The
term 'offshore' is not used in Swiss legislation
or in describing company forms. However, there
are a number of specialised forms of the basic
Stock Corporation which offer tax-privileged
treatment equivalent to that obtainable in
offshore jurisdictions.
The
EU Savings Tax Directive has applied in Switzerland
as from 1st July, 2005, through a separate
agreement reached between the country and
the EU, under which Switzerland is levying
a withholding tax (initially at 15%) to returns
on savings paid to the citizens of EU Member
States, and which in various other ways is
less onerous that the original Directive.
The withholding tax increased to 20% on 1
July, 2008 and rise to 35% from 1 July, 2011.
Although
bank interest and dividends are caught by
the Directive, payments made by what are called
'residual agents' (including for instance
trusts) are apparently excluded in the Swiss
agreement, which is not the case in Member
States. And of course the Directive applies
only to individuals who receive payments;
companies and other organisational forms do
not fall under its aegis.
In
May 2008, the Swiss government announced that
gross revenues collected from interest payments
under the European Savings Tax Directive increased
substantially between 2006 and 2007.
The
Federal Department of Finance revealed that
tax withheld on interest payments in Switzerland
on earnings liable to tax in the EU increased
from CHF863.7mio for the year 2006 to CHF822.8mio
for the tax year 2007, CHF820.3mio for the
tax year 2008. Total withholding tax withheld
in 2009 dropped to CHF670.8mio.
The
agreement on the taxation of savings income
with the European Community, in force since
1st July, 2005, makes provision for 75% of
the proceeds to be passed on to the member
states concerned. The remaining 25% is kept
by the Swiss government, although 10% of this
is passed on to the cantons.
The
Swiss figures for 2009 show that, of the withholding
tax revenues transferred to EU member states,
the largest amounts were passed to Italy (CHF122.9mio),
Germany (CHF109.2mio), France (CHF52.2mio)
and Spain (CHF26.6mio).
In
September 2008 Switzerland outlined new hedge
fund tax proposals designed to improve its
competitiveness on the world stage, promote
itself as a premier location and attract thousands
of jobs as a result.
The
new tax proposals supported by the federal
government aim to provide the vital tax incentives
needed to strengthen the international competitiveness
of the Swiss financial sector.
Reducing
the tax burden for managers of hedge funds
and other private equity companies from 40-50%
to 15-20% overall will bring taxes roughly
into line with competing centres such as London
and New York.
Despite
being the second-biggest hedge fund investor
after the United States - some USD200bn of
the estimated total of USD600bn invested in
funds of hedge funds comes from Switzerland
- only 40-50 hedge fund managers out of around
9,500 currently reside there.
Tax-related
problems linked to performance fees and carried
interest will be clarified and the Swiss banking
watchdog EBK proposed to end the “Swiss
finish” (see below) , a set of additional
rules applying uniquely to Swiss and foreign
investment funds. Given that the changes to
the tax system need only be approved by the
heads of Switzerland’s cantonal (state)
tax departments and will not require new legislation
they may therefore be implemented quickly.
In
January 2009, the Swiss Federal Council decided
to amend collective investment legislation
to remove the so-called Swiss Finish. It did
so by adapting article 31 of the Ordinance
on Collective Investment Schemes (CISO) to
bring Switzerland into line with the rest
of the EU. The amendment entered into force
on March 1, 2009.
Switzerland
Forms of Tax-Privileged Operation
Tax-privileged
operations may take place within the following
forms, all of which are variants of the basic
Stock Corporation:
Switzerland
Tax Treatment of Offshore Operations
The
“Bonny Decree”, which provides 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, ended in 2008.
Most cantons also grant tax holidays to companies
bringing economic value-added functions and
creating significant new jobs for up to ten
years.
See
Domestic
Corporate Taxes for the general principles
of Swiss corporate taxation, which also apply
to offshore entities except as indicated below.
Holding Companies:
For
federal tax purposes a company is defined as
a holding company if it holds either a minimum
of 20% of the share capital of another corporate
entity or if the value of its shareholding in
the other corporate entity has a market value
of at least 2m Swiss Francs (known as a "participating
shareholding").
The
Swiss holding company was a particular target
of the OECD's 'unfair tax competition' initiative,
and in 2004 an agreement was reached between
Switzerland and the OECD whereby information
about holding companies would be shared by Switzerland
in circumstances where there was prima facie
evidence of fraud.
