Switzerland has two levels of taxation: The federal taxes and the cantonal/communal taxes. Each tax is based on a distinct legislation which may contain different concepts and rules from the other. Most Swiss tax revenues are generated by direct taxes on individuals and corporations, with the cantonal taxes usually about double the federal taxes.
The major taxes for financial institutions and the 1995 rates are listed hereafter:
Tax Federal tax Cantonal/
(rate) communal tax
(rate)
1. Direct taxes:
1.1. Corporate yes (3.63 - 9.8 %) yes (6 - 37 %)
income tax
Corporate net yes (0.08 %) yes (0.26 - 0.7 %)
asset value
("capital") tax
1.2. Individual yes (0 - 11.5%) yes (0 - 38 %)
income tax (1)
Net asset no yes (0 - 1.8 %)
value tax
2. Indirect taxes:
2.1. Stamp duty on yes (3 % - 31.12 no
contributions to .1995 0 - 2 %
equity of afterwards)
corporations
2.2. Stamp duty on yes (06 % - no
debt securities 0.12 %) p.a.
of Swiss issuers
2.3. Securities yes (0.15 % on sometimes (usually
Turnover securities of 10 % of the
Tax on Swiss issuers, federal tax rate)
transactions 0.3 on other
in securities securities)
2.4. VAT yes (6.5 % no
regular tax, 2 %
preferential rate)
(1) Self-employed individuals engaged in banking activities ("private bankers") are in addition subject to social security contributions of 11.2 %.
All of the above taxes are self assessment taxes, i.e. they are to be declared and paid spontaneously by the taxpayer, based on returns submitted. Corporate and individual income taxes are to be declared annually or every 2 years; VAT and Securities Turnover Taxes quarterly, and Stamp Duty upon the occurrence of the contribution or issue.
Withholding taxes are considered provisional tax payments to be set-off against main stream tax; for non-Swiss residents, they may be the final tax charge.
All these taxes are further explained below.
2. Corporate taxes on income and capital:
The basic rules will be indicated for Swiss incorporated taxpayers first, with points of special interest for branches of foreign banks highlighted afterwards.
2.1. For Swiss Incorporated Entities:
2.1.1. Taxable income: The taxable income is based on the taxpayer's statutory accounts. Adjustments to such accounting income are then made for the purpose of determining taxable income. The major adjustments are:
2.1.1.1. Business expenses: They must be wholly and exclusively incurred for the purpose of the business and be at arms' length in order to be deductible for tax purposes. Capital expenditures are not deductible. Commission payments, finder's fees and the like are deductible to the extent that the name and address of the recipient are disclosed. In addition, the character of these payments as necessary expenses must be properly documented.
2.1.1.2. Interest expense: Interest paid by bank or financial institutions is a deductible business expense. However, interest expense paid to affiliates will be scrutinised as to its deductibility and may be subject to limitations.
Regulated banks are subject to "own fund requirements" set by the banking regulator. These requirements are usually respected by the tax authorities. Non-regulated entities may come under scrutiny in some cantons if their interest bearing debt exceeds 6 times their equity. Any excess would be considered a dividend distribution, disallowed as an expense and subject to Swiss withholding tax of 35 %.
Higher gearing for non-regulated entities engaged in finance activities is possible to the extent that the tax authorities can be convinced that it is "at arms' length".
The rate of interest used should reflect the fair market conditions. Interest payments made in excess of fair market rates as well as interest rates exceeding those published by the Federal Tax Administration for advances to and from shareholders are likely to be scrutinised and possibly disallowed.
2.1.1.3. Depreciation: Such charges are deductible if they are in accordance with the write-off tables published by the Federal Tax Administration. The following declining balance rates were in effect in 1995 for Federal Tax purposes:
1. Office buildings (excluding land) 4 % 2. Office furniture and equipment 25 % 3. Computer hardware 40 % 4. Computer software 40 % 5. Motor vehicles 40 % 6. Intangible assets 40 %
If the straight-line depreciation method is used, the above rates should be reduced by half. Certain cantons allow accelerated depreciation under certain circumstances.
