Switzerland: Double Tax Treaties
Switzerland has Double Taxation Treaties with over 80 other countries, more than 30 of which are based on the OECD model. The general effect of the treaties for non-residents from treaty countries is that they can obtain a partial or total refund of tax withheld by the Swiss paying agent. Although the full amount of withholding tax is deducted at source the difference can be re-claimed by the non resident from the Swiss tax authorities. Where there is no double taxation treaty in place withholding taxes deducted in the foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland.
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.
Treaty abuse: A repayment of withholding taxes under the terms of a treaty will be denied where there has been "abuse". Abuse occurs when a foreign-controlled legal entity which is resident in Switzerland fails one of the four following tests:
- The entity must have a reasonable debt/equity ratio (generally the total of all interest-bearing loans should not exceed 6 times the company's equity);
- The entity must not pay excessive interest rates on debt (for the purposes of this test the accepted rate varies from time to time);
- The entity must not pay more than 50% of its income as management fees, interest or royalties to non residents;
- The entity must distribute at least 25% of the income which could be distributed as dividend.
Where any one of the four tests are failed, the portion of withholding tax deducted and which is deemed refundable under the terms of the treaty is not refunded.
Additionally, treaty provisions do not apply to dividends, interest or royalties paid by a Swiss entity to a German, Italian, French or Belgian entity if the Swiss entity is wholly or partly exempt from cantonal tax under the tax incentives applicable to specific types of company (i.e. domiciliary, holding, auxiliary, mixed and service companies). See Offshore Legal and Tax Regimes.
The following are some of the countries which have double-tax treaties with Switzerland:
On March 13, 2009, the Federal Council announced that Switzerland intends to adopt OECD standards on administrative assistance in tax matters in accordance with Article 26 of the OECD Model Tax Convention. The decision permits the exchange of information with other countries in individual cases where a specific and justified request has been made. The Federal Council decided to withdraw the corresponding reservation to the OECD Model Tax Convention and to enter into negotiations on revising double taxation agreements. It maintains, however, that Swiss banking secrecy remains intact.
According to the Swiss, the adoption of the OECD standard will have no impact on the situation for taxpayers resident in Switzerland. The right of the Swiss tax authorities to access bank data under Swiss domestic law is not affected by the decision, stated the Federal Council's release. The Council also stated that it "resolutely rejects any form of automatic exchange of information."
The decision of the Federal Council is being implemented within the framework of bilateral double taxation agreements. The greater scope for exchange of information only has practical effects when the renegotiated agreements come into force. In addition, adjustments must be made to the agreement with the EU on the taxation of savings income.
The Federal Council laid out the following conditions for its future policy on administrative assistance in tax matters:
- Respect for established administrative assistance procedures
- Restriction of administrative assistance to individual cases (no fishing expeditions)
- Fair transitional solutions
- Limitation to taxes covered by the OECD Model Tax Convention
- The principle of subsidiarity in accordance with the Model Tax Convention
- Willingness to eliminate discrimination.
In January 2007, Switzerland and Japan agreed to take up bilateral negotiations regarding an economic partnership and free trade agreement. A joint study group whose aim it is to strengthen economic relations between Switzerland and Japan had, over the previous twelve months, undertaken a feasibility study at the official level of a comprehensive economic partnership and free trade agreement between Switzerland and Japan. In its report, the study group concluded that such an agreement would significantly enhance bilateral economic relations (trade in goods, services, investment), and could strengthen the competitiveness of firms in both countries. Japan is Switzerland's third most important trade partner (after the EU and the USA).
Also in January 2007, Federal Councillor Doris Leuthard signed the EFTA Free Trade Agreement with Egypt and reported that "considerable progress" has been made in negotiations regarding a free trade agreement between the EFTA States and Canada. EFTA ministers have also met with the Indonesian Minister of Trade to discuss the feasibility of a comprehensive trade agreement. The other EFTA members include Iceland, Liechtenstein and Norway.
In February 2007, Ms Leuthard, who heads the Federal Department of Economic Affairs (FDEA), led a Swiss business delegation to Brazil with the aim of improving access to the Brazilian market for Swiss products and investment. The visit was expected to lead to the signature of a Memorandum of Understanding between Switzerland and Brazil, and the creation of a Joint Economic Commission. Brazil is one of the few countries with which Switzerland has so far had neither an investment protection agreement nor a double taxation convention.
