Switzerland: Swiss Branch Report On "Enterprise Services" For The 2012 IFA Congress In Boston

SUMMARY AND CONCLUSIONS

Switzerland's economy is highly international and relies on the export of capital. Switzerland in general has liberal investment and trade policies and a conservative fiscal policy which ensures that the government budget is balanced. Switzerland's tax treaties follow a residence-based taxation approach (i.e. they follow the OECD model) rather than a source-based approach.¹ In its domestic tax provisions as well as its tax treaties, Switzerland tries to limit taxation of cross-border services in the source state. Switzerland has, however, made certain concessions to non- OECD member economies along the lines of specific and limited provisions of the UN model. Switzerland therefore does not wish to include service permanent establishment (PE) provisions in its tax treaties. However, as outlined in this report, Switzerland has agreed with a few non-OECD member economies on provisions regarding service PEs. Furthermore, technical services fees paid to non-residents are not subject to withholding taxes in Switzerland as even royalty payments are not subject to withholding taxes.

In 1995 Switzerland introduced a value-added tax law on the supply of goods and services similar to that implemented within the European Union. Hence, inbound services can be subject to a federal value added tax of currently 8 per cent.

Considering these facts, Switzerland very probably will not enact any additional domestic provisions on the income taxation of services in the near future.

1. TAXATION OF INCOME FROM SERVICES UNDER DOMESTIC LAW

This section of the report will outline the basic principles that apply in Switzerland under domestic income tax law for taxing services by enterprises. The report covers income falling under article 7 of the OECD model (business profits), article 14 of the OECD model prior to 2000 (independent personal services), and article 17 (artistes and sportsmen).

Based on the directives for this report, the taxation of other fees, e.g. for services provided in connection with movable and immovable property,² intangible property, insurance, financial capital, services provided by individuals in their capacity as employees, and services by directors, is not described herein.³

1.1. Basic rules

Switzerland has not enacted any specific domestic income tax provisions in relation to services. The term "service" (Dienstleistung) does not appear in the Federal Income Tax Act. Income from services is hence not treated as a separate category and is taxed in the same manner as other income. Furthermore, Swiss income tax rules for determining the source of such income do not differ from general rules applicable to other income.

1.1.1. Taxation of inbound service providers

Under what circumstances does Switzerland tax income of inbound service providers? One has to consider whether under domestic tax law provisions such person must be considered resident, for instance because the effective management of a legal entity is located in Switzerland or because an individual engages in a gainful activity in Switzerland for a certain period. If such a service provider does not become a Swiss income tax resident, one next needs to consider whether that person has limited tax liability.

In the following is an overview of the Swiss income tax provisions which could lead to an unlimited or limited tax liability of a service provider on inbound services. The description below has the following structure: (a) relevant article of the Federal Income Tax Act;⁴ (b) a simplified example; (c) the nexus (here understood as the degree of activity, the taxable object and/or taxable event that must arise before Switzerland under the Federal Income Tax Act⁵ has the authority to tax such service income); and (d) the tax base (here understood as the tax assessment method).

A first category is the inbound service provider that becomes a resident legal entity. Under article 50 of the Federal Income Tax Act, this legal entity is subject to taxation based on its personal affiliations if its registered office or place of effective management is located in Switzerland.

An example of such unlimited tax liability is a company providing advisory services which has its registered company seat in Guernsey but is effectively managed only in Switzerland.

A Swiss nexus under article 50 of the Federal Income Tax Act exists if as mentioned either a registered seat or the effective management is based in Switzerland. A registered seat arises if the legal entity is registered in the Swiss Commercial Registry. Effective management in Switzerland is acquired if the day to day management in accordance with the entity's purpose is conducted in Switzerland.⁶ The place of board meetings or the place where administrative functions are performed (for instance the accounting functions) is to a lesser extent relevant in establishing the place of effective management of a legal entity.⁷ For such tax liability of the service provider, it is not relevant whether or not the service recipient is located in Switzerland.

The tax base under article 52(1) of the Federal Income Tax Act is unlimited, but based on article 58 of the Federal Income Tax Act is assessed at a net base as the profit is taxed ( i.e. all income less all expenses). This means that the legal entity becomes subject to income tax on its worldwide profit generated within the tax year. Such liability does not, however, extend to business operations, PEs and landed property situated outside Switzerland. For instance if such a legal entity is effectively managed from Switzerland but maintains a non-Swiss PE (as defined further below), Switzerland unilaterally exempts the income attributable to the non-Swiss PE.

A second category is inbound service providers being individuals who become tax resident ( i.e. unlimitedly tax liable) under the following conditions. Based on article 3(3)(a) of the Federal Income Tax Act, an individual is considered resident (i.e. subject to unlimited Swiss income taxation) if the individual stays in Switzerland at least 30 days notwithstanding temporary interruptions and engages in a gainful activity.

