Switzerland: withholding tax exemption adopted to facilitate intragroup financing

by Davide Anghileri

The Swiss parliament on 10 March approved amendments to Switzerland’s withholding tax system to ease the raising of capital by multinational groups, approving an exemption from withholding tax for some intragroup interest payments. The amended regulations will enter into force 1 April.

The amendments adopt a proposal offered by the government in September 2016 with very little change.

During the consultation on the proposal, economic associations and all political parties called for a complete overhaul of Switzerland’s withholding tax system.

While most sought to replace the withholding tax regime with the so-called paying agent principle, as proposed in 2014, the Swiss People’s Party (UDC/SVP) opposed this measure, arguing it would create tax avoidance. Instead, the UDC/SPV advocated in favor of other tax incentives for groups.

Current system

Under the existing system, a Swiss withholding tax of 35% is levied on certain investment income, such as interest on bonds and money market funds, making it difficult for Swiss groups to raise capital. Moreover, while Swiss investors can claim back the withholding tax by declaring the relevant income, 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, in September 2015, proposed the withholding tax ordinance to encourage groups established in Switzerland to carry out targeted financing activities in Switzerland rather than abroad.

Switzerland intragroup financing exception

The general scope of the new law is to exempt withholding tax on intragroup interest payments in all cases 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 modifying paragraph 2 and 3 of article 14a of the withholding tax law, the reform states that within a group, in case of issuance of bonds outside Switzerland, it is possible to transfer directly in Switzerland funds that are collected abroad up to the maximum amount of the equity capital of the issuer without the interest being subject to withholding tax as long as a Swiss group company provides a guarantee for a bond of a foreign group company (issuer).

The exemption is available to companies whose annual accounts are fully consolidated into the consolidated financial statements in accordance with accepted accounting standards, or partially consolidated, such as in joint ventures.

Moreover, under paragraph 4 of article 14a, 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 Federal Tax Administration (FTA), in the explanatory statement, added that if the amount transferred exceeds the equity of the foreign issuer, all amounts transferred in Switzerland will be subject to withholding tax.

According to the explanatory statement, the reform will increases the attractiveness of the Swiss financial market, promoting the establishment of headquarter activities and further central corporate functions, cash pooling, and treasury activities, in particular.

This will results in an increase government receipts from the additional companies’ profit tax (direct effect), suppliers’ profit tax (indirect effect), and the income tax and VAT of additional employees and higher paid staff (induced effect). In contrast, any short-term reductions in withholding tax receipts should be negligible, the explanatory statement said.

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. He can be reached at danghileri@yahoo.it.

Davide Anghileri

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