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LOWTAX OFFSHORE

SWITZERLAND: OFFSHORE LEGAL AND TAX REGIMES


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BACK TO SWITZERLAND INFORMATION: BUSINESS, TAXATION AND OFFSHORE

On this Page:

- SWITZERLAND FORMS OF TAX PRIVILEGED OPERATION
- SWITZERLAND TAX TREATMENT OF TAX-PRIVILEGED OPERATIONS
- SWITZERLAND TAXATION OF FOREIGN EMPLOYEES OF TAX PRIVILEGED OPERATIONS
- SWITZERLAND EXCHANGE CONTROL
- SWITZERLAND ACTIVITIES OF TAX PRIVILEGED OPERATIONS
- SWITZERLAND EMPLOYMENT AND RESIDENCE


The term 'offshore' is not used in Swiss legislation or in describing company forms. However, there are a number of specialised forms of the basic Stock Corporation which offer tax-privileged treatment equivalent to that obtainable in offshore jurisdictions.

The EU Savings Tax Directive has applied in Switzerland as from 1st July, 2005, through a separate agreement reached between the country and the EU, under which Switzerland is levying a withholding tax (initially at 15%) to returns on savings paid to the citizens of EU Member States, and which in various other ways is less onerous that the original Directive.

Although bank interest and dividends are caught by the Directive, payments made by what are called 'residual agents' (including for instance trusts) are apparently excluded in the Swiss agreement, which is not the case in Member States. And of course the Directive applies only to individuals who receive payments; companies and other organisational forms do not fall under its aegis.

In May 2008, the Swiss government announced that gross revenues collected from interest payments under the European Savings Tax Directive increased substantially between 2006 and 2007.

The Federal Department of Finance revealed that tax withheld on interest payments in Switzerland on earnings liable to tax in the EU increased from CHF536.7mn (EUR331mn) for the year 2006 to CHF653.2mn for the tax year 2007.

The agreement on the taxation of savings income with the European Community, in force since 1st July, 2005, makes provision for 75% of the proceeds to be passed on to the member states concerned. The remaining 25% is kept by the Swiss government, although 10% of this is passed on to the cantons.

The Swiss figures show that, of the withholding tax revenues transferred to EU member states, the largest amounts were passed to Germany (CHF130.5mn), Italy (CHF125mn), France (CHF61.9mn) and the UK (CHF40.2mn).

In September 2008 Switzerland outlined new hedge fund tax proposals designed to improve its competitiveness on the world stage, promote itself as a premier location and attract thousands of jobs as a result.

The new tax proposals supported by the federal government aim to provide the vital tax incentives needed to strengthen the international competitiveness of the Swiss financial sector.

Reducing the tax burden for managers of hedge funds and other private equity companies from 40-50% to 15-20% overall will bring taxes roughly into line with competing centres such as London and New York.

Despite being the second-biggest hedge fund investor after the United States - some USD200bn of the estimated total of USD600bn invested in funds of hedge funds comes from Switzerland - only 40-50 hedge fund managers out of around 9,500 currently reside there.

Tax-related problems linked to performance fees and carried interest will be clarified and the Swiss banking watchdog EBK proposed to end the “Swiss finish” (see below) , a set of additional rules applying uniquely to Swiss and foreign investment funds. Given that the changes to the tax system need only be approved by the heads of Switzerland’s cantonal (state) tax departments and will not require new legislation they may therefore be implemented quickly.

In January 2009, the Swiss Federal Council decided to amend collective investment legislation to remove the so-called Swiss Finish. It did so by adapting article 31 of the Ordinance on Collective Investment Schemes (CISO) to bring Switzerland into line with the rest of the EU. The amendment entered into force on March 1, 2009.


Switzerland Forms of Tax-Privileged Operation

Tax-privileged operations may take place within the following forms, all of which are variants of the basic Stock Corporation:


Switzerland Tax Treatment of Offshore 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, has been extended until December 31st 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 Taxes for the general principles of Swiss corporate taxation, which also apply to offshore entities except as indicated below.

Holding Companies:

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:

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.

Auxiliary Companies:

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:

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:

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.

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Switzerland Taxation of Foreign Employees of Tax-Privileged Operations

There are no special rules applying to the foreign or Swiss employees of tax-privileged operations. The various exemptions from income tax described above do not apply to employees: any business employing and paying people in Switzerland will have to follow the normal rules for the taxation of individuals.

See Domestic Personal Taxes for the general principles of individual taxation of individuals in Switzerland.