A protocol to the double taxation convention between the United Kingdom and Switzerland was signed in London on 26 June 2007.
The protocol makes some amendments to the existing double taxation convention, dated 8 December 1977. The main amendments are the elimination of taxation at source on dividends, where the beneficial owner of the dividends has a substantial participation in the payer or is a pension scheme.
The protocol also amends the exchange of information article. It provides that, in future, information will be exchanged in cases of tax fraud or the like, and in cases involving holding companies.
Measures are also contained in the new protocol relating to pensions. In future, lump sum payments may be taxed only by the state in which they arise. Also, pension contributions paid to a scheme recognised for tax purposes in one country may, under certain conditions, be deductible in the other country.
In October 2010, an agreement was signed to begin negotiations towards an agreement that will see undeclared accounts held by Britons in Switzerland taxed and more information with regards tax and banking information shared between the two states. The agreement will, among other things, expand cross-border cooperation in tax matters and improve market access for banks. Negotiations commenced at the beginning of 2011 and the agreement was signed on Ocotber 6, 2011. A protocol clarifying outstanding issues was signed on March 20, 2012.
The protocol became necessary to appease the EU Commission which had expressed the view that the agreement might contravene the European treaty. Threatened with a possible challenge at the European Court of Justice, the UK and Switzerland have agreed that account holders who have already paid the 35% withholding tax as due under the European Savings Tax Directive will be subject to a final 13% withholding tax in order to discharge tax liability on interest payments.
The protocol also provides for inheritance to be included in the agreement. Beneficiaries of an undisclosed Swiss bank account must either pay inheritance tax or consent to it being disclosed to the UK authorities.
Officials from Turkey and Switzerland met in the Turkish capital, Ankara in May 2008 to discuss matters of a commercial and economic nature.
According to a report from the Turkish Press, Turkey's Deputy Undersecretary, Ulker Guzel and Switerland's head of Bilateral Economic Relations, Monica Ruhl deliberated over several subjects important to both countries, including measures to increase bilateral investment, disputed trade issues, and various other matters.
An agreement between Switzerland and Turkey with the aim of eliminating the double taxation of income tax was then signed in Bern, following bilateral discussions focusing on budgetary and fiscal policies. The agreement was ratified by Switzerland on 25 August, 2010.
Negotiations concerning this agreement began back in 1986. The differing policies on agreements pursued by each country explain why the process has been so drawn out, and according to the Swiss authorities, show "the determination of the parties to reach a compromise".
To a large extent this agreement follows the OECD Model Agreement and Swiss policies in this regard.
The first round of official negotiations for the revision of the double tax avoidance treaty between Japan and Switzerland were held in Bern from November 17 to 20, 2008. This was the first round of negotiations for the revision of the treaty since it was concluded in 1971.
In addition to this, on September 29, 2008, the two countries confirmed that agreement in principle had been reached on the Agreement on Free Trade and Economic Partnership (EPA).
Under the trade agreement, both sides have agreed to eliminate or reduce tariffs on industrial, agricultural, forestry and fishery products comprehensively. In addition, the agreement contains provisions on non-tariff measures.
In a statement on January 16, 2009, Doris Leuthard, head of the Swiss Department for Economic Affairs, announced that she would travel to Tokyo on February 19 to sign the accord and finalise the agreement.
It was announced in November 2008 that Pakistan and the Swiss Confederation had signed an updated treaty for the avoidance of double taxation which sets new withholding tax rates for dividend, interest and royalty income.
Tax officials from both countries met in Islamabad on November 24, where they exchanged the necessary Instrument of Intent to bring the Agreement into force.
According to the revised Agreement, companies with a 20% participation in dividends will be taxed at 10%, with all other cases to be taxed at 20% in the source country. The withholding tax rate on interest, royalties and fees for technical services will be 10%. Students with an income of CHF18,000 or less will be exempt from paying tax on their earnings.
At the end of 2008, the French Prime Minister François Fillon unveiled plans, not only to sign a bilateral tax agreement with Switzerland, but also to implement – on a bilateral basis – the anti-fraud agreement established between Switzerland and the European Union, even though this agreement has not yet been fully ratified by all member states.
