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:
In addition to this impressive list, there are pending treaties awaiting ratification between Switzerland and Pending: Costa Rica, Oman and Zimbabwe.
On 13 March 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 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 6 October 2011. A protocol clarifying outstanding issues was signed on 20 March 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. To a large extent this agreement follows the OECD model agreement and Swiss policies in this regard.
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.