An example of such unlimited tax liability is a foreign consultant who resides in Monaco but works without interruption for more than 30 days in different places in Switzerland.

A Swiss nexus exists if the individual for at least 30 days physically stays in Switzerland and engages in a gainful activity. Notwithstanding temporary interruptions, in order to assess whether the individual stays for more than 30 days in Switzerland one cannot yet refer to court cases. Scholars are of the view that nonworking days also need to be counted⁸ and that interruptions to the 30-day limit must be assessed on a case-by-case basis.⁹ The individual also needs to engage in a gainful activity, which includes independent services (i.e. the performance of professional services and other activities of an independent nature) as well as dependent services (employment).¹⁰ The latter, however, is not within the scope of this report. To determine the tax liability, it is not relevant whether or not the service recipient is located in Switzerland.

The tax base under article 6(1) of the Federal Income Tax Act is unlimited in scope. This means that the independent individual service provider becomes subject to income tax on his/her worldwide profit (i.e. his or her worldwide income less expenses). This liability of the service provider, however, does not extend to business operations, PEs and landed property situated outside Switzerland. So if the individual is physically present in Switzerland but maintains a non-Swiss PE as defined further below, Switzerland unilaterally exempts the PE profits of the resident individual.

A third category of inbound service providers is legal entities that maintain a PE in Switzerland. They have a limited tax liability under the following conditions. Under article 51(1)(b) of the Federal Income Tax Act, legal entities which have neither their registered office nor place of effective management in Switzerland are subject to taxation based on economic affiliations if they maintain a PE in Switzerland.

An example of such limited tax liability is a UK advisory company which rents office space in Switzerland for more than a year in order to provide consulting services to a Swiss-based service recipient.

A Swiss nexus is given with a PE. Under the domestic legal definition provided in article 51(2) of the Federal Income Tax Act, a PE is a fixed place of business which is wholly or partly engaged in the business activities of an enterprise in Switzerland. The source of the income of such a Swiss PE can also be outside Switzerland unless the foreign activity of the Swiss PE also constitutes a PE under provisions of Swiss domestic law. PEs include, in particular, branches, manufacturing plants, workshops, sales offices, permanent agencies, mines and other plants for the extraction of mineral resources, and building or installation projects with a duration of at least 12 months. The Swiss domestic PE definition is more or less in line with article 5 of the OECD model, although the provisions concerning auxiliary and preparatory activities, dependent and independent, do not exist in the domestic provision. A piece of equipment like a server can be qualified as a fixed place of business.¹¹ For a detailed outline of the PE definition, please refer to previous Swiss IFA branch reports.¹² It is also important to note that, contrary to the PE definition used for intercantonal tax allocation purposes, the PE definition under the Federal Income Tax Act for the determination of a PE in Switzerland does not require that a quantitatively and qualitatively important part of the activity be carried out in Switzerland.¹³

The tax base under article 52 of the Federal Income Tax Act is a net taxation base. It is limited to the business operations in Switzerland (i.e. the PE profit is determined based on separate PE accounts and is viewed separately from the total profit).¹⁴

A fourth category is when an inbound service provider is an individual maintaining a PE in Switzerland. It becomes limitedly tax liable under the following conditions. Under article 4(1)(b) of the Federal Income Tax Act, individuals who do not have a tax domicile or tax residence in Switzerland are nevertheless limitedly tax liable on the basis of economic affiliations if they maintain a PE in Switzerland.

An example of such limited tax liability is a foreign resident individual who is active in the marketing business and rents an office in Switzerland where some of her employees work.

A Swiss nexus exists if such a service provider maintains a PE in Switzerland but has no tax domicile in Switzerland (i.e. the individual does not reside in Switzerland with the intention of staying in Switzerland for the long term) and does not reside in Switzerland (i.e. does not stay in Switzerland for more than 90 days (30 days if the individual conducts a gainful activity in Switzerland)). The individual maintains a PE under article 4(1)(b) DGB if a fixed place of business which is wholly or partly engaged in the business activities of an independent profession exists in Switzerland. This means that the same PE definition applies as is outlined for legal entities above.

The tax base under article 6(2) of the Federal Income Tax Act is a net base and limited to that portion of profits for which a tax duty in Switzerland exists (i.e. allocated Swiss income less allocated Swiss expenses). At a minimum, the profits earned in Switzerland are subject to taxation. This means the tax base is limited to business operations in Switzerland (i.e. the PE profit as the net amount of income and expenses is determined based on separate PE accounts¹⁵ and is viewed separately from the total profit of the individual).

A fifth category is inbound service providers who provide independent services in Switzerland. Under article 5(1)(a) of the Federal Income Tax Act, non-resident individuals are subject to limited taxation on the basis of their economic affiliations if they engage in a gainful activity in Switzerland.

