Due
to the federal structure of Switzerland there
is no centralized tax system, with some taxes
being levied exclusively by federal authorities
whereas other taxes are concurrently levied
at cantonal, communal and federal levels. Although
the rate of tax levied at a federal level is
consistent, that levied at a cantonal level
varies from canton to canton. Because significant
differences presently exist in the rates of
taxes levied at cantonal level the choice of
canton is an important element in all tax planning.
Another
round of fruitless discussions forming part
of the ongoing battle between the European Union
and Switzerland over the latter's corporate
tax system took place in Bern in November 2007.
But while the European Commission has the obvious
weight advantage over its more nimble neighbour,
at present Brussels simply doesn't have the
legal reach to deliver the knock-out blow that
would oblige the Swiss to capitulate to its
demands.
Representatives
from Switzerland and the European Commission
met in Bern in April 2008 for a third round
of dialogue on the EU's assessment of certain
cantonal company taxation arrangements.
According to
the Swiss Federal Department of Finance, this
round of talks "further contributed to
improving the mutual understanding of the respective
positions" of both sides. However, it was
agreed that no date would be set for a further
round of meetings, suggesting that the impasse
between Bern and Brussels on the vexed question
of taxation remains.
The third round
of discussions focused, much like the previous
two rounds, on the question of whether the 1972
Free Trade Agreement between Switzerland and
the European Community was applicable with regard
to certain cantonal company taxation regulations.
The Swiss continued
to argue that this "is by no means the
case," and that the country has no obligation
to adapt or even do away with these regulations.
Following the discussion, the Finance Department
confirmed, somewhat unsurprisingly, that: "Diverging
positions remain in this regard." In his
address during the 17th international 'Europe
Forum', in November 2009, Federal president
Hans-Rudolf Merz confirmed the governments'
position on taxation and said that Switzerland
and the EU were conducting a 'constructive dialog
with reference to cantonal taxes'.
There
has also been little sign that the cantonal
governments are willing to relinquish their
freedom with regards taxation, and past years
have seen some cantons engage in fairly aggressive
tax competition to attract holding companies
and wealthy expats. Led by Obwalden, which cut
corporate tax to 6.6% in January that year,
the lowest rate in Switzerland,
other cantons responded with tax cuts of their
own: cantons Zurich, Valais, Fribourg, Uri and
Schaffhausen all reduced tax rates in 2006.
This prompted complaints from those on the left
that some cantons were engaged in a 'race to
the bottom' on taxation that would eventually
endanger the viability of public finances.
Obwalden also cut tax for individuals earning
over CHF300,000 by 1% to 2.35% and reduced property
tax.
According to
a report by Swissinfo, in January 2007, officials
from Swiss cantons put off a decision on whether
to raise rates for wealthy foreign immigrants,
instead deciding to examine the proposal more
closely by comparing the Swiss cantonal tax
system with preferential tax regimes in other
low tax jurisdictions such as Luxembourg and
Monaco.
While Switzerland's
corporate taxes are low in comparison to most
of its international competitors, the OECD recommended
in November 2007, that the government reinforce
entrepreneurial activity by easing the country's
relatively high burden of dividend taxation.
In
its latest economic review of the Swiss economy,
the OECD had concluded that heavy taxation of
dividends generates incentives for tax evasion
through the creation of complicated corporate
structures, and might distort financing decisions
of firms that cannot raise equity on international
capital markets. In addition, the tax-induced
incentives to retain earnings are further increased
by the absence of a capital gains tax, the OECD
observed.
In
January 2008, Swiss Finance Minister, Hans-Rudolf
Merz drew attention to the need for corporate
tax reform, in order to benefit the country's
SMEs.
Merz
argued that planned reforms to the taxation
of such businesses when they restructure, and
to the CGT regime, would be highly beneficial
for Switzerland's small and medium-sized businesses
- what he called "the backbone of the Swiss
economy."
The previous
month, it was announced that Switzerland was
amongst the top three countries - alongside
Cyprus and Ireland - in a league table of European
tax systems compiled by KPMG International,
in which major business organizations across
Europe assessed the attractiveness of their
domestic tax regimes.
All three countries
were rated highly for their combination of consistency
in interpreting tax legislation, stability in
resisting frequent changes to tax laws, and
comparatively low tax rate.
In
February 2008, voters in Switzerland narrowly
approved a package of tax measures which aim
to ease the tax burden on dividend-paying companies.
