Switzerland Business Services Overview
Setting up a business in Switzerland
Because of its federal structure, Switzerland does not have a uniform taxation system. Taxes may be levied at federal, cantonal and communal levels. Some taxes, such as Value Added Tax (VAT), are levied exclusively by the Federal State, whereas other are simultaneously raised at several levels, for instance federal and cantonal (ex.: income tax).
Switzerland levies both direct and indirect taxes. Indirect taxes include in particular VAT – which, though with significantly lower rates, is based on the EU model –, withholding tax (“Impôt anticipé”)
and stamp duty (“droits de timbre”) on certain transactions.
Direct taxes will be dealt with below, together with special tax incentives available both to individuals and corporations that make Switzerland a near tax haven for certain taxpayers.
Individuals and corporations resident in Switzerland are normally subject to tax on their worldwide income and assets, respectively on their worldwide profit and equity.
Persons not resident in Switzerland may under certain circumstances be subject to limited taxation on certain Swiss source income.
As mentioned above, direct taxes are levied by the Federal State (Direct Federal Tax) and by the cantons and/or municipalities (Cantonal and communal tax). Direct Federal Tax is governed by the Direct Federal tax Act, whereas Cantonal/communal tax is levied pursuant to the cantonal law of the canton concerned. Although Switzerland has been undergoing a reform of its tax system with the aim of harmonizing the foundations of the cantonal tax systems, cantonal tax laws still vary from one canton to another, especially with respect to the applicable tax rates.
Corporate tax rates on profit do also vary from canton to canton and from commune to commune.
Table 1 provides an overview of the ordinary profit tax rates applicable to corporate taxpayers domiciled in major Swiss cities in 2003:
Under Swiss tax law, taxes are deductible items. As a result a distinction is to be made between statutory income tax rates (Table 1, (1)), applicable to the profit after tax, and effective income tax rates (Table 1, (2)), applicable to the profit before tax.
In addition to corporate income tax, Swiss corporations are also subject to a yearly cantonal capital tax on paid-up share capital, reserves and retained earnings existing at the end of the tax year. Capital tax rates range from 0.067% to 0.74%, depending on the canton.
Withholding tax is levied by the Federal State in particular on dividends paid by Swiss corporations, on interest paid by a bank (in the sense of the Withholding Tax Act) as well as on certain lottery gains and insurance benefits. The ordinary tax rate amounts to 35%; reduced rates apply to insurance benefits. It should be mentioned that where a Double tax treaty (DTT) applies, the statutory ordinary rate of 35% may be cut down to nil.
Swiss tax rates for individuals are progressive and dependent on a variety of personal circumstances, such as the civil status of the taxpayer, number of supported children, etc. For example, according to a survey of the Swiss Federal Tax Administration (“Administration Fédérale des Contributions” - AFC), in 2001, married taxpayers with no children and a net taxable income of 200'000 Swiss Francs could expect to pay income tax at rates ranging from 13.45% (Zug-city) to 24.98% (Basel-city), including Federal, cantonal and communal tax.
As regards wealth tax, which is not levied at the federal level but only at the cantonal/communal, married taxpayers with a taxable wealth of 1’000’000 Swiss Francs would be liable to cantonal/communal wealth tax at rates ranging between 0.174% (Stans, canton of Nidwald) and 0.702% (Neuchatel-city).
The Swiss social security contribution rate is 10,1% of total salary, the employer and employee each paying 5,05%. In addition, contributions at a rate of 2% of annual salary must be paid to the unemployment fund. This contribution is also divided equally between employer and employee. Employees are also required to be members of a pension plan. 50% of contributions paid to the pension fund must be assumed by the employer.
Self employed individuals pay social contribution of 9.5% of their income. Self-employed persons are not required to contribute to a pension plan.
The Federal State levies no inheritance or gift taxes. Those are left to the competence of the cantons, which means that there are 26 different inheritance and gift tax regimes. For instance, whereas the canton of Schwyz does not raise inheritance or gift taxes, many cantons do not levy or levy very reduced inheritance taxes in the case of property passing between spouses or from parent to child.
The diversity of available fiscal regimes, coupled with lower inheritance and gifts tax rates than in other European countries make Switzerland a jurisdiction of choice for inheritance tax planning opportunities. Swiss international law permits foreigners who live in Switzerland to stipulate that their will should be governed by the inheritance law of their home country.
Although the average Swiss tax rates are lower overall than in most European countries, Switzerland offers a great variety of tax incentives or privileged tax regimes.
An especially attractive form of relief applicable to individuals is available to these who wish to take up tax domicile in Switzerland for the first time or after a period of absence of at least 10 years, without engaging in any gainful activity in Switzerland (Lump-sum taxation). Another general relief granted to individual Swiss residents is the tax exemption of capital gains derived from the sale of private assets, except on the sale of Swiss property.