2.1.1.4. Bad debt reserves and country risk provisions: Bad debt reserves are allowed as follows:
-Individual risks can be adjusted at the discretion of the bank, which adjustment can be freely reviewed by the tax authorities. Provisions can be made before the debtor has been declared bankrupt. Write-offs of bad debts are made only when the debtor is adjudged bankrupt or it is highly unlikely that the debtor will ever be in a position to pay;
-In addition, a general reserve can be made on the remaining outstanding receivables if the debtors are not banks in an OECD country. In general, 5 % of the outstanding receivables from Swiss clients and up to 7 % on the outstanding receivables from non-Swiss clients are allowed;
Regulated entities are, in addition, required to make country risk provisions going up to 100 % of the receivables from residents from certain designated countries (including sovereign risk).
All provisions must be reviewed annually and adapted. Failure to do so will lead to disallowance of excess bad debt reserves or of country risk provisions no longer required.
2.1.1.5. Tax expense:
Corporate income and net asset value taxes paid to the Swiss Confederation as well as to the Canton and the Commune are usually a deductible item. The same applies to most other taxes paid by financial traders, but not to fines.
2.1.2. Losses carried forward:
Federal income tax laws allow losses to be carried forward up to a maximum of 7 years. Most cantons' laws are less generous (4 or 5 years).
Losses cannot usually be carried back in Switzerland.
2.1.3. Tax rates:
Swiss tax rates applicable to companies are generally graduated, i.e. they are determined as a function of the return on equity realised in the reporting period. For example: Federal income tax is imposed at a minimum rate of 3.63 % up to a return of 4 % of the equity. An additional 3.63 % is applied to the return in excess of 4 % and an additional 4.84 % on the return exceeding 8 % of the equity with the maximum rate of 9.8 % being reached at a return on equity of 23.15 %.
Cantonal tax rates are graduated as well. The following table attempts to illustrate this principle:
Return on equity Federal Tax Rate Cantonal Tax Rate Geneva Lugano Zurich 5 % 4.356 % 18 % 24.3 % 12.5 % 10 % 6.776 % 14 % 24.3 % 20.0 % 15 % 8.55 % 20 % 24.3 % 25.0 %
The above return on equity is based on the tax adjusted figures for earnings and equity.
2.1.4. Credits against corporate income and net asset value taxes are generally granted for:
-Swiss withholding taxes (see below): Swiss source investment income is usually subject to 35 % Swiss withholding tax. By filing a special return with the Federal Tax Authorities, a corporate taxpayer can obtain a refund of such tax.
An individual taxpayer will file such a claim together with his income tax return and will receive a credit for the withholding tax with only the excess being refunded to him.
-Foreign withholding taxes under certain treaties: Swiss residents receiving interest (similar rules applied to dividends and royalties), which has suffered foreign withholding taxes in the source country with which Switzerland has concluded a qualifying double taxation treaty, can obtain a credit for the foreign withholding tax (or a deemed paid foreign withholding tax) against the Swiss corporate income tax due on the net result of the lending transaction.
2.2. Taxation of Swiss branches of foreign banks:
The above rules apply in principle to branches as well, with the following changes or peculiarities:
2.2.1. Interest expense: Branch offices of foreign banks need not comply with Swiss regulatories "own fund" requirements. Thus, the tax authorities have set their own requirements for non-interest bearing advances from the foreign bank to its Swiss branch: These must be between 1/7 and 1/11 of the assets of the branch (mainly depending on the qualification of the branch's assets). In a singular instance, the Swiss Federal Supreme Court has decided that the foreign head office's regulator's own fund requirements must be respected by the Swiss tax authorities as well. This case can only be applied to regulated banking institutions whose head office is in an OECD country.
2.2.2. Credit for withholding taxes:
A Swiss branch can obtain a credit for Swiss withholding taxes on interest and possibly dividends which are related to the branch's own businesses, but not for such withholding taxes on Swiss source income which is related to business carried on by the head office or other branches of the same corporation outside Switzerland.