An example of such limited tax liability, based on a Federal High Court Decision, is an asset manager who was resident in Monaco but working in the canton Tessin.¹⁶

It has been long disputed between scholars whether article 5(1)(a) should also apply to independent service providers other than artistes and sportsmen conducting business activities in Switzerland even if they had no fixed place in Switzerland.¹⁷ The Federal High Court in a 2005 decision made it clear that article 5(1)(a) of the Federal Income Tax Act would be such a basis to tax independent service providers. The Federal High Court did not mention whether or not such service providers should be practising a liberal profession in order to be subject to limited income taxation. The Court stated only that if no double taxation treaty applied, an independent service provider who was not a resident of Switzerland was limitedly tax liable if he or she engaged in a gainful activity in Switzerland.¹⁸ The Court also stated that no other limitation needed to be considered.¹⁹

As regards entertainment activities, it was furthermore never contested that a mere performance in Switzerland was sufficient to attract source taxation. Inbound service providers including non-resident entertainers (actors of stage, film, radio or television, musicians and public performers) and sportsmen become limitedly tax liable if they engage in a gainful activity in Switzerland. An example of such limited tax liability is a non-resident singer and songwriter performing in Switzerland during a concert. A Swiss nexus exists if such an artiste engages in a gainful activity in Switzerland (i.e. receives a remuneration for the activity).

The tax base is based on the net income received. Expenses directly linked to the activity in Switzerland are deductible from the gross income (for entertainers, in general a 20 per cent lump sum deduction of the gross income is granted).

1.1.2. Implications for the service recipient

Regarding the implications for the service recipient, the following can be said. In general for a Swiss resident taxpayer, payments paid to a non-resident for services provided by such non-resident are deductible provided such services are economic - ally justified expenses in the meaning of articles 27 and 58 of the Federal Income Tax Act.²⁰ Furthermore, compared to payments to Swiss resident entities, Switzerland imposes no restrictions on the deductibility of such service payments to non-residents.

1.1.3. Service payments to related parties

If service payments are made to related parties they must be made at arm's length. In assessing the arm's length nature of service payments, Switzerland follows the OECD Transfer Pricing Guidelines. For instance on 19 March 2004, the Swiss federal tax administration issued a circular letter no. 4 under which the taxable profit margin of an inbound or outbound service company providing services to a related party must be determined based on the OECD Transfer Pricing Guidelines and the cost-plus method was the only method that could be used in determining appropriate profit margins.

1.2. Income classification issues

1.2.1. Definition of "services"

The term "services" is not defined for income tax purposes in Switzerland. The word service (Dienstleistung or services) is not mentioned once in the Federal Income Tax Act or in the Federal Withholding Tax Act. There is a service definition in the Value Added Tax Act but VAT is outside the scope of this report. However, in trying to define services one can look at the VAT definition of article 3 of the Swiss VAT Act, which states that everything is a service which is not a physical supply of goods. Activities considered to be services include the provision of assistance or advice; construction activities; acting as a broker; performing as an entertainer; the provision of financial backing or support; the provision of insurance or a financial guarantee or hedge; or providing air or sea transportation.

1.2.2. Services v. royalties

There are no circumstances in which income from services is characterized as royalty under Swiss tax law. The reason for this is that Switzerland does not levy any withholding tax on royalties; thus it is of no relevance whether certain services are characterized as royalties or services.

For Swiss income tax purposes, where a contract involves both the transfer of intangible property and the provision of services, such payments do not have to be disaggregated to reflect different parts of the contract as no withholding tax applies to any arm's length transfer of intangible property.

In addition, for legal entities Switzerland applies a profit tax that is levied on the basis of the annual financial statement as determined under Swiss generally accepted accounting principles. Income from intangible property and from the provision of services is therefore not treated differently. There are furthermore no situations where a disaggregation is undertaken, e.g. where one aspect of the contract comprises by far the most important part of the contract. Disaggregation, however, is a concept that is known in the Swiss VAT law.²¹

Paragraphs 11.3 to 11.6 of the OECD commentary to article 12 distinguish payments for the supply of knowhow from payments for the provision of services. This distinction in principle is not relevant for Swiss domestic income tax purposes.

There are no additional rules or court cases available which would allow an evaluation of situations in which separate transactions are so closely linked or continuous that they cannot adequately be evaluated on a separate basis.

