SWITZERLAND: DOUBLE TAX TREATIES

Switzerland Double-Tax Treaties

Switzerland has Double Taxation Treaties with about 70 other countries. 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 4 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 4 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 Regime.

The following are some of the countries which have double-tax treaties with Switzerland:

Albania Argentina Armenia Australia Austria Azerbaijan Belgium Belarus Bulgaria Canada China Czech Republic Denmark Ecuador Egypt Estonia Finland France Georgia Germany Greece Hungary Iceland India Indonesia Iran Ireland Israel Italy Ivory Coast Jamaica Japan Kazakhstan Kirghistan Kuwait Latvia

Lithuania Luxembourg Macedonia Malaysia Mexico Moldova Netherlands New Zealand Norway Pakistan Philippines Poland Portugal Romania Russia Serbia Singapore Slovakia Slovenia South Africa South Korea Spain Sri Lanka Sweden Tajikistan Thailand Trinidad & Tobago Tunisia Turkmenistan Ukraine United Kingdom United States Uzbekistan Venezuela Vietnam

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 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 will make 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.

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Switzerland Other International Agreements

Switzerland has passed its own mutual assistance law, and is also a party to a number of international mutual assistance treaties, some multilateral and some bilateral, including the following:

• The European Convention on Mutual Assistance in Criminal Matters, 1959;
• Treaty on Mutual Assistance in Criminal Matters with the USA, 1973;
• The Federal Act on International Mutual Assistance in Criminal Matters, 1983, as amended in 1997;
• The European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, 1993.

In 2001 the European Union began negotiations with Switzerland to attempt to gain agreement to the information-sharing required as part of the EU's withholding tax directive and without which it will not be effective.

Switzerland was politely helpful, offering to extend its 35% withholding tax on resident savings income to non-resident account holders, and to distribute much of the tax collected among EU member states, but the government was adamant that it will not shift on the issue of banking secrecy. The Finance Minister, Kaspar Villiger confirmed this, commenting frequently that: 'Banking secrecy is not negotiable'.

Jean-Baptiste Zufferey, a Swiss tax expert and professor at the University of Fribourg expresses the situation more bluntly: 'It's not because we fear banks would lose business, but most Swiss people have an attachment to the idea that a human being is entitled to financial privacy. It is the problem of foreign countries if they cannot tax their citizens. We in Switzerland don't have to help other countries do their job.'

This posed a serious problem for the EU - not just because the alpine jurisdiction is home an estimated one third of the world's offshore wealth, but because other countries, in particular Luxembourg and Austria, had said that they would refuse to back information exchange plans if Switzerland does not participate. The EU had set the end of 2002 as the deadline for final adoption of its information exchange plans, but Luxembourg's refusal to accept the Swiss compromise position as acceptable meant that negotiations continued into 2003. After last-minute haggling by Italy and Belgium, it was agreed by mid-2003 that the Directive would enter into force in 2005.

The Swiss banking fraternity certainly doesn't admit to any regulatory weaknesses, and is up in arms about what it sees as incorrect foreign attitudes towards Swiss banking. “We cannot have a situation where people claim that in Switzerland, control weaknesses supposedly keep occurring,” Urs Roth, chief executive of the Swiss Bankers Association told an August, 2003 seminar.

"Where Switzerland has excessive regulation compared with the foreign competition, nothing is done about it. In the long run this may produce a widening gap that could be very damaging for our banks and therefore our economy," warned Roth.

In January, 2004, Switzerland and the Organisation for Economic Co-operation and Development reached a long-awaited compromise deal over certain Swiss tax practices deemed harmful by the OECD. Following two days of discussions with the Paris-based organisation’s fiscal affairs committee, Swiss officials agreed to exchange information with other countries on Swiss holding companies, one of a number of issues that has dogged the relationship between Switzerland and the OECD in recent years.

Wilhelm Jaggi, Switzerland's ambassador to the OECD, stated that the agreement represents a “good and balanced solution for all sides." However, he was keen to emphasise that the issue remains entirely separate from the more delicate matter of banking confidentiality.

The two parties also managed to resolve another sticking point involving the issue of administrative notes on how taxable profits are defined by firms. But a third tax issue concerned with the method by which commercial expenses are deducted from tax statements remains unresolved.

Further agreement was reached, however, in the area of transfer-pricing, and the Swiss authorities have agreed to warn domestic firms to abide by OECD guidelines when transferring profits to subsidiary companies.

It has also emerged that the OECD is to undertake further analysis of the tax regimes under which Swiss finance and leasing companies operate.

In May, 2004, agreement was provisionally reached with Switzerland over the implementation of the EU Savings Tax Directive. The Swiss government had agreed the text of the Directive, but refused to sign it until assurances were given by the European authorities that the Schengen agreement on cross-border crime would not force it to compromise its banking secrecy by reporting on tax evasion, which is not a crime in Switzerland.

The agreed compromise is that Switzerland will provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but will be exempted from providing such assistances in cases of direct taxation.

Later in the month, representatives from Switzerland and the European Union signed the nine 'bilaterals II' agreements covering various topics including tax and the free movement of people. They had been held up pending agreement on the Savings Tax Directive.

The agreements concern: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.

A protocol to the existing agreement on the free movement of persons was also signed, extending the agreement to the new EU Member States.

Right wing parties such as the Swiss People's Party, opposed to the plans to cooperate more closely with Brussels on security and other matters, threatened to force a referendum on the issue, but by November it was clear that the government was going to be able to put through the necessary implementing legislation with needing a referendum, and the Savings Tax Directive duly came into force in July, 2005, with Switzerland applying a 15% withholding tax to the returns on savings of EU residents.

The new Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters between the the European Commission and certain member states of the European Free Trade Area, which includes Switzerland, was signed on October 30, 2007.

The new agreement aims to align the Convention provisions with the present European Community legal framework. As a result of it, the rules for determining jurisdiction of the courts will now be similar in the EU and the EFTA States concerned. Moreover, the judgments delivered by EU national courts and those of EFTA Member States will be more easily recognised and enforced.

In November 2007, The Swiss Federal Council approved bilateral framework agreements with the eight European Union member states which acceded to the EU in 2004.

It was announced at the end of 2007, that Switzerland has given Malta EUR1.8 million, under the bilateral agreement which implements Switzerland’s undertaking to provide cohesion funds to the new member states of the EU, following its access to the EU internal market.

The individual bilateral agreements by Switzerland with the ten EU member states which joined in 2004 follow the Memorandum of Understanding (MoU) signed between Switzerland and the Council of the European Union in February 2006.

This MoU contained the overall conditions and modalities agreed between Switzerland and the EU for a financial contribution by Switzerland as a compensatory measure to the latter’s participation in the economic and social dimensions of the EU internal market.