Swiss corporate Taxes
There is freedom of unlimited liability to legal entities who are either a registered office or an actual administration in Switzerland. Switzerland supports the limited tax liability which applies to foreign corporations with a permanent establishment or with real estate. According to the report of the International comparison, Switzerland is a very attractive location for corporate taxpayers and entrepreneurs.
The tax system in Switzerland is classical which means a corporation and its owners or shareholders are taxed individually, it is due to economic double taxation. But to handle this situation and to reduce this double taxation the taxation of the shareholder benefitting from the dividends is lowered by 40% at the federal tax level. Some corporates have incorporated this federal Swiss corporate tax system and the rest always try to apply different systems to reduce qualified dividends.
Determination of corporate taxable profit
Switzerland has a favourable law for resident companies, according to which the resident companies are liable to pay corporate tax in Switzerland whether they are living and earning anywhere in the country. They are obliged with the exception of income attributable to foreign establishments or foreign real estate. This income is excluded from the Swiss corporate tax base and is considered for rate progression purposes in cantons that still follow the progressive tax rates.
In the case of non-resident companies, they are only liable to pay the corporate taxes in Switzerland only on Swiss-sourced income which means income and capital gains derived from Swiss business, permanent establishments or real estate property.
According to a theory, the statutory accounts and branch accounts form the basis for determining taxable income in a Swiss company and foreign company. Putting the dividend and capital gains as an exemption there are various adjustments required by tax law and the use of existing loss carryforwards, and if considering the statutory profit and taxable profit there are very nominal differences in both of them.
In Switzerland corporate tax, depreciation, tax expense, interest expense and management and service fees/ royalties are the most usual deductions allowed. The management and service fees/royalties are deductible to the extent because they fall under the arm’s- length principle.
Getting in deep the arm’s length principle is the condition or the fact that the price for a certain transaction should be the same as if the two companies involved were indeed two independents, not part of the same corporate structure.
The arm’s length principle is found in Article 9 of the OECD Model Tax Convention and is the framework for bilateral treaties between OECD countries and in many non-OECD governments.
Special Swiss corporate tax regimes
Looking at the cantonal level, there is a holding privilege which applies to pure holding companies also there is exemption of cantonal corporate profit tax. Along with this, the cantonal law defines a domicile privilege on companies who have the administration in Switzerland but whose business is conducted abroad, including shell corporations. There is only a 10% tax rate applicable on cantons on the worldwide profits of such companies.
The government is trying from long to the change the corporate tax system, and now it is being assumed that new tax reforms and financing legislation will come into force in 2020.
Switzerland’s corporate tax rates
At the cantonal and municipal level, the corporations are liable to pay income tax as well as they have to pay tax on equity.
The federal Swiss corporate tax rate is a flat 8.5% and the other Swiss cantonal tax rates may change accordingly. The rates of taxation may change due to the cantonal tax laws because they normally are subject to cantonal and municipal multipliers.
All the taxes related to corporate taxpayers are deductible in Switzerland, this may vary in other countries, so we can not compare Swiss rates 1:1 with foreign tax rates.
Swiss VAT or value-added tax
VAT(value added tax) called differently in different countries is one of the confederation’s principal sources of funding. It is levied at a rate of 7.7% on commercial goods and services, it is generally considered as a consumption tax. It has a reduced VAT rate of 2.5% on some of the goods and services like foodstuff, drugs, books and newspapers and along with this, there is tax-exemption on certain things like medical, educational and cultural services, the hotel and lodging industry has a special rate of VAT tax which is 3.7%.
While Switzerland does not fall under the EU member state, but its value-added tax system was structured according to the sixth EU VAT directive as a non-cumulative, multi-stage tax that provides for deduction of input tax. The tax regulations are designed as a tax owed by the supplier of goods or services and the tax is usually passed on to the customer as part of the price.
