas can lead to double taxation and over-taxation and make it more difficult to achieve a global consensus for a definitive solution.

Switzerland has not introduced any specific provision regarding the taxation of offshore intellectual property deployed from inland. Moreover, Switzerland does not levy WHT on royalties, whether paid to a resident or a non-resident person. However, profits of companies formally domiciled abroad with little or no local substance that are effectively managed in Switzerland or that have a permanent establishment in Switzerland may be subject to Swiss income tax (See 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules for full details).

Switzerland supports international efforts to achieve greater transparency and a level playing field with regard to the taxation of multinationals, and has an ongoing participation in BEPS project.

Lenz & Staehelin

Route de Chêne 30
CH-1211 Geneva 6

+41 58 450 70 00

+41 58 450 70 01

geneva@lenzstaehelin.com www.lenzstaehelin.com
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Trends and Developments


Tax Reform and AHV Financing

On May 19 2019, the Tax Reform and AHV Financing (TRAF) was accepted by the people and the Cantons in a popular vote known as a referendum, and will consequently enter into force on 1 January 2020. TRAF will be the subject of this contribution.

Considered the third major reform of the Swiss corporate tax system (and initially known as the Swiss Corporate Tax Reform Act III), it can be argued that this reform is the farthest-reaching in its implications, given its impact on the foundation of the Swiss tax system and its significant reduction in cantonal tax rates.

As an introductory background, TRAF was initiated by an important disagreement between Switzerland and the European Commission regarding special corporate tax statutes, considered by the European Commission as a violation of the free trade agreement existing between Switzerland and the European Union's ancestor. These special corporate tax statutes have been abolished by TRAF.

Switzerland distinguishes from cantonal (and communal) taxation at one level and federal taxation at another one. Certain special corporate tax statutes allowed full or partial cantonal tax exemption for holding companies ("holding company status") and companies with business activities that are predominantly foreign-oriented ("administrative or mixed company status").

Other special corporate tax statutes allowed partial federal and cantonal tax exemption for companies centralising different functions of a company group with a tax treatment partially allocating income abroad, thus reducing their own tax base ("principal company"), and for Swiss permanent establishments acting as a central treasury department for the company group, allowing it to deduct notional interest expenses ("Swiss finance branch").

As indicated, the European Union disputed these corporate tax statutes for several years, under the opinion that they constituted a violation of the free trade agreement between Switzerland and the European Community of 1972, placing Switzerland under threat of potential blacklisting and termination of tax treaties from EU Member States.

In this political context, Switzerland resolved to reform its corporate tax system. However, the Swiss Corporate Tax Reform Act III, as the first project the said tax reform, was rejected by the people and the Cantons in a referendum on 12 February 2017.

As the new version of what was still a necessary corporate tax reform, TRAF therefore smoothed out the most contentious aspects of the Swiss Corporate Tax Reform III, albeit keeping its essential components. Its main features will be presented hereafter.

Abolition of Cantonal Tax Regimes

At the origin of the project, the repeal of the abovementioned special tax statutes was one of the flagship measures. As mentioned, these special corporate tax statutes have been abolished by TRAF. As a result, companies with special tax statutes would have face a significant increase in tax rates, from privileged tax rates (in effect) to standard tax rates.

Lower Corporate Tax Rates at Cantonal Level

To avoid a massive departure of tax-privileged corporations, most Cantons have reduced their corporate tax rates, sometimes drastically; this is, after all, one of the main features of TRAF. It effectively means that, as of 2020 and depending upon the Canton of incorporation, the effective total income tax rate (ie, federal, cantonal and communal) will range from about 12% to 18%, with the Canton of Zurich gradually reducing its rate from 21.2% to 18.19% in 2023.

Disclosure of Hidden Reserves (Step Up)

Given these previous reduced rates resulting from special tax statutes and the acceptance under Swiss corporate law of hidden reserves (usually resulting from under-valued assets), TRAF also provides for a solution to avoid the unfair taxation of said hidden reserves. To this extent, existing hidden reserves of companies under special tax statutes will be determined by a formal decision of the tax authorities and taxed at a special rate defined by the Canton at the time of their realisation, if they are realised within the following five years (so-called "step up").

Increased Dividend Taxation

Under current Swiss tax law, dividends and others profits deriving from shares are taxable at a reduced rate to mitigate the effect of a double economic taxation (corporate income tax on the corporation's income as well as private income tax upon distribution for the shareholder). This reduced rate amounted to 60% of the distributed benefits from participation (for example, dividends) on the federal level if participation rights constitute at least 10% of the share capital of the company, while Cantons had different reduced rates. Under TRAF, the reduced rate has been increased to a minimum of 70% at the federal level and to at least 50% at the cantonal level. The Cantons may, however, provide for higher taxation.

Patent Box at Cantonal Level

TRAF also implemented a "patent box" for Cantons. No reduction has been granted on the federal level, but on the cantonal level it allows income related to patents and similar rights to be taxed with a reduction of at most 90% (meaning that the Cantons must tax at least 10% of these profits). Such income includes licence fees or benefits from the sale of patents and comparable rights. Said patent box still has to comply with OECD's rules, taking into account R&D expenses in order to ensure that patent box benefits are linked to economic substance ("modified Nexus" approach).