The
reforms sought to ease the burden of double
taxation by reducing the taxable amount of dividends
paid to companies and individuals to 50% and
60% respectively. The tax cuts came into force
on January 1, 2011, and apply to shareholders
who own at least 10% of a company's stock.
In
the case of VAT, the Federal Council had already
taken certain general decisions, after it emerged
from a consultation procedure that the desire
for a simplification of the VAT system met with
broad approval.
In January
2008, the Federal Council instructed the Finance
Department to draw up proposals for a revised
VAT Act with a uniform tax rate of 6.1%, and
tax liability removed from as many exemptions
as possible.
In
2010 Switzerland decided to increase its' standard
VAT rate from 7.6% to 8% for all supplies of
goods and services. The rate is set to remain
at this level until 2017 after which the government
plans to introduce a flat rate of 6.2%.
Switzerland
was found to have improved its position by three
places to 12th in a comparison of corporate
tax rates across Europe published by tax and
business advisory firm KPMG in September 2010.
The study conceded, however, that by applying
an arithmetic mean of all cantons were used
for comparison, Switzerland would be placed
eighth with a rate of 18.8%.
In
2007, the rates in the cantons ranged from 13.1
to 29.1%, but corporate tax rates have since
shown a significant downward trend, sinking
to between 12.66% and 24.18%, with the two cantons
with the lowest rate – Obwalden and Appenzell-Ausserrhoden,
both at 12.66%.
In
December 2008, Switzerland's Federal Department
of Finance (FDF) laid the foundation for the
third major corporate tax reform, with proposals
to simplify the federal and cantonal tax system
in a bid to improve the country's international
tax competitiveness.
Among the more
significant proposals announced by the finance
department are plans to modify cantonal tax
laws governing holding companies and management
companies, unify the treatment of domestic and
foreign revenues, and the elimination of fiscal
barriers to company financing.
"Switzerland
is facing increasingly intense tax competition.
Over the last few years a number of countries
have taken steps to considerably improve the
fiscal framework for companies. Against the
backdrop of globalized flows of trade and services,
corporate taxation must at the same time be
better safeguarded internationally. The Federal
Council is also thereby taking into account
various requests for fiscal measures on behalf
of companies in Switzerland, some of which have
already been referred by parliament," the
finance department stated.
At Federal
Councillor Hans-Rudolf Merz's request, a working
group consisting of representatives from the
Confederation and the cantons has, as a result
of these concerns, drafted detailed objectives
for further company taxation reforms. The Federal
Council instructed the finance department to
draw up a draft consultation paper on the proposed
corporate tax overhaul.
The main elements
of the reforms involve the abolition of issue
tax on equity and debt capital and the elimination
of fiscal barriers to company financing.
"Issue
tax on equity has a disincentive effect on investment,"
the finance department stated, adding:
"In international
comparison it is increasingly proving to be
a locational disadvantage for Switzerland. For
its part, issue tax on debt capital constrains
financing activities, particularly those of
international companies. If transactions within
the group are exempted from stamp duty and withholding
tax, groups operating internationally will be
more inclined to locate their financing activities
in Switzerland. That in turn will increase tax
revenues and support the creation of highly
qualified employment.
"At the
cantonal level, it should be made possible for
the cantons to waive capital tax. In addition,
the Federal Council has instructed the FDF to
examine further measures that would strengthen
Switzerland's competitiveness as a business
location. These include adjustments to the system
of investment deductions for corporate bodies."
It is estimated
that the short-term revenue loss for the central
government will equal about CHF500m. However,
the cantons are predicted to experience revenue
shortfalls only if they opt to waive capital
tax.
The working
group appointed by the FDF also closely examined
the cantonal tax issues relating to holding
companies and management companies and explored
the idea of a shift to a uniform system of tax
on profits, although this proposal was rejected.
"The in-depth
analyses showed that in terms of growth, the
existing system proved best placed to produce
the desired results. Moreover, a shift to a
uniform system of tax on profits would not be
feasible in terms of financial policy and would
have a serious impact on the cantons and on
the reorganisation of financial equalisation
and division of tasks between the Confederation
and the cantons. The proposal of a shift to
a uniform system of tax on profits was consequently
rejected by the cantons consulted," the
finance department explained.
However, the
report concluded that Switzerland's position
in terms of taxation could be further strengthened
by modifying the cantonal tax structures.