A Swiss branch of a foreign corporate entity cannot claim a credit for foreign withholding taxes as it is not entitled to the benefits of the Swiss double tax treaties.
2.3. Capital tax:
Capital tax is levied by the Confederation and the cantons on the net equity or the deemed net equity of a branch of a foreign entity. Net equity comprises share capital, paid-in surplus, the legal reserve, other open reserves shown on the balance sheet, as well as the retained earnings. In addition, amounts disallowed by the tax authorities which have been taxed are also part of the net asset value basis.
The capital tax can make up a very substantial part of the total tax charge of Swiss banks and financial institutions due to the substantial regulatory "own fund" requirements.
For 1995 the tax rates at the federal level were 0.08 % and at the cantonal level for Geneva were 0.4 %, 0.561 % for Lugano and 0.375 % for Zurich.
3. Withholding tax and issue tax on bonds and money market papers:
3.1. There is a federal withholding tax on:
-income from bonds and similar indebtedness by Swiss issuers; and
-dividend distributions by Swiss corporations; and
-distribution of income by Swiss investment funds; and
-interest paid on deposits with Swiss banking establishments
The rate of withholding in each of the above cases is 35 %. For the purpose of the withholding tax the definition of interest paid on bank deposits is very broad and includes any compensation for deposits made with any Swiss business paying interest to a minimum of 20 or more customers on a regular basis (not taking into account interest for late payment). The only exception applies to withholding taxes on interest which is paid on interbank deposits. Interest paid by foreign branch of a Swiss "bank" is exempt only if it relates to the branch's own business and is not replaced through the Swiss head office.
The term "bond" is also defined very loosely as any form of indebtedness on which interest is paid on identical terms and conditions to more than 10 creditors. For bonds, the total compensation paid to the holder of the bonds by the issuer is subject to withholding tax. This includes the difference between issue and repayment price, as well as any other "capital" compensation.
Sub-participation in loans granted by Swiss banks can lead to the creation of a "bond".
Distributions made by a Swiss corporation, either on a regular basis, or upon its liquidation, whether openly declared or transferred as a hidden advantage (either by granting conditions not at arms' length or by not collecting an amount due according to arms' length principles) are taxable.
Distributions by investment funds are subject to withholding tax unless they qualify as distributions of capital gains which are made separately from the income distribution.
3.2. Interest from fiduciary deposits:
To minimise the impact of the Swiss withholding tax on the liquidity held by foreign investors with Swiss banks, the Swiss banks have created the so-called "fiduciary deposits". These are deposits of client funds made by Swiss banks in their own name (but at the risk and on behalf of the investors) with banks established in countries outside Switzerland where such deposits do not attract withholding. These deposits are not considered deposits with the Swiss banks, but deposits with the non-Swiss bank and therefore the interest paid thereon is exempt from Swiss (and usually foreign) withholding. Special formalities are required to exempt the interest on fiduciary placement from the withholding tax.
3.3. Additional withholding by Swiss custodians on certain foreign source income:
Aside from the Swiss domestic withholding, Swiss internal laws under the double taxation treaties with the United States, Canada and Japan impose a duty on Swiss custodians receiving interest or dividends for the benefit of third parties from such source countries to assure the original level of withholding in such source countries. Investors can claim a reimbursement of this additional withholding under the double taxation treaty between their home country and the mentioned countries.
3.4. Reduction and refund of these withholding taxes:
In principle there is no reduction at source of the Swiss withholding tax. Reimbursement of the excess Swiss withholding tax can be claimed by residents of countries with which Switzerland has concluded a double taxation treaty. Switzerland insists that the forms for reimbursements are signed by the tax authorities in the country of domicile of the investor to assure the regular taxation of such income in the investor's accounts.
Special rules apply to distributions by Swiss investment funds.