1.2.3. Embedded intangibles

There are no special tax rules applicable in Switzerland which seek to address shifts in profit potential or asset value from one enterprise to another as the result of a transfer of intangible assets embedded in contracts for the provision of services. However, article 58 of the Federal Income Tax Act which stipulates the arm's length principle should be considered in this context.²² Under this provision, a shift of profits to a related party is added to the taxable profit²³ even if it is not shown in the financial statements. This is the case if (a) the company grants a benefit of financial value without receiving adequate consideration in return; (b) the benefit is granted to a shareholder or an affiliated party; (c) it would not have been made available to third parties in comparable circumstances; and (d) the lack of congruence between the benefit granted and the consideration received in return was, or should have been, apparent to the officers of the company.²⁴

In relation to shifts in profit potential or asset value from one enterprise to another, an interesting and leading Swiss court case is the following case decided by the Federal High Court in 2008.²⁵ D AG, a company resident in the canton of Fribourg, bought in 2000 for CHF 2.8 million 70 per cent of A AG, a company resident in the canton of Tessin. A AG in 2002 transferred its contracts regarding biological analysis as well as specialist employees to its 70 per cent shareholder D AG without receiving any compensation. The Tessin tax authorities viewed this transfer as profits wrongly not credited to the profit and loss accounts, and under article 58(1)(c) of the Federal Income Tax Act and the respective identical cantonal income tax provision claimed a taxable capital gain of approximately CHF 2.9 million. Based on the purchase price of CHF 2.8 million for 70 per cent of the shares in A AG in 2000, the authorities established a fair market value for A AG of CHF 4 million. They then deducted the net asset value of 0.5 million which meant that A AG had a goodwill value of CHF 3.5 million. As the turnover from transferred biological analysis work had been around 85 per cent of the entire turnover of A AG prior to the transfer, they stated that 85 per cent of the goodwill (i.e. around CHF 3 million) was transferred from A AG to D AG, which for income tax purposes has to be added to the taxable profits of A AG. During the court proceedings, the values to determine the taxable capital gain resulting from the transfer of the contracts and employees were slightly reduced but the view of the tax authorities that this transfer should have been compensated was upheld by the courts including the Federal High Court.

1.3. Source and nexus

Under the domestic law of Switzerland, there are no specific source rules. Income is attributed to a Swiss PE if services falling under this report are performed by the Swiss PE. There are therefore circumstances in which the income is attributed to the Swiss activity even if the service is physically performed abroad, unless the activity abroad again constitutes a non-Swiss PE under the above-outlined domestic law provision. For instance in the case of a PE located in Switzerland, services performed by employees of such a PE outside Switzerland should in principle be allocated to the Swiss PE and consequently profits resulting from such services would be taxed in Switzerland. The above analysis would not change if the source of the income were an automated service like a server requiring no supervision.

Switzerland will only tax the service income of non-resident service providers derived when certain threshold requirements have been met. These thresholds relate mainly to the existence of a PE through which the services are provided, or to a minimum amount of time spent by the service provider in the jurisdiction (see examples made above under section 1.1).

1.4. Gross v. net taxation

Income from services, if subject to Swiss income taxation, is in general taxed on a net basis.

As in the case of a PE, in most cases Switzerland provides for a net basis taxation of income from services (i.e. taxing the profits) either generally or in specified circumstances. Such net basis taxation aims to ensure that only the profits of the non-resident service provider are taxed in Switzerland by making appropriate allowance for direct expenses incurred by the service provider in deriving the service income.

1.4.1. Fees for technical services

Technical service fees in general are any consideration for the rendering of managerial, technical or consultancy services but not including consideration for construction, assembly, and mining or similar projects. Switzerland does not treat fees for technical services provided by non-resident enterprises as a special category of income. Such fees are furthermore not subject to any withholding taxes in Switzerland.

1.5. Compliance and administration

Regarding reporting, filing or other requirements imposed on a non-resident service provider that is tax liable in Switzerland, the following applies. The compliance obligation in respect of income from the provision of services is no different from the obligation applying with respect to other business profits, such as income from trade or manufacturing. The Swiss cantons are responsible for the assessment and collection of cantonal as well as federal income taxes. The federal income tax authorities in principle only have supervisory powers. In the case of entities newly registered in the Swiss Commercial Registry, a notification by the Registry to the cantonal tax authorities is made. If the legal entity, or its Swiss branch, does not register and file its annual income returns despite the duty under article 124(1) of the Federal Income Tax Act, it must be mentioned that it and its directors can be fined under articles 174, 177 and 181 of the Federal Income Tax Act. For a Swiss PE, the service provider operating through such a PE has to prepare separate accounts as a basis for the tax declaration.

The payer of the fee and/or the recipient of the service itself being tax resident in Switzerland is not required to make any withholding on payment for service fees to the service provider. There is only one exception to this rule: the resident payer of the fee to a non-resident entertainer (i.e. artistes, sportsmen, etc.) under article 100 of the Federal Income Tax Act is obliged to withhold a source income tax on such payments to the entertainer or a third party. In addition a strict joint and several liability is imposed on the payer. This also applies with respect to earnings and compensation not received by the artiste but paid to a third party that organized such person's performance (article 5(2) of the Federal Income Tax Act). In such a case the source income tax withheld on behalf of the non-resident entertainer is a final tax.

Furthermore, Switzerland does not apply any "force of attraction" rules according to which service income arising from sources in Switzerland is taxable if the service provider has a PE in Switzerland, provided such income is clearly not attributable to that Swiss PE (i.e. the Swiss PE did not provide the services).