"Targeted
measures could ensure that domestic and foreign
revenues from all these companies are handled
equitably, which would reinforce their international
standing. As possible measures the focus is
on a general ban on the business activities
of holding companies and modifications in the
provisions governing 'joint enterprises' and
the abolition of the status of 'foreign-based
companies'. The latter should occur in line
with the strategy of the Federal Council whereby
the focus is on fiscally attractive frameworks
specifically for companies which invest and
create jobs in Switzerland," the department
stated.
The Swiss government
is "convinced" that these measures
will strengthen Switzerland's position in international
tax competition while nullifying long standing
concerns raised by the European Union into the
compatibility of the Swiss cantonal tax system
with the 1972 Free Trade Agreement.
"[The
Federal Council] continues to categorically
reject negotiations with the EU on fiscal matters,"
the statement said.
The Swiss government
said that it intended to "push for the
swift implementation" of this package of
reforms.
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Switzerland Scope of Corporate
Income Tax
For corporate
income tax purposes a company is deemed resident
in Switzerland if it is either incorporated
in Switzerland or effectively managed from there.
Thus a UK-registered company whose effective
seat of management is in Switzerland is a Swiss
resident company for corporate income tax purposes.
The General
Assessment Rule is that resident companies are
assessed on their worldwide income except for
profits generated by enterprises, permanent
establishments and real estate situated abroad,
whereas non-resident companies are only assessed
on profit generated by enterprises, real estate
and permanent establishments situated in Switzerland
as well as interest on loans secured on Swiss
real estate.
Corporate
income tax is levied at a federal, cantonal
and communal level. The level of corporate income
tax payable varies amongst the cantons but at
present Zug and Fribourg are considered the
best cantons in which to locate trading and
holding companies respectively.
Corporate income
tax payable to the federal authorities may be
tax deductible for the purposes of an assessment
to cantonal corporate income tax and vice versa.
Advance tax
rulings on the level of corporate income tax
payable are available and are advised as a matter
of prudence.
Generally speaking
capital gains are taxed as corporate income
at federal, cantonal and municipal levels.
The Swiss
branch of a foreign company pays the same rates
of corporate income tax on profits, income and
capital gains as would be paid by a Swiss-resident
corporate entity. Profits remitted abroad by
the branch are not subject to any tax in Switzerland.
See Offshore
Legal and Taxation Regimes for details of
the taxation of Holding, Domiciliary, Auxiliary,
Mixed and Service Companies.
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Switzerland Rates of Corporate
Income Tax
Corporate
income tax is levied at federal, cantonal and
municipal levels.
The federal
corporate income tax rate is 8.5% flat. Since
income and capital taxes are deductible in determining
taxable income, the effective tax rate that
a company pays on its profits before deduction
of tax is 7.83%.
Cantonal
tax rates can be levied at rates of up to 20%
and like the federal tax are progressive, using
a scale based on the relationship of profits
to net worth. The average cantonal tax rate
in 2010 was approximately 21%.
Municipal tax
on corporate income is calculated as a small
proportion of cantonal tax.
The “Bonny
Decree”, which provided for federal assistance
in the form of a federal tax holiday for up
to ten years for companies bringing economic
value-adding activities to specific regions
in Switzerland was replaced by the Federal Law
on Regional Policy from 1 January 2008. The
new law saw a reduction in the number of cantons
qualifying for the incentive status. To ease
the transition, the government allowed cantons
no longer included in the list to continue to
offer tax holidays of up to 10 years for a further
three years after the new law came into force.
See Offshore
Legal and Taxation Regimes for details of
the taxation of Holding, Domiciliary, Auxiliary,
Mixed and Service Companies.
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Switzerland Calculation of
Taxable Base
There
are substantial differences between the federal
government and cantons, and between individual
cantons, in the calculation of taxable income.
The following list of broadly applicable rules
must be checked in any given situation:
-
GAAP principles apply to most aspects of
the tax computation;
-
Group
or consortium relief does not exist in Switzerland;
-
Losses
can be carried forwards for between 4 and
7 years, but not backwards;
-
There is no controlled foreign company tax
legislation of the type which exists in
both the UK and the USA;
-
Capital gains made by a non-resident parent
company on the sale of its shareholding
in a Swiss subsidiary are not taxable in
Switzerland (unless the Swiss subsidiary
owns real estate in Switzerland);
-
The
payment of loan interest by a resident or
non-resident subsidiary to a Swiss parent
company is free of any corporate income
tax in Switzerland;
-
Provisions
for future employee retirement liabilities
are tax deductible;
-
Income
or capital gains accruing to a resident
or non-resident company on the rental or
sale of Swiss real estate (including the
sale of shares in a company which owns real
estate in Switzerland) are subject to corporate
income tax at both federal and cantonal
levels;
-
Income and capital gains from foreign immovable
property are exempt from corporate income
tax;
-
The
profits of the foreign branches of a Swiss
company are exempt from corporate income
tax in Switzerland as are any capital gains
made on a sale of a branch;
-
The losses of the foreign branch of a resident
company can be set off against the profits
of the resident Swiss company.
