Switzerland: Offshore Legal and Tax Regimes
Tax Treatment of Tax-Privileged Operations
The “Bonny Decree”, which provides for federal assistance in the form of a federal tax holiday for up to ten years for companies bringing economic value-adding activities to specific regions in Switzerland, ended in 2008. Most cantons also grant tax holidays to companies bringing economic value-added functions and creating significant new jobs for up to ten years.
See Domestic Corporate Taxation for the general principles of Swiss corporate taxation, which also apply to offshore entities except as indicated below.
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 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.
Although the definition of a holding company varies among cantons a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either
- derives at least 51%-66% of its income from dividends remitted by the subsidiary; or
- holds at least 51%-66% of the subsidiary's shares.
Generally speaking foreign dividends remitted to a Swiss company and any capital gains realized by a Swiss company on the sale of shares in a foreign entity in which it holds a stake are taxable in Switzerland unless they are remitted to a company which by Swiss fiscal law is defined as a Swiss "holding" company.
Swiss holding companies enjoy the following relief from corporate income tax:
- At federal level a holding company pays a reduced level of corporate income tax on any dividend income received from the subsidiary or the company in which it holds a "participating shareholding". The reduction in the level of corporate income tax payable depends on the ratio of earnings from "participating shareholding" to total profit generated.
- At cantonal or municipal level no corporate income tax is payable on income represented by dividends so long the corporate entity meets the cantonal definition of a holding company.
Furthermore holding companies which hold a minimum of 20% of the share capital of a subsidiary pay reduced corporation tax on any capital gains made on the sale of that shareholding so long as
- the shareholding was held for at least one year and was purchased after 1st January 1998; or
- the shareholding was purchased before 1st January 1997 and will be disposed of after 1st January 2007.
Fribourg is currently considered the best canton in which to locate a holding company for corporate income tax purposes.
Domiciliary companies are companies that:
- are both foreign-controlled and managed from abroad;
- have a registered office in Switzerland (i.e. at a lawyer's premises);
- have neither a physical presence nor staff in Switzerland;
- carry out most if not all of their business abroad;
- receive only foreign source income.
Domiciliary companies enjoy the following relief from corporate income tax:
- At a federal level there are no tax advantages in terms of corporate income tax payable on income and gains;
- At a cantonal and municipal level the corporate income tax rate may be substantially reduced or even reduced to zero; taxes levied by the cantons are calculated according to a formula which relates the company's paid up share capital and reserves to profit.
An auxiliary company is essentially a domiciliary company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary companies can exist in only seven cantons. An auxiliary company may:
- have Swiss offices and staff;
- be in receipt of Swiss income (which is taxed at normal rates) though most of its income must be from a foreign source.
Auxiliary companies enjoy the following relief from corporate income tax:
- At a federal level no exemptions are granted on corporate income tax;
- At a cantonal and municipal level the level of corporate income tax payable on income and capital gains varies among the 7 cantons who give favorable treatment. However, in general Swiss-sourced income is taxed at 5% whereas foreign-sourced income is tax exempt. The tax concessions can vary and an advance tax ruling should be sought.
Service companies are companies 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 tax ruling.
Service companies enjoy the following relief from corporate income tax:
- At a federal level relief is not available on corporate income tax payable;
- At a cantonal and communal level corporate income tax rates will be adjusted depending on the international orientation of the services provided. There are a number of ways of calculating annual taxable profit for cantonal and municipal purposes but generally speaking annual taxable profit will be the equivalent of 8.5% of the payroll or 5%-20% of overheads (unless overheads are very low in which case a higher percentage rate will be used).
Mixed companies are companies which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. A mixed company gets the following relief from corporate income tax:
- At federal level no relief is granted;
- At a cantonal and municipal level a mixed company may pay reduced tax or be totally exempt if it meets the following conditions:
- it is foreign controlled;
- a minimum of 80% of its total income comes from foreign sources;
- the company has close relationships to foreign entities.