Additional deductions for R&D are also provided by TRAF alongside the patent box. On the cantonal level, these additional deductions are limited to at most 50% (given that, under current law, R&D and all other expenses justified by commercial use are already deductible from taxable profit, it is then a 150% deduction on such R&D expenditure). By reference to the Federal Law on the promotion of research and development and innovation, R&D is determined in a broad sense to include fundamental research, research oriented towards applications, and science-based innovation.

Deduction for Self-Financing

Cantons with a combined cantonal, municipal and other public corporation tax rate of at least 13.5% may also introduce a notional interest deduction on security equity capital (self-financing deduction or "notion interest deduction"), also known as "Lex Zürich" insofar as this measure has been custom-made for the Canton. Security equity capital is the portion of equity capital that exceeds the equity capital required for long-term business activity. The interest rate is to be calculated based on the rate paid on ten-year federal bonds.

Relief Restriction

To avoid excessive cumulative tax reductions, the Cantons are required to provide for a limitation of the global tax reduction based on the patent box, additional deductions for R&D expenditure and the self-financing deduction. The reduction in taxable income under these schemes may not exceed 70% or a more restrictive ceiling.

Capital Tax Adjustment

Unlike the Confederation, the Cantons levy a capital tax on legal entities in addition to income tax. This tax is based on the company's own capital. Since most Cantons allowed a reduced capital tax rate for special tax statutes, TRAF authorises Cantons to provide for reductions in capital tax. These reductions concern the equity capital of a company's equity linked to the capital attributable to qualifying shareholdings, patents and similar rights, as well as intra-group loans.

Capital Contribution Principle Restrictions

Swiss tax law applies the principle of capital contribution, according to which contributions made by shareholders, whether they are agios or additional payments, are not taxable when they are repaid (for direct or withholding taxes). TRAF has introduced an adjustment to the principle of capital contribution, insofar as it allows companies listed in Switzerland to repay reserves from capital contributions to their shareholders tax-free only if they distribute at least the same amount of taxable dividends. If such companies buy back their own shares, they will have to distribute reserves from retained earnings for at least the same amount as the reserves from capital contributions distributed.

Fiscal Equalisation and AHV Refinancing

Finally, TRAF also includes measures to rebalance fiscal equalisation between the federal and the cantonal level, so that the federal financial compensation to the Cantons has become higher. Mostly for political reasons and the acceptability of the reform due to the rejection of the first draft, TRAF also includes measure to refinance the AHV (old age and survivors' insurance) by raising contributions from employers and employees alike by a few percentage points.

Conclusion

It has been shown that TRAF provided Cantons with significant leeway for a diversity of tax measures. A case-by-case analysis for each Canton will therefore be necessary to determine the economic potential and suitability of each Canton, according to a given structure.

Although it remains to be seen what effects TRAF will have on previously tax-privileged companies and if reduced rates and the step-up process will prove sufficient to keep these companies in Switzerland, the reform is to be commended as a positive and necessary step forward for Switzerland.

In summary, TRAF has succeeded at adopting Swiss corporate tax to modern tax standards and to the positions of its economic partners while allowing Switzerland to remain at the forefront of the European corporate tax landscape thanks to the various accompanying tax measures described above.

Lenz & Staehelin

Route de Chêne 30
CH-1211 Geneva 6

+41 58 450 70 00

+41 58 450 70 01

geneva@lenzstaehelin.com www.lenzstaehelin.com
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Law and Practice

Authors



Lenz & Staehelin is the largest law firm in Switzerland, with more than 200 lawyers forming its legal staff. Internationally oriented, the firm offers a comprehensive range of services and handles all aspects of international and Swiss law. Languages spoken include English, French, German, Italian, Russian and Spanish. Lenz & Staehelin’s tax team is one of the largest among Swiss law firms, with more than 25 tax attorneys offering a full range of tax advice in its three offices in Geneva, Zürich and Lausanne. Tax practice areas include M&A; restructurings and buyouts; financing; financial products and derivatives; estate and tax planning for executives, including employee share and stock option plans; investment funds; private equity funds; property (acquisition and development); value added tax; internal investigations; and tax litigation.

Trends and Development

Authors



Lenz & Staehelin is the largest law firm in Switzerland, with more than 200 lawyers forming its legal staff. Internationally oriented, the firm offers a comprehensive range of services and handles all aspects of international and Swiss law. Languages spoken include English, French, German, Italian, Russian and Spanish. Lenz & Staehelin’s tax team is one of the largest among Swiss law firms, with more than 25 tax attorneys offering a full range of tax advice in its three offices in Geneva, Zürich and Lausanne. Tax practice areas include M&A; restructurings and buyouts; financing; financial products and derivatives; estate and tax planning for executives, including employee share and stock option plans; investment funds; private equity funds; property (acquisition and development); value added tax; internal investigations; and tax litigation.

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