Switzerland

Private Company Limited by Shares

Switzerland is a 'code' country, and business entities are governed by the Civil Code. As in all civil law jurisdictions, formation and administration of companies tends to be considerably more bureaucratic than in common law jurisdictions. Although the Civil Code is at Federal Level, businesses are domiciled in a particular canton. Each canton maintains a Commercial Register and the mandatory entries in the Register of subscribers, directors, capital structure etc have strict legal force. The Register is a public document.

The most common forms of business entity are:
  • the Stock Corporation and its variants,
  • the Limited Liability Company.
The Stock Corporation

The Stock Corporation SA “Societe Anonyme" or AG” Aktiengesellschaft" is the form almost universally used by foreign investors.

Key characteristics of SA’s and AG’s:
  • The minimum number of subscribers is 3,
  • Nominee shareholders and nominee subscribers are permitted,
  • The minimum authorised share capital is CHF100,000 of which either 20% or CHF50,000 (whichever is the greater) must be paid up by way of a deposit of funds in a bank account; the bank will not relinquish control over these funds until the company registration certificate has been issued,
  • Share capital cannot be increased by more than 50% of the authorised capital at any one time,
  • Shares can be ordinary shares, preference shares, voting shares or non voting shares and can be issued at a premium; bearer shares are permitted,
  • A majority of directors must be Swiss nationals and must be domiciled in the country,
  • All directors must be shareholders whether they are the beneficial owners of those shares or hold as nominees (the holding of one share as a nominee is sufficient to meet this requirement),
  • The company must have an auditor and a registered office,
  • A person whose name appears in the articles of association signs on behalf of the company,
  • Accounts must be filed each year with the Companies Registration Office. Small companies can prepare abbreviated accounts which do not have to include the level of turnover.
The Holding Company

The 'Holding' Company is a Stock Corporation with a particular tax status. Holding companies benefit from reductions in corporate income tax and capital gains at federal and cantonal levels, and from a reduction in net worth tax at cantonal level.

The Swiss holding company was a particular target of the OECD's 'unfair tax competition' initiative, and in 2004 an agreement was reached between Switzerland and the OECD whereby information about holding companies would be shared by Switzerland in circumstances where there was prima facie evidence of fraud.

For federal tax purposes a company is defined as a holding company if it holds either a minimum of 10% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least CHF1m (known as a "participating shareholding"). The reduction in the level of corporate income payable tax depends on the ratio of earnings from "participating shareholding" to total profit generated.

Although the definition of a holding company varies among cantons, broadly speaking a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either:

  • derives 51%-66% of its income from dividends remitted by the subsidiary; or
  • holds 51%-66% of the subsidiary's shares.
The Domiciliary Company

Domiciliary Companies are Stock Corporations that are both foreign-controlled and managed from abroad, have a registered office in Switzerland but have neither a physical presence nor staff in Switzerland. They must carry out most if not all of their business abroad and receive only foreign source income . The use of domiciliary companies can result in savings in corporate income tax levied on income and capital gains and net worth tax.

The Auxiliary Company

An Auxiliary Company is essentially a Domiciliary Company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary Companies are possible in only seven cantons, and do not benefit at federal level. Treatment varies according to canton, but in most cases an auxiliary company may have Swiss offices and staff and be in receipt of Swiss income (which is taxed at normal rates). Most income though must be from a foreign source.

The Service Company

Service Companies are Stock Corporations whose sole activity is the provision of technical, management, marketing, publicity, financial and administrative assistance to foreign companies which are part of a group of which the service company is a member. Service companies may not in general derive income from third parties (i.e. companies outside their corporate group). Service company status is obtained by way of an advance cantonal tax ruling (there is no benefit at federal level).

The Mixed Company

Mixed Companies are Stock Corporations which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. There is no benefit at federal level, but at cantonal and municipal level there are corporate income tax benefits if the mixed company meets the following conditions:

  • the company is foreign controlled;
  • a minimum of 80% of its total income comes from foreign sources;
  • the company has close relationships to foreign entities.
The Branch

Branch offices, whether of foreign companies, or of Swiss companies in other cantons, must be registered in the Commercial Registry of the canton in which they are located. The branch must have a nominated, Swiss-resident representative. Branches need not publish their annual financial statements, but branches of foreign corporations constitute 'permanent establishments' from a tax point of view, and will therefore be taxed on local source income both at federal and at cantonal level as if they were resident corporations. There is no withholding tax on transfers of branch profits to its foreign parent.