-
Where
there is no double taxation treaty in place
withholding taxes deducted in a foreign
jurisdiction on remittances paid to a Swiss
entity give rise to a tax credit in Switzerland.
See Double Taxation
Treaties.
See
Offshore Legal and Taxation
Regimes for details of the taxation of Holding,
Domiciliary, Auxiliary, Mixed and Service Companies.
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Switzerland Stamp Duty
The
federation has the exclusive right to levy this
tax. The rates are as follows:
- 1% on the
issue of shares where the value of the shares
is over CHF1m including cases in which shares
are issued at a premium. A loan made by
a shareholder to the company without any
consideration is also subject to this tax.
The tax is also payable on the nominal value
of shares where a majority shareholding
is transferred as a consequence of a liquidation
irrespective of the fact that the shares
have virtually no market value in the circumstances.
The issue tax is not payable by the Swiss
branch of a foreign company.
- A rate of
0.15% on the transfer value of shares in
Swiss resident companies and 0.3% on the
transfer value of shares in non-resident
companies where the transfer is effected
by "security dealers" which definition includes
banks, stock brokers, investment fund managers
and other financial institutions. The definition
of security dealers is quite wide and includes
any company which owns securities with a
value in excess of 10m Swiss francs and
all intermediaries. The tax is split between
the buyer and the seller and is automatically
deducted by the dealer.
- A rate of
0.12% per annum on the value of bonds issued
meaning that a 5-year bond pays 0.6% stamp
duty (this was abolished from March 1, 2012)..
- A rate of
0.06% per annum on bank-issued medium term
bonds and on the issue of financial paper
meaning that a 5-year bond pays 0.3% stamp
duty (this was abolished from March 1, 2012).
- A rate of
5% on an insurance premium or 2.5% in the
case of a life insurance premium paid in
one contribution.
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Switzerland Filing Requirements
and Payment of Tax
For
federal tax purposes the tax year is the company
financial year whereas for cantonal and communal
tax purposes the tax year is the calendar year.
Although the cantonal basis of assessment differs
amongst cantons (i.e. it is occasionally annual)
assessment is generally on a bi-annual basis
meaning that it is based on the average profits
of the previous 2 calendar years so that, for
instance, the corporate income tax payable to
the canton for the period January 1, 2009 to
December 31, 2010 is the average of profits
for the like periods in 2007 and 2008.
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Switzerland Net Worth Tax
This
tax is levied by both the federal authorities
and cantons. The tax is based on the value
of a corporate entity's assets, normally equal
to shareholders' equity (paid-in capital,
legal reserves, and other retained earnings,
public or otherwise). The rates are:
- A rate of
0.8% of the company's net worth is levied
by the federal authorities annually;
- A rate of
between 0.3% to 1% of the company's net
worth is levied by the cantons annually,
depending on the canton.
Foreign branches
based in Switzerland are only assessed on
the value of their Swiss assets for the purposes
of this tax. Resident companies are not assessed
on the value of any foreign-based real estate
assets.
See Offshore
Legal and Taxation Regimes for details
of the taxation of Holding, Domiciliary, Auxiliary,
Mixed and Service Companies.
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Switzerland Withholding Tax
The
federation has the exclusive right to levy withholding
tax. The general rule is that withholding taxes
are deducted at source from distributions made
by Swiss entities. The rate is 15% on pension
fund benefits, 8% on insurance benefits and
35% for "investment income", which includes
corporate dividends and interest from bank accounts,
bonds & debt instruments.
As
from July, 2005, the EU's Savings Tax Directive
was implementd in Switzerland, and a withholding
tax of 15% was being applied to the returns
on savings of citizens of EU member states.
The rate rose to 20% from Juy 1, 2008 and to
35% from July 1, 2011.
No
withholding tax is levied on royalties paid
to foreign beneficiaries.
Profits
repatriated abroad by the Swiss branch of a
foreign company do not attract withholding taxes
irrespective of any double taxation treaty.
NB:
Switzerland has double
taxation treaties with about 100 other countries,
and these determine the rates of withholding
tax in most cases, rather than the general rules
above.
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