Demonstrating a marked softening of attitude, Fillon emphasised his determination to forge ahead and foster closer trade and economic relations between the two countries, despite acknowledging remaining differences in fiscal policy. Indeed, in a bid to overcome these differences, both sides have resolved to establish a working party, designed to evaluate individual policies, and propose a way forward.
Keen to clarify that France does not regard its neighbour as a ‘tax haven,’ Fillon did, however, express his hope to persuade Switzerland to comply with key regulations drawn up by the Organisation for Economic Co-operation and Development, in terms of fiscal exchange of information, and reaffirmed France’s determination to take resolute action against any areas deemed insufficiently regulated or transparent.
In December 2008, Micheline Calmy-Rey, Swiss Minister of Foreign Affairs, visited Malta to sign a double taxation avoidance agreement with her Maltese counterpart, Tonio Borg.
The statistics for January to July 2010 show that imports from Switzerland were EUR72m (mainly pharmaceuticals, jewellery, electric machinery), down from EUR91.2m for the same period in 2009, while Malta’s exports rose to EUR9.3m (mainly machinery and pharmaceuticals) compared to EUR5.7m in the first half of 2009.
The agreement will enter into force following ratification by both countries.
The Protocol amending the Double Taxation Convention between Switzerland and the United Kingdom for the Avoidance of Double Taxation with respect to Taxes on Income entered into force on December 22, 2009.
The most important amendment to the Double Taxation Convention of December 8, 1977 is the full exemption from tax at source on dividends paid to a company with a substantial shareholding in the company paying the dividends, or to a pension scheme.
Full exemption from tax at source will apply to dividend payments between companies where one company holds at least 10% of the capital of the company paying the dividends. Dividend payments to pension schemes will also be exempt from tax. For all other dividend payments the state in which they arise retains a residual tax rate of 15%, i.e. any tax at source may not exceed 15% of the gross amount of the dividends.
The Protocol also contains new measures on the taxation of pensions and deduction of tax on pension contributions. In future, lump sum payments from pension schemes may be taxed only by the state in which they arise. Furthermore, pension contributions paid in one contracting state will, under certain circumstances, be tax-deductible in the other contracting state.
In accordance with Switzerland's commitments within the OECD and towards European Union member states, the Protocol extends administrative assistance to holding companies and cases of tax fraud or similar offences.
The provisions of the Protocol are applicable to Swiss taxes from January 1, 2009 and concerning British taxes, from April 1, 2009 for corporation tax and from April 6, 2009 for income tax. The entitlement to tax credits in relation to dividends paid by companies resident in the UK to residents in Switzerland will be terminated for dividends paid on or after April 6, 2009.
In March 2009, Swiss Finance Minister Hans-Rudolf Merz announced that discussions into an OECD model agreement with Japan were well advanced.
Merz explained that Switzerland would initially sign treaties with those countries of ‘primary’ importance to the Swiss economy. Japan, as a crucial trade partner, bolstered by the signing of a free trade agreement in February, and already in discussions with Switzerland over the possibility of a double tax agreement, naturally made it ‘top of the pile’, informed Merz.
The agreement was signed on May 21, 2010, and came into force on January 1, 2012.
Merz underlined that Switzerland would also give priority to countries who had expressed an interest on re-negotiating an existing double tax agreement. Addressing the proposed double tax treaty with the United States, Merz announced that: “The United States Finance Minister, Timothy Geithner, rang to announce Washington's interest on March 13, about five hours after the Swiss cabinet announced its plan to ease banking secrecy.”
Speaking to a press conference on March 25, Merz announced that negotiations into the possibility of concluding a revised treaty were underway but warned it would not be a rapid process.
Elaborating on Switzerland’s OECD standards adoption plan, Merz underlined that negotiating an agreement with the EU would be a long-winded process, and therefore tackled later, but announced that Switzerland would endeavour to conclude OECD model agreements with Poland (in force January 1, 2012), and the Netherlands (in force November 9, 2011).
Merz added that negotiations were being dealt with post haste but warned against countries expecting further concessions. Merz emphasized that Switzerland would only offer concessions where the same was offered in return, welcoming particularly better access for Swiss insurance firms in partner countries. The Swiss Finance Minister did, as ever, rule out concessions on the country’s banking secrecy regime, reaffirming that Switzerland would offer assistance in cases with conclusive evidence, not ‘fishing expeditions’.
Switzerland and the US signed a protocol amending the double tax treaty on September 23, 2009. It is yet to enter into force.