SWITZERLAND: An Introduction to Tax

Switzerland consistently ranks highly in terms of innovation and competitiveness, and this also applies to the general tax environment. International tax and economic developments also impact Switzerland and have triggered several legislative changes in the past and will no doubt continue to do so in the future. This overview outlines some key trends in the Swiss tax landscape.

Impact of the OECD Pillar Two Proposal 

The OECD’s Pillar Two proposal, which aims to introduce a global 15% minimum tax rate, prompted Switzerland to enact new measures. Provided the mandatory referendum (18 June 2013) is successful, the Swiss government will likely implement the GloBE Rules as of 1 January 2024 – unless the implementation progress is slower in other countries.

It is currently the plan that cantons, rather than the federal government, will levy a 15% top-up tax in line with the OECD’s GloBE Rules – ie, an additional tax to account for a potential delta from the Swiss tax levied under current rules. Hence, Switzerland will not cease taxation rights on profits to other jurisdictions but will ensure it takes advantage of the additional tax levied under Pillar Two. As the Swiss tax basis is determined based on the local Swiss generally accepted accounting principles (GAAP), the calculation of the 15% top-up tax under GloBE will be a key focus point for the 2023 financial year – given that the calculation of the net GloBE income will be based on an accepted accounting standard (in most cases, the International Financial Reporting Standards).

Swiss-Specific Impacts of Pillar Two 

Pillar Two poses several interesting questions and issues for Swiss-based businesses, as some Swiss cantons provide for an overall combined effective tax rate below the 15% threshold (and calculated on a tax basis different from GloBE). The following aspects show that nearly all companies active in Switzerland are substantially affected by Pillar Two.

Jurisdictional blending 

Some Swiss cantons provide for tax rates in excess of 15%, whereas some are below the GloBE threshold. Assuming there are no material changes in the tax basis for the purposes of Pillar Two, jurisdictional blending may result in Swiss operations not being subject to a top-up tax – given that the aggregate Swiss income is subject to an effective tax rate (ETR) higher than 15%.

Participation reduction 

Switzerland applies an indirect exemption to income from qualifying investments. Instead of excluding such income from the tax basis, Switzerland reduces the tax calculated on the total income by the ratio calculated from the net participation income to taxable profit. This also means that where there is substantial dividend income, the participation reduction would also exempt other income (interest, royalties, etc) from taxation. As Pillar Two applies a direct exemption method, Swiss holdings will almost certainly be faced with a higher cash tax expense and thus are required to review existing set-ups.

Step-up in basis 

With the recent corporate tax reform implemented as of 2020, Switzerland allowed for a tax-neutral step-up in basis for companies or permanent establishments that previously applied a tax regime (eg, mixed company regime, holding regime, principal regime and the Swiss finance branch). Similarly, Switzerland introduced the possibility of a tax-neutral step-up in basis upon migration or relocation of assets and functions to Switzerland. This step-up allows for the recognition of the fair value of the transferred assets or goodwill with a subsequent tax effective amortisation.

Under the GloBE Rules step-ups may be an issue where such transaction has been implemented in the gap period (ie, between 1 December 2021 and the application of GloBE Rules) or if such step-up has not been properly recognised for accounting purposes – for example, the deferred tax asset is not recognised.

Swiss Dividend Withholding Tax as key issue in cross-border M&A

Switzerland levies a 35% dividend withholding tax and requires the application of a double tax treaty in order to grant an exemption at source.

For investors located in a jurisdiction where a direct investment would not benefit from a 0% dividend withholding tax rate (eg, US, Canada and Brazil), tax-efficient investment structures have been a key consideration.

The Swiss federal tax administration, however, has increasingly challenged acquisition and holding structures under a very broad notion of anti-abuse. These anti-abuse rules broadly cover the following three fact patterns.

1. Old-reserves doctrine – if a reorganisation or third-party sale results in a more beneficial withholding tax refund position (eg, switches from a residual withholding tax rate to a 0% rate), withholding tax is continued to be levied based on the previous residual rate until any distributable profits (tainted reserves) that existed at the time of such transaction have been fully distributed.

2. International transposition – if a shareholder that has not been in a position to obtain a full refund of Swiss withholding tax sells a Swiss target into another Swiss entity against either debt or reserves from capital contributions (the repayment of which is not subject to withholding tax), dividend distributions of the target to the acquiring Swiss entity will be subject to a 35% non-refundable withholding tax.

3. Extended international transposition – a non-refundable withholding tax leakage may also occur if a third-party acquirer, which is not entitled to a full refund of Swiss withholding tax, acquires a Swiss target through a Swiss acquisition vehicle that is financed in order to allow repatriation without Swiss withholding tax.

The above-mentioned anti-avoidance rules have been recently confirmed to some extent in case law. Although the Swiss federal tax administration in some cases only levies withholding tax to the extent that the investors would also be subject to a residual withholding tax under an applicable treaty (eg, 5% leakage if a treaty provides for a 5% rate), newer case law seems to indicate that any dividend withholding tax may be non-refundable (ie, 35% tax leakage). Acquisition and buy-out structures are therefore subject to strict rules that need careful review prior to implementation.

The Outlook 

The international tax agenda will keep on impacting Switzerland and local businesses. Given that Swiss operations continue to benefit from a stable and business-friendly environment, in which taxation complies with international standards without exceeding the international 15% consensus, Switzerland will remain a prime location.