SWITZERLAND: An Introduction to Tax

Switzerland maintains a strong policy on fostering a competitive business environment with a focus on innovation and high-end quality. The country regularly scores top marks in terms of rankings for competitiveness, innovation and its tax environment, as is the headquarter jurisdiction of a multitude of multinationals from all sectors such as Roche, Nestlé, Novartis, ABB, UBS, Zurich Insurance, Holcim and Glencore.

International tax developments, increasing geopolitical tensions as well protectionist policies however also impact Switzerland. Below is a summary of the key tax trends and important factors for Swiss business in 2025.

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. After a public referendum vote accepted the introduction of Pillar Two implementation legislation, the Minimum Tax Ordinance, the Swiss government introduced a Qualifying Domestic Minimum Top-up Tax (QDMTT), effective from 1 January 2024, and an Income Inclusion Rule (IIR), effective from 1 January 2025. The Undertaxed Payments Rule (UTPR) was delayed indefinitely due to concerns that such measure was in breach of existing double tax treaties or bilateral investment treaties and in view of US criticism towards such measure as the USA is the largest FDI investor in Switzerland.

The application of Pillar Two remains a substantial challenge. The Swiss domestic legislation contains a direct static reference to the Model Rules but applies the Commentary as well as the Administrative Guidance issued from time-to-time as a means of interpretation. For Administrative Guidance, this poses the issue that such guidance can only be applied if it does not alter or deviate from the initial Model Rules. Otherwise the Swiss government would be required to re-issue the domestic implementation ordinance in view of constitutional issues on retroactivity.

Swiss-Specific Impacts of Pillar Two 

Switzerland has an average corporate income tax rate in most cantons of 14-16%, meaning that, depending on the exact structure, Swiss businesses may face top-up tax liability under Pillar Two.

For  Swiss-based businesses, the following key Pillar Two questions remain.

• 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 as the aggregate Swiss income is subject to an 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.
• Impairments on investments and recapture: Switzerland allows for tax deductibility of impairments on participations with a recapture rule. For GloBE purposes, neither the impairment nor the recapture would be part of GloBE income and thus may trigger distortions without proper election under the Model Rules. Separately, it is also possible to defer such tax deduction under Swiss law in order to re-align domestic tax rules with GloBE rules.
• Deferred taxes: the recent 2025 guidance issued by the OECD aimed at limiting pre-existing deferred tax assets which may require businesses in Switzerland to verify through in-depth analysis whether a DTA is in scope of such guidance and if other measures may apply (Grace Period or Switch-Off Rule). This new guidance partially impacts certain mandatory transition rules Switzerland introduced in a corporate tax reform in 2020. Depending on the choices made by groups in 2020, such choices now imply either a benefit or disadvantage under GloBE with a substantial risk of top-up for affected groups.

Increased Focus on Transfer Pricing

Swiss federal and cantonal tax authorities show an increased focus on transfer pricing issues. After publication of comprehensive transfer pricing guidance in 2024, there has been a a strong increase in TP disputes as well as requests for adequate benchmarking and documentation.

For instance, similar to the USA, Switzerland provides for safe harbour interest rates for intercompany financial transactions. However, international developments may require groups to deviate from such safe harbours on a regular basis and thus will require transfer pricing documentation. During audits, it appears that advance documentation is generally more successful than operating after the fact. Therefore, even if Switzerland has no mandatory transfer pricing documentation requirements such as Local or Master Files, it is best practice to document and evidence main transactions within a group.

In recent case law, the Swiss Supreme Court even held that if a taxpayer deviates from a safe harbour rule, a tax administration technically can increase the transfer pricing adjustment beyond the safe harbour threshold thus increasing a potential tax risk even further if no substantiation can be provided by the taxpayer.

Swiss Withholding Tax as a General Hurdle

Switzerland levies a 35% withholding tax notably on dividends unless reduced in full or part under an applicable double tax treaty or other international law instrument.

Swiss anti-avoidance rules applied by the Swiss Federal Tax Administration (SFTA) require thorough handling especially in the context of cross-border reorganisations or even in third-party acquisition structures. These rules include the following.

• Old-reserves doctrine: if a reorganisation or third-party sale results in a more beneficial withholding tax refund position (eg, switch 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) which existed at the time of such transaction have been fully distributed. Withholding tax is imposed on the lower of (i) any non-business assets maintained by a Swiss entity (Amount A, Asset Test) and (ii) freely distributable profit reserves under Swiss corporate law (Amount B, Equity Test). Any intra-group reorganisation may therefore carry the risk of transferring a latent withholding tax liability if it is not properly addressed.
• International transposition: if a shareholder which has not been in a position to obtain a full refund of Swiss withholding tax sells or contributes 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.
• Extended international transposition: similar to the above, 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 which is financed in order to allow repatriation without Swiss withholding tax.

The SFTA has now introduced a relaxation of these rules, notably if a transaction involves minority shareholders or includes external third-party financing and/or rollover structures for a Swiss acquisition vehicle.

In any event, the rules still generate complexity and require a thorough analysis for Swiss M&A structures (especially for private equity investments) prior to implementation.

Outlook – Swiss Tax Developments 

2025 will see an increase in transactional matters such as public takeovers, relocations as well as private equity deals. It will further be a year of challenge for groups subject to Pillar Two, but there has generally been a strong trend towards inbound investment into Switzerland since December 2024.