Efficient Tax Planning for a Company in Switzerland with Foreign Shareholders
Contributed by Zugimpex
07 December, 2020
Corporate income tax in Switzerland 2020
Compared to other countries, Switzerland receives a lower share of its government revenue from VAT and social security contributions and a larger share from corporate and private income tax. Because of the progressive tax rate, a small number of taxpayers contributes a high proportion of federal and local tax. Therefore, the 26 cantons compete and address different target groups with their tax offers. Generally, Switzerland welcomes multinational corporations with qualified employees. Even if they pay little tax, their employees have higher taxable salaries, pay therefore progressive tax rates, and contribute to the social system.
Corporate income tax is collected by the Cantonal tax office. They forward a part of it to the Federal Government, and for the local part, there is a different rate depending on the Canton and on the village. For the tax base, the Cantons have some local rules; knowing them can help to reduce the tax basis and to understand exemptions. Tax rates are linear within a Canton, and some Cantons offer rather low tax rates, other ones a more flexible in the acceptance of expenditures.
Tax officers are friendly, but it is important to have good legal knowledge, proper documentation, and excellent arguments, because the officers are well educated and repeatedly ask for detailed information about underlying positions. The officers act carefully, because the Federal tax administration undertakes regular inspections at the Cantonal tax offices to assure proper assessments.
The Tools and Techniques of Income Tax Planning
Depending on the industry, tax planning starts when choosing a Canton where the business can be done properly (availability of personnel and proper service providers, traffic connections), but with low structure costs and taxes.
Then the activities shall be structured in the proper way from the very beginning, including proper contracts. There are cases where substance in Switzerland is available, but management and control is located in a low tax country outside Switzerland (e.g. Malta, Cyprus, UAE).
Other interesting tax planning tools are interest expenses, benefits on intellectual property and tax free capital gains.
VAT is administrated centrally by a special department of the Federal VAT administration in Bern. They assess and collect VAT and they organize rather tough VAT inspections.
For companies, there are little obstacles to receive a VAT number, but if declarations are not submitted in time, the tax office quickly issues an assessment based on estimations.
A special department in the Federal tax administration oversees the withholding tax on interests and dividends. This department is granting the approval to pay dividends without withholding tax according to the double tax treaty or according to article 15 of the convention of interest. However, the application process is slow and full of obstacles.
The tax was organized as security tax on investment income to get investors to declare their local income properly. At that time, shareholders of an AG were not registered, banking secrecy was stronger, and the Cantons did not have sufficient electronic tools to exchange information. Therefore, it happened that shareholders received dividends in one Canton and forgot to declare them in their residence Canton. Then, the management of a company that distributes dividends must pay 35% of it to the central tax office and the taxpayer who receives and declares the dividends gets credit for this payment on his tax liability.
For foreigners, reimbursement or crediting is bureaucratic and associated with high costs for foreign investors. Trustees and local managers are scared, because they are personally liable for the tax if the required procedures are not executed properly.
For foreign individual shareholders, there are only little improvements in the double tax treaties. An obstacle is the "old reserve practise": if the company old capital reserves and changes from private to corporate shareholding, a different handling may be established by the authorities: old dividends shall be taxed according to the original structure, and only new dividends can be taxed according to the new structure. There are still solutions, but they are sophisticated, slow, and cost intensive.
For foreign corporate shareholders, there are better conditions in the double tax treaties. There can be a holding company in a country that has a double tax agreement with Switzerland with a zero withholding tax on dividends. In this case, the Swiss subsidiary must declare the dividends and fill in form 823b to get approval to apply art 10 of the double tax treaty.
If a holding is located in an EU country and the beneficial owner resides in the EU, Art 15 of the Agreement between the European Community and the Swiss Confederation regarding the taxation of savings income in the form of interest payments allows the Swiss subsidiary to participate in the benefits of the Parent- Subsidiary directive. In this case, the Swiss subsidiary must declare the dividends and apply for approval with form 823c.
To avoid withholding tax, there are additional options, resulting mainly to avoid dividends:
If the Swiss company expands quickly and/or has costs abroad, there remains no profit and the problem is solved.
Also, it is possible that a foreign entity establishes a branch in Switzerland. Legally, this is part of the foreign entity, therefore the remittance to the main seat is no dividend and there is no withholding tax. Usually, the remittance from the branch does not constitute income at the main seat.
If the main seat is in a country that has no tax on outgoing dividends, there still may be a tax for the shareholders in their country of residence. Therefore, one should consider structuring the transfer from corporate to private level, too.
Social security contributions play an important role in Swiss economy. While it is mandatory for every resident to organize his health insurance privately, several institutions collect contributions: for the pension funds, for the unemployment funds, for accident insurance and for other purposes.
The social system has a strong social redistribution effect: almost all active income is subject to social charges, including the income of limited partners. There is no upside limit for contributions, while there is a low upside limit for pension payments.
Swiss residents can avoid social charges if a legal entity collects the revenue for them. However, inspections expect an adequate salary.
For residents in the EU, a person may have first his country of residence in an EU country with a low ceiling for social charges. Then he may be posted temporarily to Switzerland according to the European Directive 883/2004. This means, he can declare with form A1 to continue to pay social charges in the original country, let it be stamped there and present it to the Swiss authorities.
Residents outside the EU can benefit, if their country has no agreement on social charges with Switzerland. They simply can invoice their services and receive their payments.
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