Switzerland offers foreign direct investors favourable tax environment

By Christoph Niederer and Wu Fan, VISCHER
0
1991
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Whenever investors consider a location for direct investments, they look not only for an excellent framework in terms of access to the global markets, but also for attractive tax solutions. But what are ‘attractive tax solutions’? Besides an environment of fairly low corporate profit taxes, it is key to get comfort on the tax consequences of any intra-group transactions, or of upcoming restructurings (e.g. split-offs). Finally, even at the beginning of an investment, the careful investor is already considering the exit scenario.

Corporate profit tax

Switzerland offers one of the lowest corporate tax rates in the world, from approximately 12% to 25%, depending on in which region of Switzerland a company is resident. However, these tax rates can significantly be reduced for companies that perform their business activities predominantly outside Switzerland, or whose statutory purpose is holding stakes in other companies.

Christoph Niederer Partner and Head of the Tax Team VISCHER Zurich
Christoph Niederer
Partner and Head of the Tax Team
VISCHER
Zurich

Furthermore, certain dedicated corporate functions benefit from exceptionally low taxation, for example group financing activities (tax rates of 2% or less) or licensing of intellectual property rights to group companies or to third parties (tax rates of below 10%). Recently, as a trend, significant reductions of the tax rate have been achieved by way of international profit allocation, without the need to obtain any double taxation treaty benefit, purely by allocating certain profits to a fixed place of business of a company, i.e. a branch outside Switzerland.

As outlined in our last column, it can be expected that Switzerland will be able to maintain its solid, stable public finance despite the current difficult environment throughout Europe. It can therefore be expected that the tax rates will also remain at the current low level, and even further improvements – for example, related to the use of tax loss carry forwards – can be achieved.

OECD challenge

Recently, the Organisation for Economic Co-operation and Development (OECD) has challenged certain favourable tax models that Switzerland is providing for foreign-controlled companies.

This may have caused some concerns for potential investors as to whether these solutions will be reliable. The current political discussion within Switzerland now points to whatever changes may finally be made in order to avoid any adverse tax consequences set out by the OECD (such as the application of controlled foreign company [CFC] rules, etc.), the effective tax rates will not increase but rather be lowered through alternative tax solutions (e.g. interest box, licence box, reduced corporate income taxes, innovation box, etc.).

Comfort via advance tax rulings

What is the appropriate royalty for any licence rights granted by a Swiss company to its international group companies? Is a Swiss company required to receive a guarantee fee for a guarantee granted for the benefit of its parent company, which issues a bond on the international capital markets? Can tax losses still be used after a merger of two Swiss companies? With an advance tax ruling it is possible to get clarification of these and other issues.

Wu Fan Counsel VISCHER Zurich
Wu Fan
Counsel
VISCHER
Zurich

In practice, it often turns out that getting certainty on any tax consequences of planned activities is of much more value to investors than the pure tax rate. An advance tax ruling constitutes a binding confirmation of the competent tax authority with regard to any future corporate activity.

It should, however, be noted that a change of law or a change of practice due to a decision of the Swiss Supreme Court may overrule an advance tax ruling. Further, an advance tax ruling is required to be obtained prior to realisation of the planned transaction subject to the ruling; the particular facts have to be presented to the competent tax authority in as much detail as possible, and in a timely manner. Whereas it may usually take about three weeks to obtain a signed tax ruling, a quicker reply is possible in urgent matters. As already mentioned, it is key to present the correct and complete facts to the tax authority, since otherwise even a signed tax ruling can be held void.

Exit scenarios

An investor needs to be in a position to either liquidate a company or repatriate the accumulated profits. Furthermore, the sale of a company to another group company or to an independent third party should not trigger adverse tax consequences.

In Switzerland, any liquidation proceeds consisting of accumulated profits or a distribution of profits are basically subject to a withholding tax of 35%, whereas the repayment of capital contributions, including surplus payments, is tax free.

Furthermore, under certain circumstances, the sale of a company to a related company, or even to an independent third party, may cause withholding tax issues.

The withholding tax can be mitigated based on a double taxation treaty, limiting or encumbering the right of Switzerland to impose such a tax. Switzerland has a worldwide double taxation treaty network of approximately 90 treaties, including with the PRC and the Hong Kong Special Administrative Region (HKSAR), the latter entering into force as of 1 January 2013 with respect to Swiss tax, and as of 1 April 2013 with respect to Hong Kong tax.

Repatriation of profits

Based on these treaties, any form of exit or repatriation of profits can be performed without triggering adverse tax consequences. The maximum withholding tax rate on dividend payments made by a Swiss corporation to its China or HKSAR parent company is 10% and 0%, respectively.

In summary, it can be stated that also from a tax perspective, Switzerland is an attractive jurisdiction to establish the European hub of an international group structure. Much more than simply the low corporate tax rates, it is the comfort on the tax treatment of any critical movements and the beneficial double taxation treaties applicable to dividend distributions that make Switzerland an attractive domicile.

Christoph Niederer is partner and the head of the tax team at the Swiss law firm VISCHER in Zurich, and Wu Fan is counsel at VISCHER in Zurich

VISCHER

Schützengasse 1

Postfach 1230

8021 Zürich

电话 Tel: +41 58 211 34 00

传真 Fax: +41 58 211 34 10

Christoph Niederer

电话Tel: +41 58 211 34 37

电子邮件E-mail: cniederer@vischer.com

吴帆 Wu Fan

电话Tel: +41 58 211 36 45

电子邮件E-mail: FWu@vischer.com

www.vischer.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link