Although
the definition of a holding company varies among
cantons a corporate entity is a holding company
for cantonal corporate income tax purposes so
long as it either
Generally
speaking foreign dividends remitted to a Swiss
company and any capital gains realized by a
Swiss company on the sale of shares in a foreign
entity in which it holds a stake are taxable
in Switzerland unless they are remitted to a
company which by Swiss fiscal law is defined
as a Swiss "holding" company.
Swiss holding companies enjoy the following
relief from corporate income tax:
-
At federal level a holding company pays
a reduced level of corporate income tax
on any dividend income received from the
subsidiary or the company in which it holds
a "participating shareholding". The reduction
in the level of corporate income tax payable
depends on the ratio of earnings from "participating
shareholding" to total profit generated.
-
At cantonal or municipal level no corporate
income tax is payable on income represented
by dividends so long the corporate entity
meets the cantonal definition of a holding
company.
Furthermore
holding companies which hold a minimum of 20%
of the share capital of a subsidiary pay reduced
corporation tax on any capital gains made on
the sale of that shareholding so long as
-
the shareholding was held for at least one
year and was purchased after 1st January
1998; or
-
the shareholding was purchased before 1st
January 1997 and will be disposed of after
1st January 2007.
Fribourg is currently considered the best canton
in which to locate a holding company for corporate
income tax purposes.
Domiciliary
Companies:
Domiciliary
companies are companies that:
-
are both foreign-controlled and managed
from abroad;
-
have a registered office in Switzerland
(i.e. at a lawyer's premises);
-
have neither a physical presence nor staff
in Switzerland;
-
carry out most if not all of their business
abroad;
- receive
only foreign source income.
Domiciliary
companies enjoy the following relief from
corporate income tax:
-
At a federal level there are no tax advantages
in terms of corporate income tax payable
on income and gains;
-
At a cantonal and municipal level the corporate
income tax rate may be substantially reduced
or even reduced to zero; taxes levied by
the cantons are calculated according to
a formula which relates the company's paid
up share capital and reserves to profit.
Auxiliary Companies:
An
auxiliary company is essentially a domiciliary
company which in addition may carry out a
certain proportion of its business in Switzerland.
Auxiliary companies can exist in only seven
cantons. An auxiliary company may:
Auxiliary
companies enjoy the following relief from corporate
income tax:
-
At a federal level no exemptions are granted
on corporate income tax;
-
At a cantonal and municipal level the level
of corporate income tax payable on income
and capital gains varies among the 7 cantons
who give favorable treatment. However, in
general Swiss-sourced income is taxed at
5% whereas foreign-sourced income is tax
exempt. The tax concessions can vary and
an advance tax ruling should be sought.
Service
Companies:
Service
companies are companies whose sole activity
is the provision of technical, management,
marketing, publicity, financial and administrative
assistance to foreign companies which are
part of a group of which the service company
is a member.
Service
companies may not in general derive income
from third parties (i.e. companies outside
their corporate group). Service company status
is obtained by way of an advance tax ruling.
Service
companies enjoy the following relief from
corporate income tax:
-
At a federal level relief is not available
on corporate income tax payable;
-
At a cantonal and communal level corporate
income tax rates will be adjusted depending
on the international orientation of the
services provided. There are a number of
ways of calculating annual taxable profit
for cantonal and municipal purposes but
generally speaking annual taxable profit
will be the equivalent of 8.5% of the payroll
or 5%-20% of overheads (unless overheads
are very low in which case a higher percentage
rate will be used).
Mixed companies:
Mixed
companies are companies which have the characteristics
of both domiciliary companies and holding
companies but which do not qualify as either.
A mixed company gets the following relief
from corporate income tax:
-
At federal level no relief is granted;
-
At a cantonal and municipal level a mixed
company may pay reduced tax or be totally
exempt if it meets the following conditions:
-
it is foreign controlled;
-
a minimum of 80% of its total income
comes from foreign sources;
-
the company has close relationships
to foreign entities.
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Switzerland
Taxation of Foreign Employees of Tax-Privileged
Operations
There are no special rules applying to the foreign
or Swiss employees of tax-privileged operations.
The various exemptions from income tax described
above do not apply to employees: any business
employing and paying people in Switzerland will
have to follow the normal rules for the taxation
of individuals.
See
Domestic Personal Taxes
for the general principles of individual taxation
of individuals in Switzerland.
A
person is deemed resident in Switzerland if:
-
He has Swiss employment (to work in Switzerland
a non-national needs a work
permit - limited work permits of 90-120
days can be granted and where granted lead
to limited taxation);
-
He carries on a business in Switzerland;
or
-
He lives in Switzerland for not less 180
days in any one year. If however he remains
in the same abode the time required to be
a resident for tax purposes drops to 90
days.
