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
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:
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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LOWTAX.NET
13/07 