A person is deemed resident in Switzerland if:

  • He has Swiss employment (to work in Switzerland a non-national needs a work permit - limited work permits of 90-120 days can be granted and where granted lead to limited taxation);
  • He carries on a business in Switzerland; or
  • He lives in Switzerland for not less 180 days in any one year. If however he remains in the same abode the time required to be a resident for tax purposes drops to 90 days.

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Switzerland Exchange Controls

Switzerland has no exchange controls.

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Switzerland Activities of Tax-Privileged Operations

The various tax-privileged forms described above are all subject to limitations on their activities or structures as set out. In approximate terms:

  • Holding Companies must derive most of their income from subsidiaries;
  • Domiciliary Companies must have only the smallest toe-hold in Switzerland;
  • Auxiliary Companies (in 7 cantons only) may have some local activity;
  • Service Companies must be active only within their own groups; and
  • Mixed Companies combine Domiciliary and Service Company restrictions.

See above for further details.

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Switzerland Employment and Residence

There are no special privileges for the employees of non-resident or tax-privileged entities in Switzerland. Entry into Switzerland, residence in Switzerland and the right to work or purchase property in the country are all inextricably interlinked.

However, agreements with the EU are gradually putting EU freedom-of-movement rules into place which will eventually allow EU citizens to by-pass the quota permit system altogether.

EU citizens now have:

  • a free choice of residence and work cantons;
  • the right to change jobs and employers; and
  • a right to work for their family members.

Eventually, EU-citizens will have complete freedom of movement within Switzerland and Swiss citizens within EU-countries. However, there was a fixed quota for work permits until 31 May 2007 with a maximum of 15,000 new long-term residence permits a year and 115,500 new short-term residence permits a year.

On 31 May 2007, quotas for EU citizens wishing to work in Switzerland were suspended. As of June 2009 Switzerland will make a decision on whether or not to extend the agreement. If the response is positive, freedom of movement will be fully introduced between Switzerland and the EU as of June 2014.

Obtaining Residence in Switzerland: The available types of permit are the '120-day' permit, the class A, B or C permits, the fiscal deal permit and the political refugee permit. The class A permit (for 'blue-collar' workers) and the political refugee permit are not described further here. Permits other than the '120-day' variety are subject to a quota system. However, agreements with the EU are gradually putting EU freedom-of-movement rules into place which will eventually allow EU citizens to by-pass the quota permit system altogether.

The '120-Day' Permit: This permit allows a managerial or specialist worker to work in a specified position for up to 120 days in a particular year; rotation among a number of individuals is not allowed.

The Class B permit: The class B permit is the most commonly issued permit and gives the right to live and work in Switzerland. It is the permit of choice for professional and managerial people, self employed individuals who wish to start their own company in Switzerland, people who wish to reside in Switzerland and are wealthy enough to live off their own resources (but see the Fiscal Deal Permit below). The Class B permit has the following characteristics:

  • It is usually granted for a period of up to one year at a time;
  • If the permit is for work purposes then the applicant must have a job to go to in Switzerland;
  • The granting of his permit must not have the effect of depriving a Swiss national of employment. Since many trades in Switzerland are protected by guilds which prohibit the recruitment of foreign workers an application for a class B permit is not always successful;
  • The class B permit allows the applicant to bring his wife and children into the country but not his extended family;
  • The application is not prejudiced by inability to speak the official languages of Switzerland;
  • It takes about 3 months to obtain a Class B permit.

The Class C permit: The class C permit is a longer-term residency permit which gives the applicant almost the same rights as Swiss citizens and allows the applicant to buy real estate in Switzerland. To obtain a class C permit one must have had a class B permit for between 5 and 10 years depending on country of origin. The class C permit is the last step before applying for Swiss citizenship. It is subject to the same conditions as the class B permit.

The 'Fiscal Deal' Permit: This is a variant of the class B permit and is primarily for wealthy individuals who wish to live in Switzerland off income earned outside Switzerland (e.g. international tennis players and formula 1 drivers) but who have no need or desire to work in the country. To obtain a fiscal deal permit the applicant needs a certified net wealth of at least 2m Swiss Francs and must be willing to spend at least 180 days a year in the country. The fiscal deal permit allows the applicant to pay considerably less tax than a Swiss national of his income bracket would normally pay since the assessment to tax is not based on the applicants real income but rather on a much lower notional amount.

For further information see lump sum assessment method in our personal income tax section. The amount of tax payable by the holder of such a permit is a matter of personal negotiation with the canton in which the applicant resides. Switzerland is already a low tax country by OECD standards and the 'fiscal deal' results in extremely low levels of taxation. It takes about 3 months to obtain a fiscal deal permit.

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