There are also no special income tax obligations for a non-resident service provider under a contract with a non-resident which provides for service activities performed in Switzerland (e.g. management training to all subsidiaries) for the benefit of a resident.

2. TREATY ISSUES

The main focus of this section is on income from services that falls within article 7 (business profits) of the OECD model or the UN model and article 14 (independent personal services) of the UN model or the OECD model as it was before 2000. Below you will find a description of how treaties entered into by Switzerland would deal with income from such services.

2.1. Income from services under articles 5 and 7 of the OECD model

Insofar as the definition of PE relates to the provision of services, in the tax treaties entered into by Switzerland a PE generally follows the PE definition found in paragraph 1 of article 5 of the OECD model which defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on, while paragraph 2 sets out a number of examples of such places of business.

Switzerland has as an exception agreed to enter into treaties which include a provision along the lines of article 5(3)(b) of the UN model.²⁶ This is the case with the following countries: Algeria (article 5(2)(i) of the Swiss-Algerian tax treaty); Argentina (article 5(3)(b) of the Swiss-Argentinian tax treaty); Azerbaijan (article 5(3)(b) of the Swiss-Azerbaijanian tax treaty); China (article 5(3)(b) of the Swiss-Chinese tax treaty); India (article 5(2)(l) of the Swiss-Indian tax treaty); Kazakhstan (article 5(3)(c) of the Swiss-Kazak tax treaty); the Philippines (art icle 5(2)(h) of the Swiss-Philippine tax treaty); Thailand (article 5(2)(j) of the Swiss-Thai tax treaty); and Vietnam (article 5(3)(b) of the Swiss-Vietnamese tax treaty).²⁷

In its tax treaties, Switzerland has not agreed to include the alternative services PE provision set out in paragraph 42.23 of the commentary on article 5 of the OECD model (or a provision based on that provision).

Where a services PE provision based on the UN model is included, it generally applies notwithstanding the provision dealing with construction sites (paragraph 3 of article 5 in the OECD model).²⁸ Furthermore, the time threshold provided in respect of construction activities is in general consistent with that in the services PE provision.

Services PE provisions included in tax treaties entered into by Switzerland generally have the following limitations: a minimum time threshold during which the activities are performed and a requirement that the services be performed for the same or connected projects for more than 12 months. In detail the limitations in these provisions are as follows:

• More than 6 months in article 5(2)(i) of the Swiss-Algerian tax treaty; in article 5(3)(b) of the Swiss-Argentinean tax treaty; in article 5(3)(b) of the Swiss-Azerbaijanian tax treaty; in article 5(3)(b) of the Swiss-Chinese tax treaty; in article 5(2)(h) of the Swiss-Philippine tax treaty; in article 5(2)(j) of the Swiss-Thai tax treaty; and in article 5(3)(d) of the Swiss-Vietnamese tax treaty;²⁹ and
• more than 12 months in article 5(3)(c) of the Swiss-Kazakh tax treaty.

Services PE provisions included in tax treaties entered into by Switzerland generally do not have the following limitations: (a) a source taxation of income from services performed outside the jurisdiction; (b) a provision that applies only to services provided by the enterprise to third parties, i.e. an enterprise will not be deemed to have a services PE merely by reason of services provided to the enterprise in the jurisdiction by an employee of the enterprise; or (c) a minimum presence test in the case of services performed primarily through a single individual or a minimum threshold based on the percentage of revenue derived from the activities of that individual in the jurisdiction.

Swiss tax treaties do not usually include force of attraction rules, for instance as provided for in article 7(1)(c) of the UN model which states that the profits of an enterprise that are attributable to business activities carried on in the other state of the same or similar kind as those effected through a PE are taxable.

2.2. Income from services treated as royalties

2.2.1. Supply of knowhow

The OECD and UN models include payments for information concerning industrial, commercial or scientific experience ("knowhow") within the definition of "royalties". Paragraphs 11 to 11.6 of the OECD commentary on article 12 provide guidelines for distinguishing such payments from payments for the provision of services.

As Switzerland does not levy any withholding tax on royalties, it is not relevant whether payments identified as being payments for the provision of services in paragraphs 11 to 11.6 in the OECD commentary on article 12 are considered to be royalties for treaty purposes.

In general Swiss tax treaties do not adapt the definition of "royalties" to specifically include payments that would be treated as payments for services in accord ance with the OECD commentary.

2.2.2. Secondment of employees

Rather than transferring knowhow or providing services to another enterprise directly, an enterprise may provide for the secondment of one its employees to the other enterprise for the purpose of bringing expert skills or knowledge to that other enterprise. As noted above in section 1.2.3, this may be considered by the jurisdiction in which the supplying enterprise resides as an outbound transfer of intellectual property, in respect of which an amount should be treated as taxable income of the supplying enterprise (even if no fee is charged under the secondment arrangement). If a fee is charged, then additional issues may arise in the jurisdiction of the receiving enterprise.