Tax is levied on any entity which is generating revenues through any kind of business or professional activity in Switzerland. If the tax revenue exceeds from CHF 100,000 per year, then there is a registration obligation for the individuals or corporations. In case if the revenues are less, than the entity is exempt from tax liability. Consequently, this type of entity can relinquish an exemption from tax liability.
Company Taxes in Switzerland
If a company is earning revenues from abroad than it is liable to pay tax at the rate of 9% approximately. There is a special application process for the companies who want to get benefited from this tax rate.
The companies registered in Switzerland and earning their revenues in Switzerland are subject to pay three types of tax, this payable tax ranges from 20% to 35%.
Let’s discuss the three types of taxes:
- Cantonal and municipal taxes on capital:
This tax varies according to the derived profits of the company, which means it leive 1.8 per thousand if the company derives profit and 3 percent if it does not derive profit. After this, this tax base is added to the additional surcharges, which can be cantonal and municipal. The companies which are incorporated before 2008 and 2011 have the benefit to save themselves from these additional surcharges.
- Cantonal and municipal taxes on profit:
According to the cantonal tax base, there is a tax rate of 10% on the net income for limited companies. In this, the cantonal and municipal tax base is also added.
- The direct federal tax on profit:
The direct federal tax rate on company earnings is 8.5% on the net income. According to the Federal Tax Authority taxable profit is rounded off to the lowest francs in the determination of tax.
Die 3 Nachteile- Geschaftsfuhrer, Quellensteuer und Vermogenssteuer
If you are planning to move your business to Switzerland then you have to pay three additional costs which are involved with the Swiss entity. These three director costs are Geschaftsfuhrer, Quellensteur and Vermogenssteuer.
Director Services (Geschaftsfuhrer)
The Swiss Civil Law gives a special right to the companies, according to which a company can use the service of a Director, or we can say that there are companies who provide nominee directors for clients who require legitimate confidentiality protection or who want their company to be tax resident in Switzerland.
The annual fees of the director services mostly depend on the roles and responsibilities taken by the directors. The fees generally are between 2500-3500 € per year. Remember that the director is a necessary element to make the firm taxable in Switzerland but putting it aside there are many mandatory elements which are needed to keep in consideration.
Many shareholders and their information are available publicly but some shareholder requires confidentiality for commercial reasons. This issue is recognised due to the use of nominee shareholders. The nominee shareholder will accomplish a declaration of trust in favour of the beneficial owner of the share. In this declaration, they both agree to exercise all voting rights and otherwise deal with the shares only according to the instructions of the beneficial owner. After this process, the name of the nominee shareholder than appears on all public records related to shareholding.
Withholding tax is charged on the following incomes:
- Income from capital, such as interest on securities and bank accounts.
- Annuities and pensions
- Lottery winning
- Shares in profits
The tax rate on this is applicable as follows:
- 35% on income from capital and lottery winnings
- 15% on annuities and pensions
- 8% on other insurance benefits.
This tax is refundable in the case if you declare your assets and the revenue they produce in your tax return. By doing this, the claim for a refund gets triggered. Generally, the cantonal tax gets fixed with the refund amount otherwise it is repaid to you.
Wealth Tax (Vermogenssteuer)
A progressive wealth tax differs from the residential location. Many cantons do not own wealth tax for individuals whose net worth is less than CHF 100,000 which is approx. US$102,000) by doing so they raise the tax rate on net assets with a top rate ranging from 0-.13% to 0.94% depending on canton and municipality of residence. The wealth tax is levied on worldwide assets of Swiss residents, but it is not levied against assets in Switzerland held by non-residents.
Tax at the source (Quellenssteuer)
The tax gets automatically deducted from the income (tax at source) of People who are residents of abroad but works in Switzerland. The individuals who live in Switzerland and own a residence permit (permit C), needs to declare their income and assets in a standard tax return.
