The Swiss government has proposed to amend Switzerland’s withholding tax regime to facilitate the raising of capital by multinational groups, calling for an exemption from withholding on some intragroup interest payments.
Under the existing system, Swiss withholding tax of 35% is levied on certain investment income, such as interest on bonds and money market funds. Swiss investors can claim back the withholding tax by declaring the relevant income, but foreign investors can generally only claim back part of the withholding.
As a result, Swiss corporate groups in need of debt capital regularly issue their bonds through foreign group companies. Only a few local group financing and cash pooling activities are domiciled in Switzerland at present.
In 2014, the Federal Council proposed to enhance the Swiss debt capital market by amending the withholding tax laws to switch from the debtor principle to the so-called paying agent principle. However, this reform has been suspended pending the outcome of the vote on the popular initiative “Yes to protecting privacy” and the timetable for any legislative changes is currently unknown.
Against this backdrop, the Federal Council, on September 23, has proposed to amend the withholding tax regulations to encourage groups established in Switzerland to carry out targeted financing activities in Switzerland rather than abroad.
The general scope of the proposed amended regulation is to exempt withholding tax on intragroup interest payments in all cases in where a Swiss group company (guarantor) provides a guarantee for a bond of a foreign group company (issuer) belonging to the same group.
In particular, by changing paragraph 3 and paragraph 4 of article 14a of the withholding tax regulation, the proposal states that:
- The exemption will be applicable to companies whose annual accounts are fully consolidated into the consolidated financial statements in accordance with accepted accounting standards, or partially consolidated into the consolidated financial statements in accordance with accepted accounting standards, such as in joint ventures.
- It will be possible to transfer directly in Switzerland funds that are collected abroad, without incurring in the withholding tax, if the foreign bond is guaranteed by a Swiss company of the same group.
- Forwarding of funds from the foreign issuer to a group company established in Switzerland will be possible up to the maximum amount of the equity capital of the issuer (i.e. the foreign entity).
The explanatory statement adds that if the amount transferred exceeds the equity of the foreign issuer, all amounts transferred in Switzerland will be subject to withholding tax.
The amended regulations are proposed to enter into force during the first six months of the 2017.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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