For example, a foreign company (ForCo) may agree to second a skilled manager to a subsidiary company (SubCo) for a limited period for the purpose of assisting SubCo to establish new management processes and train its employees in operating the new processes. Under the contract, ForCo is entitled to a fee in addition to reimbursement of expenses relating to the manager's remuneration. In this way, know - how developed by ForCo may be transferred to SubCo through the work performed by the secondee for SubCo.

In Switzerland, under such circumstances the payment to the supplying enterprise is likely to be characterized as a payment for the provision of services and not as a royalty.

Furthermore, the activities of the secondee for SubCo in Switzerland could be considered in determining whether ForCo should be regarded as having a PE in Switzerland.

2.3. Fees for technical and other services

Switzerland under domestic law does not levy any withholding tax on technical or other services. There is, therefore, no guidance available in Switzerland on the meaning of fees for technical services.

However, a few tax treaties concluded by Switzerland provide for fees derived by a non-resident service provider from the provision of technical or other services to be taxed at limited rates in the jurisdiction of the payer of such fees. Fees to which these provisions apply often include payments in consideration for any service of a technical, managerial or consultancy nature. Below is a list of tax treaties where such provisions have been included.³⁰

Under the Swiss-Argentinian treaty a 10 per cent withholding tax can be imposed by Argentina on technical support services (article 12(2)(c) of the Swiss-Argentinian tax treaty) which are supplied by the residence state. Directly related expenses, however, can be deducted (see protocol to article 12 of the tax treaty between Switzerland and Argentina).

Regarding the tax treaty with Ghana, a withholding tax of 8 per cent can be levied by Ghana on administrative, technical or consultancy services to individuals. Not subject to such withholding tax are payments for construction site supervision and fees for independent professions or any other activity of an independent character under article 12(2) and (4) of the Swiss-Ghanaian tax treaty).

Under the tax treaty with India, India may levy a withholding tax of 10 per cent on technical services, namely in the fields of management, technical and general advice. Not subject to such withholding tax are fees paid in connection with professional services or other activities of an independent character (see article 12(2)(4) and (5) of the Swiss-Indian tax treaty).

Under the tax treaty with Indonesia, Indonesia can impose a withholding tax of 5 per cent on services of any kind including advisory services provided by employees physically present in Indonesia. Again, fees paid for professional services or for other activities of an independent character under article 13(2) to (3) of the Swiss- Indonesian tax treaty are not subject to such withholding tax.

Under the tax treaty with Jamaica, Jamaica has the right to impose a withholding tax of 5 per cent on services of any kind including advisory services which are provided by employees present in Jamaica if within 12 months they are present for more than 6 months (see protocol to article 13 of the Swiss-Jamaican tax treaty). Not subject to any withholding tax, however, are professional services or other activities of an independent character (article 13(1) to (3) of the Swiss-Jamaican tax treaty).

Under the tax treaty with Pakistan, Pakistan could levy a withholding tax of 10 per cent in the case of additional and subordinated support or advisor's services in connection with licences (article 12(2) and (3) of the Swiss-Pakistani tax treaty). On the other hand also under the tax treaty with Pakistan, a withholding tax of 7.5 per cent can be levied on technical services, consulting services or management activities. However, considerations for construction or similar activities and consideration in connection with a professional service or an independent activity are exempt from such withholding tax (see article 13(1) to (3) of the Swiss-Pakistani tax treaty). Furthermore, expenses directly related to such services can be deducted, up to 20 per cent of the gross consideration (see protocol to article 13 of the Swiss- Pakistani treaty).

The tax treaty with Sri Lanka allows for a withholding tax of 5 per cent on services of any kind which are provided by local employees within a period of 12 months if such employees are present for more than 6 months. However, the withholding tax is not applicable in the case of fees for professional services or other activities of an independent character (article 13(1) to (3) of the Swiss-Sri Lankan tax treaty).

Finally, under the tax treaty between Switzerland and Trinidad and Tobago a 5 per cent withholding tax can be imposed on certain management payments (i.e. on payments for the management of a business and also for the provision of personal, professional and technical services (article 13(1) to (3) of the Swiss-Trinidad and Tobago tax treaty).

2.4. Independent personal services

Prior to 2000, the OECD model included article 14 independent personal services which provided for source taxation of income from professional services and other activities of an independent character where the income was attributable to a fixed base available to the non-resident in the other jurisdiction for the purpose of performing his activities. This article was deleted in 2000, with the result that income from such activities is now covered by article 7 business profits. The UN model continues to include article 14 which addresses such activities. This article adopts an approach similar to the former OECD provision. However, the income may also be taxed at source in the absence of a fixed base if the person stays in the jurisdiction for a period or periods aggregating more than 183 days in a 12-month period. In this case, the jurisdiction may tax income derived from the services performed in that jurisdiction.

