• Examples for the legal reduction of corporate taxes

• DTA permanent establishment concept

• Our services and fees

• Parent companies and their subsidiaries in the European Union

• OECD: Articles of the Model Convention with Respect to taxes on income and on capital

• Beware of cheap founders!

• Information about the company formations in English

• Worldwide Registries

• Table of Fees:  International Business Formations

• Basic considerations within the framework of international taxation

Introduction/summary

Switzerland has double taxation agreements = DTA with most other countries. Freedom of establishment in the European Union is not applicable. For approval of the permanent establishment according to tax laws, a commercially equipped business operation must be installed in Switzerland, and active business must be transacted in Switzerland. In addition, it is possible to install a branch of a European company. Such a branch will be treated like a Swiss GmbH without the obligation to pay CHF 20,000 capital stock. This legal form is taxed with only 8.5% in the tax law domicile privilege.

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Handbook for Investors Facts Swiss Tax

  Switzerland is a 'code' country, and business entities are governed by the Civil Code. As in all civil law jurisdictions, formation and administration of companies tends to be considerably more bureaucratic than in common law jurisdictions. Although the Civil Code is at Federal Level, businesses are domiciled in a particular canton. Each canton maintains a Commercial Register (Registre de Commerce), and the mandatory entries in the Register of subscribers, directors, capital structure etc have strict legal force. The Register is a public document.

The forms of business entity with legal personality are the Stock Corporation and its variants (dealt with below), the Limited Liability Company (Societe a Responsabilite Limite), and the Limited Partnership (Societe en Commandite). These last two are not much used by foreign investors. General Partnerships (Societe en Nom Collectif) and Sole Proprietorships (Raison de Commerce) are also possible.

The Stock Corporation

The Stock Corporation ("Societe Anonyme" or "Aktiengesellschaft") is the form almost universally used by foreign investors and has the following characteristics:

• The minimum number of subscribers is 3;
• Nominee shareholders and nominee subscribers are permitted;
• The minimum authorized share capital is 100,000 Swiss Francs of which either 20% or 50,000 Swiss Francs (whichever is the greater) must be paid up by way of a deposit of funds in a bank account; the bank will not relinquish control over these funds until the company registration certificate has been issued;
• Share capital cannot be increased by more than 50% of the authorized capital at any one time;
• Shares can be ordinary shares, preference shares, voting shares or non voting shares and can be issued at a premium; bearer shares are permitted;
• A majority of directors must be Swiss nationals and must be domiciled in the country;
• All directors must be shareholders whether they are the beneficial owners of those shares or hold as nominees (the holding of one share as a nominee is sufficient to meet this requirement);
• The company must have an auditor and a registered office;
• A person whose name appears in the articles of association signs on behalf of the company.

A company must have an auditor, and accounts must be filed each year with the Companies Registration Office. Small companies can prepare abbreviated accounts which do not have to include the level of turnover.

The Holding Company

The 'Holding' Company is a Stock Corporation with a particular tax status (see Offshore Legal and Tax Regimes). Holding companies benefit from reductions in corporate income tax and capital gains at federal and cantonal levels, and from a reduction in net worth tax at cantonal level.

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.

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 reduction in the level of corporate income payable tax depends on the ratio of earnings from "participating shareholding" to total profit generated.

Although the definition of a holding company varies among cantons, broadly speaking a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either:

• derives 51%-66% of its income from dividends remitted by the subsidiary; or
• holds 51%-66% of the subsidiary's shares.

The Domiciliary Company

Domiciliary Companies are Stock Corporations that are both foreign-controlled and managed from abroad, have a registered office in Switzerland (i.e. at a lawyer's premises) but have neither a physical presence nor staff in Switzerland. They must carry out most if not all of their business abroad and receive only foreign source income . The use of domiciliary companies can result in savings in corporate income tax levied on income and capital gains and net worth tax. See Offshore Legal and Tax Regimes.

The Auxiliary Company

An Auxiliary Company is essentially a Domiciliary Company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary Companies are possible in only seven cantons, and do not benefit at federal level. Treatment varies according to canton, but in most cases an auxiliary company may have Swiss offices and staff and be in receipt of Swiss income (which is taxed at normal rates). Most income though must be from a foreign source. See Offshore Legal and Tax Regimes.

The Service Company

Service Companies are Stock Corporations 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 cantonal tax ruling (there is no benefit at federal level). See Offshore Legal and Tax Regimes.

The Mixed Company

Mixed Companies are Stock Corporations which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. There is no benefit at federal level, but at cantonal and municipal level there are corporate income tax benefits if the mixed company meets the following conditions:

• the company is foreign controlled;
• a minimum of 80% of its total income comes from foreign sources;
• the company has close relationships to foreign entities.

