Beneficial improvement on Swiss interest withholding tax for debt financings
Non-Swiss issued debt instruments which benefit from a Swiss credit support by a Swiss group entity may be in scope of Swiss interest withholding tax if proceeds from the issuance are remitted to Switzerland in an amount exceeding the foreign issuers equity as per the closing of the financial year.
A recently issued practice guidance significantly increases the amount of permitted use of proceeds in Switzerland – thus critically improving upon current rules.
1 Current withholding tax regime for debt financing
Switzerland levies an interest withholding tax of 35% on certain debt instruments issued by a Swiss-resident issuer. Based on current rules, interest withholding tax notably applies in the following scenarios:
- Swiss borrower has issued debt to more than 10 non-bank lenders (10 non-bank lender rule);
- Non-Swiss issuance with a guarantee from a Swiss related party (down-stream guarantee) and proceeds from such issuance are directly or indirectly remitted to Switzerland in excess of the equity of the non-Swiss issuer calculated as per the closing of the financial year (harmful use of proceeds rule).
Most importantly, intra-group loans are excluded from the scope of debt instruments for withholding tax purposes provided the group complies with the harmful use of proceeds rule above.
2 Improved new regime applicable as of 5 February 2019
On 5 February 2019, the Swiss federal tax administration (SFTA) issued a practice statement which significantly increased the amount of permitted use of proceeds in Switzerland in the above scenario.
For non-Swiss issued debt with a guarantee from a Swiss related party, proceeds may be remitted to Switzerland in the aggregate amount of (i) the consolidated equity of all non-Swiss group entities/affiliates (equity escape) and/or (ii) the aggregate amount of all outstanding intra-group loans provided by Swiss group entities to non-Swiss group entities (netting escape).
The new escape rules can be applied individually or combined. In any event, in order to apply either of the rules an advance tax ruling is a prerequisite. The revised rules allow for interesting planning opportunities for multinationals given the broad wording of the practice statement.
Fabian SutterAssociate Attorney at law, Swiss certified tax expert
Fabian Sutter, attorney at law and Swiss certified tax expert, is an associate in our Zurich office. He focusses on Swiss and international taxation, in particular corporate reorganizations and restructurings, M&A, financing and capital market transactions, transfer pricing, private equity, real estate transactions as well as tax litigation.T: +41 43 434 67 14 M: +41 79 398 76 39 E: email@example.com