Switzerland still includes article 14 of the OECD model prior to 2000.³¹ For instance the new tax treaty with the Netherlands which is not yet in force provides for the following independent personal services provision:

This provision applies only to individuals. The cross-border activity of a company-employed physician hence is not covered by this provision.³²

The term "fixed base" has similarities with the term used in article 5(1)of the OECD model. However, article 14 of the OECD model prior to 2000 only requires that a fixed place is at the disposal of the taxpayer; it does not require an actual activity of the enterprise in the fixed place of business.³³

Under article 5(1)(a) of the Federal Income Tax Act, non-resident individuals are subject to taxation on the basis of their economic affiliations if they engage in a gainful activity in Switzerland. In general, income derived from services performed outside the jurisdiction in which the fixed base is situated is not attributed to the fixed base as article 6(2) limits the taxation to income from Swiss source. The income generally is taxed on a net basis.

Switzerland has in general not entered into tax treaties which contain a provision under which source taxation is permitted, i.e. where the remuneration exceeds a monetary threshold and is paid by a resident of the source jurisdiction or is borne by a PE situated in that jurisdiction.

Switzerland has agreed to a provision similar to article 14(1)(b) which states that:

Such provisions can be found³⁴ in the following treaties:

• a stay amounting to or exceeding in the aggregate 183 days within the calendar year is required under article 14(1)(b) of the Swiss-Algerian tax treaty; under article 14(1)(b) of the Swiss-Chilean tax treaty; under article 14(1)(b) of the Swiss-Moroccan tax treaty; under article 14(1)(b) of the Swiss-Mexican tax treaty; under article 14(1)(b) of the Swiss-Mongolian tax treaty; and under article 14(1)(b) of the Swiss-Uzbek tax treaty;
• a stay amounting to or exceeding in the aggregate 183 days in any 12-month period is required under article 14(1)(b) of the Swiss-Lithuanian tax treaty; under article 14(1)(b) of the Swiss-Azerbaijanian tax treaty; under article 14(1)(b) of the Swiss-Bangladeshi tax treaty: under article 14(1)(b) of the Swiss-Chilean tax treaty; under article 14(1)(b) of the Swiss-Estonian tax treaty; under article 14(1)(b) of the Swiss-Indian tax treaty; under article 14(1)(b) of the Swiss-Kazakh tax treaty; under article 14(1)(b) of the Swiss- Mexican tax treaty; and under article 14(1)(b) of the Swiss-Philippine tax treaty;
• a stay amounting to or exceeding in the aggregate 183 days within a tax year is required under article 15(1)(b) of the Swiss-Pakistani tax treaty; under article 14(1)(b) of the Swiss-South African tax treaty; under article 14(1)(b) of the Swiss-Tunisian Tax treaty; and under article 14(1)(b) of the Swiss- Vietnamese tax treaty;
• a stay amounting to or exceeding in the aggregate 120 days within a tax year is required under article 14(1)(b) of the Swiss-Egyptian tax treaty; and
• a stay of at least 9 months in any 12-month period is required under article 14(1)(b) of the Swiss-Ghanaian tax treaty.

Originally published in IFA Cahiers de droit fiscal international

Footnotes

1 Rolf Markus Wüthrich, Source and residence: new configuration of their principles, in Cahiers de droit fiscal international, 2005, vol. 90a, pp. 643 et seq.

2 This is why for instance limited tax liability of creditors or usufructuaries with respect to claims secured by mortgages or pledges on landed property situated in Switzerland as mentioned in art. 5(1)(c) of the Federal Income Tax Act and non-resident brokers or dealers in Swiss-sited landed property as mentioned in art. 51(1)(e) of the Federal Income Tax Act are not addressed herein.

3 This means that services potentially falling under arts. 6, 10, 11, 12, 15, 16, 18, 19, 20 or 21 of the OECD model are not mentioned in this report.

4 As federal and cantonal income tax provisions have been harmonized to a very large extent, the cantonal provisions are not outlined in this report but nevertheless should be considered in individual cases.

5 Federal Income Tax Act of 14 December 1990, SR 642.11, as of 1 January 2011.

6 Jean-Frédéric Maraia, "Residence of Companies under Tax Treaties and EC Law – Switzerland", in Maisto (ed.), EC and International Tax Law Series, vol. 5 (2009), pp. 795 et seq.; Xavier Oberson and Howard Hull, Switzerland in International Tax Law, 3rd edn, p. 24.

7 Federal High Court Decision, 2A.321/2003, para. 3.1.

8 Peter Locher, Kommentar zum DBG – Bundesgesetz über die direkte Bundessteuer, I. Teil, Therwil and Basle 2001, art. 3 no. 36.

9 Madeleine Simonek in P. Nefzger, M. Simonek and T. Wenk, Kommentar zum Steuergesetz des Kantons Basel-Landschaft, Basel 2004, §4 no. 19.