See Offshore Legal and Tax Regimes.

The Branch

Branch offices, whether of foreign companies, or of Swiss companies in other cantons, must be registered in the Commercial Registry of the canton in which they are located. The branch must have a nominated, Swiss-resident representative.

Branches need not publish their annual financial statements, but branches of foreign corporations constitute 'permanent establishments' from a tax point of view, and will therefore be taxed on local source income both at federal and at cantonal level as if they were resident corporations. There is no withholding tax on transfers of branch profits to its foreign parent.

SWITZERLAND DOMESTIC CORPORATE TAXATION

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. (There is currently legislation in the pipeline that aims to terminate this variation, and to reorganise the division of responsibilities and of revenues between the federal and cantonal administrations, but the timescale of change is not yet settled). 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.

In 2005 the EU put a warning shot across the bows of the cantons by threatening the tax regime in Zug, one of the more attractive cantons to foreign companies.

In a letter sent to the Swiss Mission in Brussels in October, the EU congratulated Switzerland on its decision to extend the free labour accord with the European Union. However, the letter also went on to point out that certain parts of the Swiss corporate tax regime "may be incompatible" with Switzerland's obligations under the agreement.

"The legislation in question, that is enforced in Zug and [canton] Schwyz, is said to grant fiscal advantage to undertakings for... economic activities taking place outside Switzerland," the letter stated.

Zug denied that its corporate tax regime breaches a 1972 Free Trade Agreement between Switzerland and the European Union. Guido Jud, head of corporate tax in canton Zug, said that he was "surprised" by the EU's viewpoint.

"The rules on taxation in Switzerland have not changed recently so we do not see why, in 2005, there should be suddenly be a problem," he stated.

Currently, the tax rate for companies in Zug ranges from 14% to 17%.

The federal government has played down the affair, saying the letter was merely a request for information rather than a formal complaint against the tax regime.

By international and OECD standards Swiss tax rates are relatively low.

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.

Rates of Corporate Income Tax

Corporate income tax is levied at federal, cantonal and municipal levels.

The basic federal tax rate is 3.63% of taxable profits with an additional percentage based on a formula which relates trading profits to net worth (i.e. capital and reserves). The maximum rate of 9.8% is arrived at if profits exceed 23.15% of net worth.

Cantonal tax rates vary between 17% and 35% and like the federal tax are progressive, using a scale based on the relationship of profits to net worth.

Municipal tax on corporate income is calculated as a small proportion of cantonal tax.

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.

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 SFr 250,000 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.
• 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.
• A rate of 5% on an insurance premium or 2.5% in the case of a life insurance premium paid in one contribution.

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 1st January 2003 to 31st December 2004 is the average of profits for the like periods in 2001 and 2002.

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 applies in Switzerland, and a withholding tax of 15% is being applied to the returns on savings of citizens of EU member states.

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 50 other countries, and these determine the rates of withholding tax in most cases, rather than the general rules above.

Table of Treaty Rates

The rates shown are those of withholding taxes applied to payments made by Swiss entities or persons to non-resident entities or persons; a zero rate applies to royalties. Although Switzerland recognises the member states of the CIS as successor states to the USSR, and therefore applies its USSR Double Tax Treaty to them, they are not included in the table because the USSR treaty does not contain concessionary rates of withholding tax for dividends or interest.

• According to a recent decision of the Federal Supreme Court the transmission of such information requires the permission of the Swiss police authorities who must inform the customer about the order and give him a right to appeal;
• It is not permitted to forward information on persons who are not the subject matter of the investigation;
• Information will not be given if
  • The foreign authorities might use the information for purposes other than those for which it was requested;
  • The offence alleged is not equally punishable in Switzerland;
  • The requesting state does not offer Switzerland reciprocal treatment in these matters;
  • The offence is related to tax, politics or military matters.

• The foreign authority must be recognized by the Commission as a supervisory authority authorized to request administrative assistance;
• The foreign authority may only use the information for the purposes of direct supervision of the institution concerned;
• The foreign authority must be bound by official or professional secrecy;
• The foreign body can only re-transmit the information under very restrictive circumstances. This is called the principle of specificity and means that information that was given for the purposes of a criminal offence such as drug dealing cannot be used in proceedings for tax evasion. In practice the foreign authority must confirm that it will not so transmit the information unless required to do so by a competent court against whose decision it will appeal. Since the grant of assistance by the commission is discretionary if specificity cannot or was not guaranteed future assistance may be denied though in practice the commission is always eager to be seeing to play its part;
• If the information requested gives the name of a client he must be notitfied and given time to contest the decision;
• There is a right of appeal to the Federal Supreme Court.