Swiss Withholding Tax Reform: Federal council publishes discussion draft of revised Withholding Tax Act
Federal council publishes discussion draft of revised Withholding Tax Act.
In changing to a paying agent principle (Zahlstellenprinzip), the draft proposes to fully exempt Swiss corporate and foreign investors from withholding tax on interest bearing investments. Interest on investments such as bonds are currently subject to a 35% withholding tax if certain requirements are met. Switzerland is one of the few European countries to apply complex withholding tax rules to debt financing which may even apply if a debt instrument is issued by a non-Swiss issuer. This led to the practice of Swiss multinational enterprises to issue bonds through foreign structures. The revised rules aim at setting an incentive to relocate financing functions (including cash pooling and treasury activities) back to Switzerland.
In the current withholding tax system, the tax liability lies with the debtor of a certain payment (e.g., Swiss resident company paying interest or dividends). Under the paying agent principle, the withholding tax is no longer paid by the debtor, but by the investor's paying agent (e.g. the bank where the investor holds the interest bearing instrument; see chart for illustration). The new withholding tax system applies if the paying agent is domiciled in Switzerland. Tax liability will thus be based on whether the interest-bearing assets are held with a domestic or foreign paying agent. The debtor principle continues to apply to other income from capital assets such as dividends.
The discussion draft of the revised Withholding Tax Act (Verrechnungssteuergesetz) proposes the following changes:
- Voluntary paying agent system: introducing a voluntary paying agent system for interest proceeds on domestic and foreign bonds as well as bank deposits of Swiss banks. The domestic debtor may elect for the application of the paying agent system. The reasoning for the voluntary system stems from the fact that not all interest-bearing debt instruments are held by a custodian bank, as the debtor may pay interest directly to lenders. Small- and mid-sized Swiss groups may therefore elect to remain within the old system where there is no requirement to differentiate between the tax-residency of lenders.
- Definition of paying agent: A paying agent is defined as someone who transfers, reimburses, credits or pays out taxable income in the course of business activity. This will primarily be banks, but also companies issuing bonds as well as asset managers and trustees may qualify. However, the application of the paying agent system is voluntary as outlined above.
- Exemption for Swiss corporate and foreign investors: Swiss corporate and foreign investors will be exempt from withholding tax on interest bearing investments, if the proceeds are transferred, reimbursed, credited or paid out by a paying agent. If the paying agent does not elect for the application of the paying agent system, the debtor principle applies by default. In such case, foreign investors may still benefit from a relief under an applicable double taxation treaty.
- Focus on Swiss tax-resident individuals: For Swiss individuals, interest proceeds on foreign bonds, collective investment schemes or structured products will be subject to withholding tax if the proceeds are transferred, remunerated, credited or paid by a domestic paying agent. In the draft legislation, all of the Swiss and foreign collective investment schemes are subject to withholding tax. Currently only interest income from collective investment schemes according to the Collective Investment Scheme Act (Kollektivanlagengesetz) falls within the scope of the withholding tax.
- Quarterly payment of tax: The withholding tax claim on interest proceeds arises at the time of transfer, remuneration, crediting or payment by the paying agent and will be due 30 days after the end of each business quarter. This may theoretically also lead to an interest rate advantage for paying agents, if interest rates between origination of the tax claim and the due date rise.
- Intertemporal application of revised rules: Once enacted, the new rules will apply to income due from the date of entry into force of the proposed legislation. Bonds already issued and existing bank deposits as well as other income subject to the paying agent principle will thus also fall under the new regulation.
- Abolishing of securities transfer stamp tax on domestic bonds: Switzerland also levies a stamp tax on the transfer of certain "securities" for tax purposes of up to 0.3% if a Swiss securities dealer for stamp tax purposes is a party or intermediary to the transaction and no exemption applies. Currently, the transfer of debt instruments such as bonds or sub-participations thereof are subject to stamp tax. As an additional incentive, the federal council proposed to fully exclude domestic debt instruments from the scope of the tax.
The discussion draft will be in consultation period until 10 July 2020. It is expected that parliamentary sessions and approval should not occur before 2021. In a realistic scenario, the new withholding tax rules may enter into force as of 1 January 2023.
Fabian SutterPartner Attorney at law, Swiss certified tax expert
Fabian Sutter, attorney at law and Swiss certified tax expert, is a partner 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: firstname.lastname@example.org