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Switzerland
Exchange Controls
Switzerland has no exchange controls.
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Switzerland Activities
of Tax-Privileged Operations
The various tax-privileged forms described above
are all subject to limitations on their activities
or structures as set out. In approximate terms:
- Holding
Companies must derive most of their income
from subsidiaries;
- Domiciliary
Companies must have only the smallest toe-hold
in Switzerland;
- Auxiliary
Companies (in 7 cantons only) may have some
local activity;
- Service
Companies must be active only within their
own groups; and
- Mixed
Companies combine Domiciliary and Service
Company restrictions.
See
above for further details.
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Switzerland
Employment and Residence
There are no special privileges for the employees
of non-resident or tax-privileged entities in
Switzerland. Entry into Switzerland, residence
in Switzerland and the right to work or purchase
property in the country are all inextricably
interlinked.
However,
agreements with the EU are gradually putting
EU freedom-of-movement rules into place which
will eventually allow EU citizens to by-pass
the quota permit system altogether.
EU
citizens now have:
- a
free choice of residence and work cantons;
- the
right to change jobs and employers; and
- a
right to work for their family members.
Eventually, EU-citizens will have complete freedom
of movement within Switzerland and Swiss citizens
within EU-countries. However, there was a fixed
quota for work permits until 31 May 2007 with
a maximum of 15,000 new long-term residence
permits a year and 115,500 new short-term residence
permits a year.
On
31 May 2007, quotas for EU citizens wishing
to work in Switzerland were suspended. As of
June 2009 Switzerland made a decision to extend
the agreement. Freedom of movement will be fully
introduced between Switzerland and the EU as
of June 2014.
Obtaining
Residence in Switzerland: The available
types of permit are the '120-day' permit, the
class A, B or C permits, the fiscal deal permit
and the political refugee permit. The class
A permit (for 'blue-collar' workers) and the
political refugee permit are not described further
here. Permits other than the '120-day' variety
are subject to a quota system. However, agreements
with the EU are gradually putting EU freedom-of-movement
rules into place which will eventually allow
EU citizens to by-pass the quota permit system
altogether.
The
'120-Day' Permit: This permit allows a managerial
or specialist worker to work in a specified
position for up to 120 days in a particular
year; rotation among a number of individuals
is not allowed.
The
Class B permit: The class B permit is the
most commonly issued permit and gives the right
to live and work in Switzerland. It is the permit
of choice for professional and managerial people,
self employed individuals who wish to start
their own company in Switzerland, people who
wish to reside in Switzerland and are wealthy
enough to live off their own resources (but
see the Fiscal Deal Permit below). The Class
B permit has the following characteristics:
- It
is usually granted for a period of up to
one year at a time;
-
If the permit is for work purposes then
the applicant must have a job to go to in
Switzerland;
- The
granting of his permit must not have the
effect of depriving a Swiss national of
employment. Since many trades in Switzerland
are protected by guilds which prohibit the
recruitment of foreign workers an application
for a class B permit is not always successful;
-
The class B permit allows the applicant
to bring his wife and children into the
country but not his extended family;
-
The application is not prejudiced by inability
to speak the official languages of Switzerland;
-
It takes about 3 months to obtain a Class
B permit.
The
Class C permit: The class C permit is a
longer-term residency permit which gives the
applicant almost the same rights as Swiss citizens
and allows the applicant to buy real estate
in Switzerland. To obtain a class C permit one
must have had a class B permit for between 5
and 10 years depending on country of origin.
The class C permit is the last step before applying
for Swiss citizenship. It is subject to the
same conditions as the class B permit.
The
'Fiscal Deal' Permit: This is a variant
of the class B permit and is primarily for wealthy
individuals who wish to live in Switzerland
off income earned outside Switzerland (e.g.
international tennis players and formula 1 drivers)
but who have no need or desire to work in the
country. To obtain a fiscal deal permit the
applicant needs a certified net wealth of at
least 2m Swiss Francs and must be willing to
spend at least 180 days a year in the country.
The fiscal deal permit allows the applicant
to pay considerably less tax than a Swiss national
of his income bracket would normally pay since
the assessment to tax is not based on the applicants
real income but rather on a much lower notional
amount.
For
further information see lump
sum assessment method in our personal income
tax section. The amount of tax payable by the
holder of such a permit is a matter of personal
negotiation with the canton in which the applicant
resides. Switzerland is already a low tax country
by OECD standards and the 'fiscal deal' results
in extremely low levels of taxation. It takes
about 3 months to obtain a fiscal deal permit.
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