3.5. Special withholding tax on interest secured by Swiss real estate:
Under a different Federal Law and related cantonal laws, withholding on interest secured by Swiss real estate has been introduced on January 1, 1995 throughout Switzerland. The combined cantonal and federal taxes are: in Geneva 20 %, in Lugano 30 % and in Zurich 17 %.
Withholding tax as under 3.1. and 3.5. is levied independently from each other and in certain instances could be levied cumulatively.
3.6. Issue tax on debt instruments (bonds and money market papers) of Swiss issuers:
The taxable instruments are:
-Bonds: Bonds are defined for the purposes of this tax as bonds, promissory notes issued in sequence and similar paper, discount paper and any other evidence of indebtedness in the form of a debt security or traded as if there were a debt security which is intended for placement in the public, all with a term of more than 12 months, as well as sub-participations in loans granted by banks to Swiss debtors.
-Money market papers: These are identical instruments to bonds with a fixed term of not more than 12 months, issued by a Swiss person.
The tax rates are:
0.12 % of the nominal value for each year or part thereof up to the maturity of a bond
0.06 %p.a. on the same basis for sub-participations and "obligation de caisse"
0.06 % p.a. on commercial paper: face value calculated at 1/360th for each day which such paper is outstanding.
3.7. Issue tax on the issue and increase of the equity of Swiss corporations:
Such tax is levied at the rate of 3 % (after 1.1.1996 2 %, contributions upon incorporation up to SFrs. 250,000.- tax free) on all transfers of cash or in kind or waivers of claims by shareholders to a Swiss corporation to the extent that the shareholder did not commercial consideration for such transfer or waivers.
4. Securities turnover tax:
4.1. Qualifying transactions:
Securities turnover taxes are levied on transfers of Swiss and foreign securities in which Swiss securities traders participate in any way.
4.2. Securities traders are:
-Banks subject to the Swiss banking supervision including branches of foreign banks;
-Brokers and other operations or individuals as well as branches of foreign entities whose activity is mainly to trade in securities for third parties or to act as investment advisors for the purchase and sale of securities;
-Investment fund management companies;
-Swiss corporations holding taxable securities valued at more than SFrs. 10 Mio. in their balance sheet
4.3. Taxable securities include:
-Securities issued by domestic debtors such as bonds, certificates of deposits, debenture bonds, shares, jouissance bonds, units in investment funds, bills of exchange and similar commercial papers;
-Securities issued by non-resident debtors if their economic function is similar to the above;
-Documents covering participations in the securities referred to above.
The classification of more sophisticated financial instruments is rather complex. Options are not subject to the Swiss securities turnover tax as well as most other of these financial instruments. However, the exercise of such financial instrument or derivative may lead to the delivery of a security transaction which will become a taxable event.
4.4. Tax rates and tax charges:
The ordinary rates are the following:
0.15 % for securities issued by a resident of Switzerland (plus cantonal taxes, if any);
0.3 % for securities issued by a resident of a foreign country (plus cantonal taxes, if any);
based on the market value of the securities traded. The tax is payable by the securities dealer (taxpayer) who usually charges the tax burden on to his clients. Given that two parties are involved in each security transaction, half of the tax is accounted for and reported by each registered securities dealer. If the counterparty is not a registered securities dealer, a dealer has to pay and declare the other half of the tax for such counterparty as well.
This leads to the exemption of transactions between registered securities dealers executed on the same day. In addition, professional dealers who carry a trading inventory are exempt from the tax for their purchases from and into their trading inventory. To simplify trading between Swiss registered securities dealers and foreign counterparties the tax which would fall on the foreign counterparty is waived in the case of securities by foreign issuers, so that foreign securities can be traded by Swiss registered securities dealers with foreign parties and with Swiss professional counterparties as intermediaries or for/from their trading inventory without any Swiss securities turnover tax.
In addition, the following exemptions from securities turnover tax apply:
-The issue by foreign debtors of bonds denominated in foreign currency and - a special concession - in Swiss Francs as well as the issue of foreign shares.
