SWITZERLAND: An Introduction to Tax

Switzerland continues to hold a top position in international tax competitiveness. The country is constantly working on the challenges involved in remaining in compliance with international developments and newly set standards. In particular, 2023 will be shaped by the implementation of the OECD Pillar II minimum tax.

Implementation OECD-Pillar II 

Swiss tax law has lately been driven by the implementation of the corporate tax reform which entered into force in 2020. Due to the reform, many cantons decreased their tax rates ending up with a total corporate tax burden below 15%. Various groups reaching the turnover threshold of EUR750 million will now be confronted by OECD Pillar II since the corporate income tax falls below the minimum burden of 15%. The planned Swiss implementation of the GloBE rules is based on the “Global Anti-Base Erosion Model Rules” of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting of 14 December 2021 to ensure international acceptance. The minimum burden is ensured by levying a supplementary federal tax, increasing the tax burden to 15%. Subject to approval by public vote, the supplementary tax will enter into force on 1 January 2024. Due to the tight timeframe, the implementation will initially be governed by an ordinance, which will be replaced by a formal law at a later date.

Even if the tax burden in various cantons will slightly increase due to the minimum tax, Switzerland will remain an attractive location for international corporations and headquarters due to its reliable and pragmatic approach in tax matters, its long-lasting ruling practice, its political stability as well as its well-developed infrastructure ensuring a high level of innovation, education and living standards.

Rejected Withholding Tax Reform 

The planned withholding tax law reform was rejected by the Swiss population in September 2022. The abolition of withholding tax on interest payments from bonds, which was intended to bring back the financing activities of MNE’s domiciled in Switzerland, has failed. As a result, the practice that bonds will mainly be issued outside of Switzerland, will continue and, to avoid Swiss withholding tax, it will still be crucial that such issued instruments will not qualify as Swiss bonds.

Dividend Reporting Procedure 

As of 1 January 2023, certain rules for the withholding tax reporting procedure have changed. The procedure allows groups to report the withholding tax of 35% on dividends instead of paying it. In domestic situations, a participation of 10% in the dividend distributing company is sufficient to report (previously 20%). Furthermore, all legal entities (including foundations and associations) can apply the procedure. In the international context, the permission to apply the reporting procedure will now be issued for five years (previously three years). Once the request for the reporting procedure is approved by the Swiss Federal Tax Administration (SFTA), dividends may be paid out to corporate shareholders holding a qualifying participation without deduction of the withholding tax; ie, deducting the reduced withholding tax (based on the applicable double taxation agreement).

Taxation of Cross-Border Workers and Home Office Activity, in Particular with France

As a result of the COVID-19 pandemic Switzerland signed various agreements with neighbouring countries regarding the home office activities of cross-border employees, which regulate taxation according to the applicable double taxation agreements. However, these agreements are or were time-limited.

Since home office working has become an integral part of the new working world after the pandemic, Switzerland and France have agreed to define a permanent solution for cross-border employees. From 1 January 2023, for all employees covered by the 1983 agreement between France and the cantons of Berne, Solothurn, Basel-Stadt, Basel-Landschaft, Vaud, Valais, Neuchâtel and Jura, home office work limited to 40% of working hours will neither affect the cross-border commuter status nor the related provisions on the taxation of income from employment.

For employees not covered by the 1983 agreement, a permanent solution shall also be found in the form of an amendment to the Swiss-French double taxation agreement: taxation shall remain in the employer’s country provided that the home office activity carried out in the employee’s country of residence does not exceed more than 40% of the working time.

Substance Requirements for Companies 

The European Commission has published in its package of measures “Company Taxation in the 21st Century” a proposal for a new directive to combat the abuse of shell companies for tax purposes. Substantive requirements for the recognition of the tax residence of such companies shall be established. Since it is primarily about substance requirements, the directive does not only concern shell companies, but all companies.

 Even though the scope of the directive is limited to EU member states, the directive might have an impact on Switzerland as a non-EU member. Since the substance of companies in international relations has lately been examined more closely in the context of treaty benefits eligibility, the proposed directive might set a benchmark to examine substance in the context of agreements between EU member states and Switzerland.

Domestic Profit Adjustment Agreement as Replacement for Mutual Agreement Procedure

The SFTA’s previous practice on withholding tax in cases of international profit adjustments by way of mutual agreement solutions was adjusted per 1 January 2022. On the one hand, the practice of the SFTA providing that withholding tax is not levied if a secondary adjustment is made as the outcome of a mutual agreement procedure was codified. On the other hand, it is now possible in clear cases to make a domestic adjustment of the previous taxation without having to go through an (intergovernmental) mutual agreement procedure. For this purpose, a so-called domestic agreement must be concluded between the competent Swiss tax authority and the State Secretariat for International Financial Matters (SIF). The starting point for such an agreement is the request of the taxpayer to initiate a mutual agreement procedure; such request must be filed with the SIF. If the competent Swiss tax authority and the SIF agree beyond doubt that a correction must be made in Switzerland, they can conclude a domestic agreement and submit it to the taxpayer for approval. Such agreement will make the intergovernmental mutual agreement procedure superfluous. Since the domestic agreement is considered equivalent to an (intergovernmental) mutual agreement, secondary adjustments made on the basis of a domestic agreement will not trigger Swiss withholding taxes on hidden profit distributions.

Further Developments in a Nutshell 

Switzerland is considering the introduction of a tonnage tax regime on maritime trade. The tonnage tax will be calculated on a flat-rate basis, irrespective of the actual profit. The introduction is under discussion in the Swiss Parliament and might still be rejected in a vote by the Swiss population.

In September 2022, the authorities of Switzerland and the Netherlands signed a mutual agreement to establish the mode of application of arbitration processes. The agreement applies to requests for arbitration concerning assessments for taxable years and periods beginning on or after 1 January 2012, with the exception of paragraphs 2 and 3 of Article 25 of the treaty that will apply only to cases where the request for the initiation of the mutual agreement procedure was submitted after September 2022.

Finally, as of 1 January 2024, the Swiss standard VAT rate will be increased to 8.1% (currently 7.7%) and the reduced rate (which applies, for example, to food) to 2.6% (currently 2.5%).