10 Locher, op. cit., art. 3 no. 37.

11 Hans Ulrich Meuter, "Besteuerung einer E-Commerce-Betriebsstätte", Zürcher Steuerpraxis 2010, H. 1, pp. 1 et seq.; Oberson and Hull, op. cit., p. 100.

12 Peter Brülisauer, The attribution of profits to permanent establishments, in Cahiers de droit fiscal international, 2006, vol. 91b, pp. 641 et seq.; Stefan Widmer, Is there a permanent establishment? in Cahiers de droit fiscal international, 2009, vol. 94a 2009, pp. 631 et seq.

13 Daniel de Vries Reilingh, "The Concept of Permanent Establishment: A Comparative Analysis of Tax Treaty and Swiss Domestic Tax Law" (2010) 38 Intertax, p. 580.

14 Athanas and Giglio, in Martin Zweifel and Peter Athanas (eds.), Kommentar zum schweizerischen Steuerrecht, Band I/2a – Bundesgesetz über die direkte Bundessteuer (DBG), 2nd edn, Basle 2008, art. 52 no. 37 et seq.

15 This is in principle the view of the tax authorities but is not uncontested; see Athanas and Giglio, op. cit., art. 6, no. 16 et seq.

16 Federal High Court Decision, 2P.188/2005 and 2A.457/2005.

17 Peter Agner, Beat Jung and Gotthard Steinmann, Kommentar zum Gesetz über die direkte Bundessteuer, Zurich 1995, n. 1c ad art. 91 Federal Income Tax Act; Locher, op. cit., art. 5, no. 7 et seq.; Maja Bauer-Balmelli and Philip Robinson, in Zweifel and Athanas, Kommentar zum schweiz - erischen Steuerrecht, vol I/2a, Bundesgesetz über die direkte Bundessteuer [DBG], 2000, n. 5 ad art. 5, LIFD; Felix Richner, Walter Frei and Stefan Ka ufmann, Handkommentar zum DBG, Zurich 2003, n. 1 ad art. 5 DFTA; Danielle Yersin, "Distinction entre l'activité indépendante et la gestion de la fortune privée", ASA 67, pp. 97 et seq.

18 Federal High Court Decision, 2P.188/2005 and 2A.457/2005, para. 3.2. (It seems that the Federal High Court takes the view that only activities in Switzerland should fall under art. 5(1)(a) of the Federal Income Tax Act); see also Stefan Oesterhelt, "Besteuerung des Erwerbseinkommens von gebietsfremden Personen", Steuer-Revue 65(2010), H. 2, p. 96.

19 Federal High Court Decision, 2P.188/2005 und 2A.457/2005, para. 3.2.

20 For instance, the Swiss Federal Tax Authorities on 22 June 2005 issued circular letter no. 9 with which they ended the so-called fifty-fifty practice. Under this abolished practice, Swiss companies which were engaged in foreign trade and which had only little substance in Switzerland were able to claim income tax deductions on certain related expenses paid to non-residents including commissions and management fees matching up to 50 per cent of gross profit, without further proof of economic justification. The 2005 circular, which definitively terminated this practice and remains in force, clearly states that all companies or branches subject to taxation in Switzerland must prove that their expenses are commercially justified in order to be accepted as income tax deductible expenses.

21 Art. 19 of the Swiss VAT Act 2010.

22 Raoul Stocker and Kersten Honold, Cross-border business restructuring, Cahiers de droit fiscal international, 2011, vol. 96a, p. 707.

23 In addition, it can under certain circumstances be subject to a 35 per cent or even 53.83 per cent Swiss withholding tax.

24 Jean-Frédéric Maraia, Transfer pricing and intangibles, Cahiers de droit fiscal international, 2007, vol. 92a, p. 568.

25 Federal High Court Decision 2C.335/2008; an analysis and German translation of the case which is in Italian can be found in Madeleine Simonek, "Unternehmenssteuerrecht", Entwicklungen 2008, Bern 2009, pp. 91 et seq.

26 Marco Vitali, "Grenzüberschreitende Dienstleistungserbringung – Unilaterale Anknüpfungs - prinzipien und abkommensrechtliche Abgrenzungsprinzipien, zsis aktuell" 12/2010, Monatsflash 1, 4–23, para. 2.2.1.

27 Ibid., para. 2.2.1.

28 See for example art. 5(3)(b) of the Swiss-Chinese tax treaty.

29 Vitali, op. cit., para. 2.3.

30 Ibid., para. 3.

31 Frantisek J. Safarik, "Das neue Doppelbesteuerungsabkommen Schweiz – Niederlande", ASA 79, p. 965.

32 Xavier Oberson, Précis de droit fiscal international, 3rd edn, Berne, n. 532.

33 Ibid., n. 533.

34 Vitali, op. cit., para. 2.3.

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