-Trading in Swiss and foreign money market papers; intermediary transactions between two foreign parties (which need not be qualifying securities brokers) for the purchase and sale of foreign bonds.
-All issue transactions which have suffered the Swiss issue tax.
5. VAT:
VAT was introduced in Switzerland on January 1, 1995, thus the following can only be a summary of the rules which are rapidly evolving.
5.1. Taxable turnover:
Most of the classical banking services are exempt from taxable turnover whether they are provided to Swiss, EU or non-EU clients. This means that the banks are partially exempt from VAT and that allocation of the input VAT is the major problem.
No VAT is due on services (such as investment advice) which are rendered to persons resident outside Switzerland and are therefore deemed to be used outside Switzerland. These services are deemed "zero rated" for the purposes of input tax. However, even exempt services provided to persons who are not resident in Switzerland, are not deemed "zero rated".
The following services are exempt:
Account maintenance and operation fees, granting of credit, guarantees, money transfers, trading in currencies, securities, issue of securities, investment funds management and advice, trading in precious metals.
However, services are subject to VAT include investment advice and custodianship, including collection of dividends and interest, applications for reimbursement of withholding tax and other similar services, asset management, fiduciary transactions and in particular fees and charges for fiduciary placements, leasing transactions and the provision of other services relating to banking, finally the supply of beverages and other food to employees or clients (self consumption).
5.2. Taxpayer:
Every individual or corporate entity realising taxable turnover of SFrs. 75,000.-- a year, as well as any person (individual or corporation) who imports services for more than SFrs. 10,000.- provided such services would be subject to VAT if supplied by a Swiss person.
5.3. Tax rates:
The ordinary rate is 6.5 % for all supplies and own consumption of goods, as well as for services which are not exempt and are not subject to the preferred rate, and
2 % for all food stuffs and drinks (with the exception of alcoholic beverages, prepared foods and drinks which are served), cattle, poultry and fish, various agricultural supplies, seeds and flowers, drugs, newspapers, magazines, books and similar printed matters, mains water supply and the supply of radio and television programs.
5.4. Formalities:
Each taxpayer has to deliver to his clients an invoice indicating his name and address as well as his VAT number, the name and address of the recipient of the goods of services, the date and time of the supply, its description, the charge for the supply and the tax amount. The latter may be indicated by the applicable tax rate only, but preference is given (in particular when the invoice amount is in a foreign currency) to stating the amount of tax in Swiss Francs. The same particulars have to be given in the invoices received by a taxpayer to claim input tax.
5.5. Input tax:
All taxes charged on "pleasurable" activities, the purchase and maintenance of motorcycles with more than 125 ccm's, sailing- and motor boats as well as sports aircraft are excluded from input tax.
All VAT on invoices for travel and entertainment as well as the purchase, maintenance or rent and leasing of cars and supplies thereof can only be reclaimed to the extent of 50 %. Moreover, input VAT has to be reduced to the extent that exempt turnover is realised by a taxpayer. This applies to the input VAT on fixed assets which are, at the moment of delivery, used for tax exempt activities.
5.6. Special calculation of input tax for banks:
Regulated banks may use a simplified method of calculating the share of input VAT which they may claim for turnover which they realise outside precious metal trading, leasing out real estate or carrying on other activities which are not considered banking such as supplies of food and beverages to employees. This simplified method also takes care of transfers of fixed assets from taxable to exempt or from exempt to taxable activities within the bank.
A bank has to indicate the turnover which it realises according to Swiss banking regulations, showing interest and commission net and giving the details of the commission as to taxable and exempt commission to arrive at the percentage of the taxable commission as part of a bank's total turnover. Such percentage, possibly increased by a certain amount will indicate the percentage of the input tax which may be reclaimed by the bank. Included in taxable commission is commission which is subject to VAT in principle, but where VAT is not levied due to the foreign residence of the recipient of the service.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Debbie Grauf on +411 249 3131 or enter text search "KPMG Fides" and "Business Monitor".