This tax gets deducted directly from your salary. If you are a worker from abroad your employer will do this along with the following condition:
- You haven’t received a residence permit and you are living in Switzerland for tax purposes.
- You are earning an income in Switzerland without having a resident there. This case occurs when you work as a (cross-border commuter, weekly resident, conference speaker, sportsperson, artist etc)
If you are a foreign worker resident in Switzerland for tax purposes and your income exceeds from a certain limit, the whole income and assets will be carried out for statutory assessment.
The limit for income is CHF 120,000 for confederation.
It is different for various cantons. For more details, you can consult the tax office in your canton.
Banking and payment in der Schweiz
The (SBA) Swiss Bankers Association estimated in 2018 that Swiss banks held US$6.5 trillion in assets or 2.5% of all global cross-border assets.
There are some serious advantages to this:
- Switzerland holds some secrecy laws which are unparalleled and strictest in the world. Due to this Switzerland is attractive for people with bigger financial assets.
- Switzerland is politically stable and historically neutral thus it is a perfect place for private banks and financial services.
- Swiss Accounts are paying higher yields than foreign counterparts and money markets.
- The banking system in Switzerland is the world’s secure platform in the world. According to a survey, Swiss banks are one of the most liquid ones in the world by providing the highest possible assurance and keeping safe funds of their depositors.
- Nowadays, it is not difficult to open your account with Swiss banks because due to the internet security the accounts can be opened with a minimum of CHF 5000.
- The banks in Switzerland plays a big part in contributing to the Nation’ economy and it is famous for its professionalism.
- These banks maintain several security protocols and due to which these banks are quite commercial and their fees are higher compared to the local banks.
- These banks do not own many branches in the local areas but it gives its access to the funds through e-banking, mobile app, and token that directly provides you with access to the money.
Corporates Taxes in Switzerland
Usually, cantons have many competitive CIT rates for both tax purposes either it is cantonal or communal. It generally depends upon the specific cantonal and communal tax location in Switzerland, all three federal, cantonal, and communal CIT rates are applicable on profit before tax and the rates of tax may differ between 11.5% and 24.2%
The cantons always focus on improving their attractiveness as business locations. It is important to take care of the cantons to credit CIT against the capital tax to diminish the overall tax burden.
Privileged cantonal tax regimes
There are many cantons who offer privileged corporate tax regimes. It is all come into the process by a request, after requesting an upfront confirmation from the relevant cantonal tax authorities is important. The confirmation for this is done by a process in which the tax authorities make sure that the planned business activities of an entity are meeting the requirements as predicted by the pertinent cantonal tax laws for a specific privileged tax regime. It is mandatory that such up-front confirmation qualifies as an advance tax ruling that is related to the spontaneous exchange of information.
There are several chances when the TRAF will abolish the privileged cantonal tax regimes, by replacing it with other measures. Moreover, there are many transitional rules which are applicable and available.
The TRAF is currently concerned with a facultative referendum. When the referendum is successfully called, 19 May 2019 is scheduled for public voting in Switzerland and after the confirmation of TRAF for the public vote, the majority of the reform package is expected to enter into force on 1 January 2020.
Holding company tax regime
There is an exemption from all cantonal/communal CIT for a qualifying holding company, these holding companies are also exempted by the income from Swiss real estate, in general, which is taxed after a deduction of typical mortgage expenditures on such real estate.
Consequently, a holding company is only subject to an effective CIT rate of 7.83% prior to participation relief for qualifying dividends and capital gains. Moreover, the reduced capital tax rate at the cantonal/communal level applies.
Following conditions are necessary to meet the holding company tax status:
- To meet and manage the long term equity investments in subsidiaries is the main purpose of the company.
- It is important that the company does not get involved in any commercial activity in Switzerland.
- The company has successfully passed an alternative asset or income test, according to which two-thirds of the company’s assets must consist of substantial shareholdings or participations or two-thirds of the total income of the company must consist of participation income form shareholdings and participation.