Swiss tax laws have introduced numerous tax incentives for corporations in the form of tax holidays for newly established companies for up to 10 years, cantonal/communal profit tax exemption for certain types of companies (holding privilege), Significant tax-cuts may also be obtained for corporations not performing business activities within Switzerland or for other special-purpose corporations, such as research, management, or auxiliary corporations.
Those incentives will be presented in more detail hereafter.
The following survey is aimed at providing a general overview of tax privileges granted by Switzerland to certain categories of enterprises or revenues. It should not be regarded as exhaustive. Indeed, each privilege may be combined with other instruments resulting in a lower tax burden. Further, even if relatively clearly defined in the tax legislation, special tax regimes are often granted in the form of tailor-made tax rulings to be negotiated with the competent tax authorities.
The Tax Harmonisation Law, which had to be implemented by the end of the year 2000, resulted in substantial formal similarity, but the cantons and communities retain considerable autonomy in setting tax rates and allowances; the expected tax burden therefore continues to play a role when choosing a location within Switzerland.
Qualifying dividends received by a Swiss corporation from Swiss or foreign subsidiaries are almost tax exempt, for Direct Federal as well as cantonal/communal tax purposes (so called participation or holding relief”). Moreover, for the purpose of the Direct Federal tax and in most of the cantons, capital gains on the sale of qualifying holdings may also be received tax-free.
Participation relief is available for the following income:
Service companies generally provide technical, administrative or scientific assistance, including research and promotional services to related companies. As services are mainly rendered to group companies, it is often difficult to determine whether transactions take place at arm’s length or whether profits are being improperly accumulated in a low tax jurisdiction.
Service companies do not really benefit from a privileged tax status, but are merely subject to specific rules with respect to the determination of their taxable profit, these rules being sometimes suitable for tax strategies. As a rule, taxable profit must correspond at least to 5% of the expenses incurred by the company. Nonetheless, taxpayers may demonstrate that in spite of a margin lower than 5%, services are rendered at arm’s length prices.
In practice, the specific rules governing the taxation of service companies are set forth in an advance ruling granted by the cantonal tax authority, being specified that the actual regime may vary from canton to canton.
The service company tax regime is available at the cantonal/communal as well as at the federal level. It may be advantageous and used in tax planning where the actual margin of the business is superior to 5%.
This status is only available at cantonal/communal level. It is ruled in the Tax Harmonization Law (THL) and hence available in all cantons. Nonetheless, as THL does not provide for detailed taxation rules, many differences remain between the cantons.
Holding companies are fully exempted from cantonal/communal tax on profit. This exemption benefits not only income from participation as defined above, but all other earnings received by the company, such as interest and royalties. Income deriving from Swiss real estate is excluded from this privilege and is taxable in most cantons. Capital tax is levied at very low rates in most of the cantons (between 0.0066% and 0.3060%).
At Federal tax level, holding companies cannot benefit from a distinct tax regime. However, income from qualifying participation may nevertheless be approximately 95% tax exempt by means of the Participation relief.
In order for a company to qualify as a holding company for the purpose of taxation, generally three tests must be met:
It should be mentioned that cantonal interpretations of the above tests are inconsistent, which gives rise to tax-saving opportunities. Some cantons permit holding companies to finance, hold, manage and make the most of Intellectual property (IP). Holding companies may further undertake financing activities, as well as (according to certain commentators), commercial activities abroad. Income from such activities would also benefit from holding privilege.
Requirements as regards the kind of investment as well as the importance of the holding vary from canton to canton.
A domiciliary company is a company which carries out only administrative functions in Switzerland and no business activities. Outside Switzerland an auxiliary, such a company, may conduct any activities whatsoever. Auxiliary regime is only available at the cantonal/ communal level and varies from canton to canton. An advance ruling setting forth the concrete taxation of a company must be negotiated with the local tax authorities.
Revenues and expenses of domiciliary companies are split among different categories, each subject to different taxation rules. Auxiliary companies’ tax regime may be summarized as follows:
As a result of the different tax burden saddling each category of income, a domiciliary company should keep its books in a manner making it possible to proceed to the split. As a rule, expenditures are deductible from the revenues they are economically connected with.
This tax regime is very similar to the domiciliary company tax privilege. It is available to companies carrying out administrative functions in Switzerland, whereby commercial activities are tolerated to the extent that they do not exceed 20% of the company’s income.
Some cantons require that the 20% benchmark also be fulfilled on the expense side (i.e., Swiss business expenses of such a company shall not exceed 20% of total expenses). Outside Switzerland a company with the mixed company tax privilege may conduct any activity.
If a company meets the above criteria, it may apply for a tax ruling entitling it to a fiscal treatment similar to the one shown above for domiciliary companies. However, as additional commercial activities are conducted in Switzerland, the exemption of foreign source income subject to Swiss tax is normally lower than in the case of domiciliary companies.
As is the case for other privileges, the conditions to qualify as a mixed company vary from canton to canton. The grant of a mixed company tax status is normally subject to an advance ruling to be negotiated with the local tax authorities.