Scope of Corporate Income Tax

For corporate income tax purposes a company is deemed resident in Switzerland if it is either incorporated in Switzerland or effectively managed from there. Thus a UK-registered company whose effective seat of management is in Switzerland is a Swiss resident company for corporate income tax purposes.

The General Assessment Rule is that resident companies are assessed on their worldwide income except for profits generated by enterprises, permanent establishments and real estate situated abroad, whereas non-resident companies are only assessed on profit generated by enterprises, real estate and permanent establishments situated in Switzerland as well as interest on loans secured on Swiss real estate.

Corporate income tax is levied at a federal, cantonal and communal level. The level of corporate income tax payable varies amongst the cantons but at present Zug and Fribourg are considered the best cantons in which to locate trading and holding companies respectively.

Corporate income tax payable to the federal authorities may be tax deductible for the purposes of an assessment to cantonal corporate income tax and vice versa.

Advance tax rulings on the level of corporate income tax payable are available and are advised as a matter of prudence.

Generally speaking capital gains are taxed as corporate income at federal, cantonal and municipal levels.

The Swiss branch of a foreign company pays the same rates of corporate income tax on profits, income and capital gains as would be paid by a Swiss-resident corporate entity. Profits remitted abroad by the branch are not subject to any tax in Switzerland.

Rates of Corporate Income Tax

Corporate income tax is levied at federal, cantonal and municipal levels.

The federal corporate income tax rate is 8.5% flat. Since income and capital taxes are deductible in determining taxable income, the effective tax rate that a company pays on its profits before deduction of tax is 7.83%.

Cantonal tax rates can be levied at rates of up to 20% and like the federal tax are progressive, using a scale based on the relationship of profits to net worth.

Municipal tax on corporate income is calculated as a small proportion of cantonal tax.

The “Bonny Decree”, which provided for federal assistance in the form of a federal tax holiday for up to ten years for companies bringing economic value-adding activities to specific regions in Switzerland was replaced by the Federal Law on Regional Policy from 1 January 2008. The new law saw a reduction in the number of cantons qualifying for the incentive status. To ease the transition, the government allowed cantons no longer included in the list to continue to offer tax holidays of up to 10 years for a further three years after the new law came into force.

Withholding Tax

The federation has the exclusive right to levy withholding tax. The general rule is that withholding taxes are deducted at source from distributions made by Swiss entities. The rate is 15% on pension fund benefits, 8% on insurance benefits and 35% for "investment income", which includes corporate dividends and interest from bank accounts, bonds & debt instruments.

As from July, 2005, the EU's Savings Tax Directive was implemented in Switzerland, and a withholding tax of 15% was being applied to the returns on savings of citizens of EU member states. The rate rose to 20% from July 1, 2008 and to 35% from July 1, 2011.

No withholding tax is levied on royalties paid to foreign beneficiaries.

Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

Double-Tax Treaties

Switzerland has Double Taxation Treaties with 91 other countries, more than 30 of these are based on the OECD model. The general effect of the treaties for non-residents from treaty countries is that they can obtain a partial or total refund of tax withheld by the Swiss paying agent. Although the full amount of withholding tax is deducted at source the difference can be re-claimed by the non resident from the Swiss tax authorities. Where there is no double taxation treaty in place withholding taxes deducted in the foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland.

No withholding tax is levied on royalties paid to foreign beneficiaries. Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

A repayment of withholding taxes under the terms of a treaty will be denied where there has been "abuse". Abuse occurs when a foreign-controlled legal entity which is resident in Switzerland fails one of the four following tests:

  • The entity must have a reasonable debt/equity ratio (generally the total of all interest-bearing loans should not exceed 6 times the company's equity);
  • The entity must not pay excessive interest rates on debt (for the purposes of this test the accepted rate varies from time to time);
  • The entity must not pay more than 50% of its income as management fees, interest or royalties to non residents;
  • The entity must distribute at least 25% of the income which could be distributed as dividend.

Where any one of the four tests are failed, the portion of withholding tax deducted and which is deemed refundable under the terms of the treaty is not refunded.

Additionally, treaty provisions do not apply to dividends, interest or royalties paid by a Swiss entity to a German, Italian, French or Belgian entity if the Swiss entity is wholly or partly exempt from cantonal tax under the tax incentives applicable to specific types of company (i.e. domiciliary, holding, auxiliary, mixed and service companies).

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