It is mandatory to obtain advance confirmation from the cantonal tax authorities which clarifies the specific company will qualify for the criteria of the holding company status as foreseen by the relevant cantonal tax laws before incorporating a holding company.
Domicile company tax regime
The companies who only performs the administrative functions in Switzerland and does not involve in any commercial activities are usually acceptable for the domicile company tax status.
As discussed above, if the company is attaining above criteria it will get the domicile company tax regime, which has the following implications at the cantonal CIT levels:
- A major part of foreign-source income is related to tax in accordance with the importance of the administrative function in Switzerland.
- Income from different gains like dividends, capital gains, and re-evaluation gains is normally exempted from tax.
- Tax is applied on ordinary rates to all income from Swiss sources.
- The expenditures related to business purposes are justified and deductible from the income to which they have a business correlation.
- Reduced capital tax rates usually are applicable.
There are various conditions to qualify as a domicile company from canton to canton. In this case, the percentage of income from foreign sources is related to tax in Switzerland and it is difficult to analyse the foreign-source of income.
An effective tax rate of 8% to 11% on foreign income is applicable to a domicile company.
The mixed trading company tax regime
The mixed trading company tax status is quite similar to the domicile company tax status, due to some small differences their names are different by cantons. On the international level, it is considered as the mixed trading company tax status.
Contradictory to a company benefited from the classical domicile company tax status if benefited from the mixed trading company tax status it allows undertaking limited commercial activities in Switzerland.
According to a rule, at least 80% of the income from commercial activities of a mixed trading company it must derive from non-Swiss sources. Mostly cantons require at least 80% of the costs must be related to activities undertaken abroad.
As discussed above, if a company completes the above criteria it will automatically get benefitted from the mixed trading company tax regime. Generally, it depends upon the concrete Swiss activity and infrastructure, the portion is concerned with cantonal and communal income taxes and it differs from 5% to 25% of the foreign-source income and it is quite high than the domicile companies. The proper portion is based on the specific business activities of a company, it may need to be clarified with the responsible cantonal tax authorities in case of the general guidelines would not cover a specific case.
Foreign tax credit
Swiss tax resident corporations have to face several types of taxes like foreign non-recoverable WHTs on dividend, interest, and royalty income which is derived from foreign sources. According to the law in Switzerland, the foreign-source income is related to corporate income tax and due to which double taxation occurs. In this situation, a DTT exists to reduce or to eliminate double taxation, in Switzerland the credit is applicable generally. There are specific conditions and formalities which are needed to meet the benefit from foreign tax credits.
Switzerland portion private tax rulings with other nations for the first time
On May, 8 Switzerland’s Federal Tax Administration (FTA) has announced that for the first time it transmitted information on private tax rulings to partner states because of this its obligation of spontaneous exchange of information.
By doing so, Switzerland continuously exemplifies its commitment to implement international standards in the area of taxation requiring tax transparency.
Under the voluntary exchange of information, different tax authorities are liable to share information in case of encountering something that is an interest of another state. The Advance tax rules are not directly exchanged but an agreed template containing the information from the tax ruling is voluntarily exchanged.
Particularly, the FTA has transmitted the first batch of 82 reports to a total of 41 states, which includes countries like France, Germany, the United Kingdom, the Netherlands, and Russia. Several other reports are also exchanged with different states and exchange concerned private tax rulings that were still effective on 1 January 2018.
The basis of this exchange is tax administrative assistance rules which were introduced by Switzerland after it ratified the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters. These exchanges were caused within the structure of the OECD/G20 base erosion profit shifting (BEPS) project.
The cantonal tax administrations usually take the responsibility of the advance tax rulings in Switzerland. Furthermore the FTA, at the federal level. Carries the administrative assistance procedure and transmits the agreed template containing the information regarding the rulings to the partner states. The cantons do not own any authority transmissions. They just forward the rulings to the FTA.