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Switzerland To Refine WHT Regime

by Ulrika Lomas, Lowtax.net, Brussels
24 December, 2014

The Swiss Federal Council has said that it intends to refine the withholding tax (WHT) system, to provide increased stability and facilitate the raising of capital.

The Council explained that while WHT makes a considerable contribution to federal receipts and plays a safeguard role for income and wealth taxes, the system's design has some disadvantages. According to the Council, Swiss groups can avoid the tax by processing their financing through foreign companies. As a result, the creation of value added takes place abroad. Companies in turn incur expenses for maintaining foreign structures, and the safeguard purpose of the WHT regime is only partially fulfilled.

WHT is levied on interest, participation income, lottery winnings, and certain insurance benefits. It is collected from the debtor of the taxable item, in accordance with the debtor principle. It is refunded only if the corresponding income is declared. The Federal Council says that this is intended to allow WHT to act as a safeguard for the taxation of Swiss residents' domestic income. The WHT levied is either set against cantonal and communal taxes, or refunded in cash. Withholding tax receipts totalled CHF5.9bn (USD5.99bn) in 2013, with much of this figure relating to foreign beneficiaries, who either cannot claim a refund or can only claim a partial refund.

The Council hopes that switching from the debtor principle to the so-called paying agent principle would eliminate some of the challenges it presently faces.

Under the debtor principle, a debtor can be a Swiss company that issues bonds, for example. If the bonds are interest-bearing, the company pays 65 percent of the gross coupon to the beneficiary, and transfers the 35 percent tax deduction to the Federal Tax Administration. By contrast, if the paying agent principle was applied, the debtor would transfer the full gross amount to the paying agent (typically a bank). Depending on who the investor is, the paying agent would then decide whether WHT needed to be collected.

The Federal Council said that a paying agent system would allow WHT to be collected in a more targeted manner than at present. The change would impact largely in the area of interest, where tax collection would be focused on natural persons resident in Switzerland. WHT would cease to apply for all other investors. No change is intended for Swiss companies' dividends.

The Council plans to introduce two corresponding measures, to reduce the risk of Swiss residents avoiding the tax by transferring their assets to a foreign bank. Under the proposals, natural persons resident in Switzerland would be given the option of voluntary disclosure, in place of the tax deduction. In addition, the new WHT regime would not enter into force until Switzerland has established the automatic exchange of information with major financial centers.

The Council expects WHT receipts to fall by approximately CHF200m a year. However, it believes that the removal of obstacles in the capital market and treasury areas would help create jobs and added value in the medium-term. This should lead to higher income tax and profit tax receipts for the Confederation, the cantons and the communes. Additional tax receipts should also arise from the taxation of previously untaxed assets of Swiss residents.

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