SWITZERLAND: An Introduction to Tax

Chambers Switzerland: An introduction to tax 

Switzerland consistently scores top ranks in innovation and competitiveness and this also applies to the general tax environment. International tax and economic developments also impact Switzerland and trigger several legislative changes in the past and upcoming years.

International developments and impact on Switzerland's corporate tax reform since 2020

The past years saw significant changes and developments in the Swiss tax landscape. Under an agreement with the European Union, Switzerland abolished all its previous preferential tax regimes (e.g., holding company, mixed company and finance branch regime) as per 1 January 2020 as part of a comprehensive corporate tax reform. As part of the reform, Switzerland introduced certain tax incentives as accepted under the OECD's international tax standards such as patent boxes and R&D incentives. Instead of relying on regimes, Swiss cantons reduced statutory corporate tax rates, available for all corporate taxpayers. This initiative reduced the average effective corporate income tax rates in Switzerland to approx. 14-16%, e.g., 11.85% in the canton of Zug, 13.04% in the canton of Basel-Stadt, 13.79% in the canton of Vaud and 14% in the canton of Geneva (federal and cantonal income tax level combined).

The years 2020 and 2021 therefore had a strong focus on the implementation of tax reform measures and the adaption of existing Swiss businesses to the new tax rules. For instance, companies which previously applied a preferential regime were granted a limited phasing-in by way of a beneficial tax neutral step-up in basis in order to avoid an over-taxation upon entry into force of the new rules. Clients were required to invest a significant amount of time in securing this step-up in basis by way of advance tax rulings from the competent tax authority – also requiring an analysis how this transition rule should be viewed from an international tax perspective, e.g., anti-hybrid and CFC rules as well as DAC6 (mandatory disclosure rules). This work is still ongoing as 2021 marks the year in which the 2020 tax returns will be due.

Aside from the transitional rules, the general lowering of tax rates and abolishing of tax regimes, however, largely relieved Swiss business from scrutiny under foreign CFC rules, as the effective tax rates are mostly above relevant thresholds and apply to a comparable tax without any specific exclusions. The new rules and the rather stable economic environment have attracted a lot of new activities in the past two years as relocation business was flourishing.

Impact of the OECD Pillar 2 proposal 

The OECD's Pillar 2 proposal which aims at introducing a global 15% minimum tax rate may require certain Swiss cantons to either increase tax rates or provide for separate income tax rates for groups which are in scope of Pillar 2. It is yet uncertain how the Swiss federal government and cantons will implement Pillar 2 and react to its implications.

However, the fact that 15% will be a globally accepted tax rate and that Pillar 2 technically is assessed on a consolidated country level may result in continued further relocations to Switzerland: additional business in cantons with a higher effective tax rate than 15% (e.g., Zurich with approx. 18.2% in the future) may raise the consolidated tax level in Switzerland for a group to the global 15% minimum. It remains to be seen whether multinational groups will not rather seek the globally accepted 15% rate by relocating functions to Switzerland instead of paying a higher corporate income tax rate in another jurisdiction – especially if inflationary pressure would continue to rise and further contribute to the expense side of value creation.

Swiss dividend withholding tax as key issue in cross-border M&A

Although Switzerland provides for rather low corporate income tax rates, its dividend withholding tax rate of 35% is one of the highest in the world. Despite the fact that Switzerland avails of a very broad network of tax treaties, multinational groups continue to seek direct investments into Switzerland in view of international developments without relying on intermediate holdings. As under Swiss domestic law, the repayment of share premium (additional paid-in capital or qualifying capital reserves) is exempt from withholding tax regardless of the treaty position of the direct parent entity, inbound reorganizations typically seek to secure such exemption by utilizing a Swiss acquisition vehicle (especially with jurisdictions where Switzerland does not have a 0% rate under the treaty, e.g., the US and Canada). The same applied to private equity acquisitions with a Swiss target as PE funds typically are not viewed as being entitled to treaty benefits and thus acquisition structures prone to challenges on grounds of treaty shopping.

The Swiss federal tax administration has increasingly challenged acquisition structures based on an expanding practice of anti-abuse rules. This often requires investors or multinational groups to carefully structure acquisitions or reorganizations and will require an advance tax ruling from the tax authorities. The scrutiny especially applies to private equity structures where investments structured through Luxembourg are being challenged more often if there is no relevant functional substance or people functions in Luxembourg. Clients are therefore urged to carefully review and structure such investments in order to adhere to Swiss substance requirements in order to obtain treaty entitlement.

COVID-19 pandemic 

The COVID-19 pandemic was a dominating topic in 2020 and early 2021. Many cross-border activities were interrupted due to local restrictions or lockdowns and clients facing the issue of whether such restrictions could trigger a permanent establishment in Switzerland. However, Swiss tax authorities handled the pandemic in line with the OECD recommendations and typically refrained from challenging taxpayers due to restrictions imposed during the pandemic. In addition, Switzerland concluded a multitude of competent authority agreements with neighbouring countries in order to safeguard cross-border workers' status under the applicable tax treaties (e.g., with France, Italy, Germany and Austria).

The pandemic also triggered a new wave of remote working situations and Switzerland appears to attract many cross-border workers. This has increased demand for wage and social security advice in case of remote working in Switzerland or secondments.

Outlook – Swiss tax developments 

The Swiss government has further proposed to abolish the 1% equity stamp tax to corporations. The respective bill has been passed by parliament but may be subject to a public referendum vote, with entry into force expected not before May 2022. If accepted, the abolishing would provide more flexibility in financial restructurings as debt waivers and other debt-equity swap measures would no longer trigger stamp tax.

Separately, the government proposes to abolish the 35% interest withholding tax on bonds and similar debt instruments issued by a Swiss company. The proposal would end the Swiss 10 and 20 non-bank rules which limit syndication for external financing to regulated banks and limit attractiveness on the international market. Currently, non-Swiss groups typically do not issue bonds through a Swiss entity due to the 35% interest withholding tax associated with it and Swiss groups still finance externally through foreign finance vehicles. Expected to enter into force in 2024, the change will abolish the interest withholding tax and likely lead to the relocation of external financing to Switzerland.