As mentioned above, there are two main tax incentives available to individual taxpayers. Firstly, capital gains on the sale of privately held assets are in principle free of Swiss taxes (Federal, cantonal/communal).
Secondly, certain Swiss residents may apply for a taxation based on expenses rather than on actual income.
The following report is mainly concerned with the conditions set for a foreigner wishing to benefit from the taxation on expenses. As such a taxation scheme is subject to the applicant taking up residence in Switzerland, conditions applicable to a foreign citizen intending to settle in Switzerland will be briefly addressed.
Capital gains on personal movable property are normally tax-exempt. An exception is made for capital gains on the transfer of real estate, which are subject to a special cantonal/communal tax (so called “Impôt sur les bénéfices et les gains immobiliers”). On the other hand, capital gains – on movable and/or immovable property -, which are the result of a business activity as opposed to the management of personal wealth are taxable items.
Two conditions must be met in order for a person to be eligible for the lump-sum taxation regime: (i.) The person must take up residence in Switzerland either for the first time or after having lived for more than 10 years abroad and (ii.) said person must not engage in business activities in Switzerland.
For persons who are not Swiss citizens, taking up of residence in Switzerland inevitably requires a residence permit. As regards respective requirements, a distinction must be made between EU citizens and citizens of non-EU countries.
EU-nationals' residence and work permits are largely governed by the Agreement on the Free Movement of Persons between Switzerland and the EU, which entered into force on June 1st, 2002. According to the new regulations, EU nationals have the right to reside and work in Switzerland. They must be treated in a non-discriminatory manner. However, there is a transition period ending in 2007. During that period, certain restrictions continue to apply (e.g.: "local worker priority", fair salary requirement, etc.).
Residents who do not engage in employment or who are self-employed must demonstrate sufficient funds and health insurance. EU nationals may stay in Switzerland up to three months without any residence permit. Thereafter, they must submit an application to the cantonal authorities.
As regards non-EU citizens, permits may be issued to foreigners who do not intend to carry on gainful activity in Switzerland. In general, applicants must be over 55 years of age, demonstrate close ties to Switzerland and show that they have sufficient financial means to reside in that country. Younger persons wishing to settle in Switzerland are in principle subject to tougher provisions; special provisions apply to celebrities or persons whose residence in Switzerland is in the interest of the country.
In spite of the relatively strict age requirements, young foreigners may still apply for residence in some cantons by setting up a Swiss company in the considered canton and therefore obtaining an annual residence permit under the annual cantonal permits quota.
Under current lump-sum taxation rules, Swiss taxes are levied at ordinary rates on an amount of deemed income, which equivalent to the total taxpayer's yearly cost of living expenses (“tax on expense”). In principle, the relevant expenses are deemed to correspond to five times the yearly rent (or rental value, if the taxpayer owns his or her place of residence) of the Swiss home. In practice, the aforementioned amount is agreed upon with the local tax authorities for a certain period of time before taking up residence in Switzerland. It should be noted that taxpayers deriving Swiss source income and/or income for which double taxation relief is claimed are subject to specific rules. As a rule, cantonal/communal wealth tax is levied.
Besides the relatively low tax level, lump-sum taxation offers beneficiaries substantial confidentiality, as many cantons do not require them to declare their foreign wealth and/or income.
Beside Switzerland’s wide Double Taxation Treaties (DTT) network, Swiss tax legislation contains numerous rules aimed at eliminating double taxation. As an example, one may mention the exemption of foreign profits derived from a permanent establishment abroad or profits on real estate located outside Switzerland from Swiss income taxes, irrespective of an actual taxation abroad.
As Switzerland has its own tax concepts, which may differ from those applicable in other countries, domestic rules for the avoidance of double taxation may under circumstances be used in tax planning schemes. Persons not resident in Switzerland may under certain circumstances be subject to limited taxation on certain Swiss source income.
As mentioned above, Switzerland usually levies a 35% withholding tax on certain types of passive income, such as dividends and interest, derived from Switzerland. Nevertheless, Switzerland has concluded over 60 DTT with all important industrial countries and numerous eastern European countries. Most of the Swiss DTT follow the Model Tax Convention for the avoidance of double taxations elaborated by the OECD.
As a rule, taxpayers entitled to the benefit from a DTT, which provides for a Swiss tax inferior to 35%, may claim for the refund of withholding tax paid in excess. The unrecoverable Swiss withholding tax is shown in table 2.
In this respect, it should be emphasized that Switzerland is currently renegotiating its DTT with many EU countries in order to implement the EU Council Directive of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States in its DTT network.
The following table provides an overview of non-recoverable Swiss withholding tax on income from Swiss source paid to foreign recipients. It should be emphasized that Switzerland has concluded a very large number of DTT with other countries. Non-recoverable taxes are expressed as a percentage of the gross income to be paid by the Swiss debtor of the taxable attribution.