Abolishing of interest withholding tax: the end of the non-bank lender rules
On 17 December 2021, the Swiss parliament passed a bill which will abolish the interest withholding tax of 35% on bonds and certain credit agreements as of 1 January 2023.
The abolishing will mean that the Swiss 10 and 20 non-bank lender rules as included in credit agreements of Swiss borrowers will no longer apply. Lenders will be free to syndicate to non-bank lenders without triggering withholding tax. This will also mean that direct lending will be facilitated as for instance debt funds will be able to finance without risking triggering withholding tax at the level of the Swiss borrower. In practice, certain direct lenders and debt funds may have obtained advance tax rulings in order to confirm that they qualify as one single non-bank lender to secure certainty that the financing does not trigger withholding tax. The abolishing will make these procedures obsolete.
The change is expected to have a significant impact on the Swiss debt bank and capital markets as Swiss businesses may attract debt in Switzerland and no longer through non-Swiss SPVs. Generally, the change will facilitate financings for any Swiss business including start-ups.
Also see our prior publications on this topic:
Impact on non-Swiss financings with Swiss guarantee / security
Under current rules, interest withholding tax in Switzerland can also be triggered if a group issues a debt instrument through a non-Swiss entity with a Swiss group entity providing a guarantee or security and proceeds from the issuance are on-lent to Switzerland (harmful use of proceeds rule). If the interest withholding tax is abolished, the harmful use of proceeds rule will also cease to apply and strictive language in respective financing documents will no longer apply.
The bill however also includes several other changes:
- Withholding tax on manufactured payments: the bill introduces a legal basis to levy withholding tax on manufactured payments, e.g., for securities borrowing transactions. The withholding tax is imposed on any person or entity that pays, transfers, credits or transfers a manufactured payment – even on non-residents. How the tax authorities intend to enforce such a tax claim is however unclear. The legal basis is required after the Swiss supreme court recently held that domestic law does not allow for a withholding tax on manufactured payments whereas the Swiss federal tax administration requested such tax from market participants in order to prevent tax evasion by multiple refund claims. The new bill will close this gap. Non-Swiss payors of manufactured payments on Swiss instruments subject to withholding tax should however carefully review whether and how they could be impacted by the extraterritorial rule.
- Abolishing of the securities transfer stamp tax on Swiss bonds and issuance / redemption of foreign money market funds: in order to promote the Swiss debt capital market further, the bill also abolishes the securities transfer stamp tax on Swiss bonds. Separately, the stamp tax is also exempt on the issuance and redemption of units in non-Swiss money market funds (holding debt instruments with a maturity of less than 397 days).
- Abolishing of securities transfer stamp tax on certain share transfers: the bill will also exempt securities transfer stamp tax on the transfer of shares of at least 10% if a Swiss holding company qualifies as securities dealer for purposes of the tax and is either a party or intermediary to the transaction. This is the case if such holding holds shares or other securities for stamp tax purposes in excess of CHF 10 million as per its Swiss GAAP statutory accounts. A recent supreme court ruling confirmed that a Swiss top holding is liable to such tax as an intermediary if it purchases shares through foreign subsidiary (in this case in a public tender offer). The case law provoked concerns that Swiss holding entities would now almost always be characterized as intermediary, and the bill intends to limit the supreme courts ruling.
Entry into force
If the bill passes the referendum vote, the abolishing of the interest withholding tax will enter into force on 1 January 2023. As the law links the new rule to the formal issuer, existing issuance of a Swiss issuer will not automatically benefit from the abolishing but only upon re-financing – whereas non-Swiss issuances will immediately benefit from the abolishing of the use of proceeds rule.
The entry into force of the other provisions will be determined by the federal government.