Corporate tax relief in Switzerland. Edition 2008

Transcription

1 Corporate tax relief in Switzerland Edition 2008

2 Contents 3 Introduction Taxes in Switzerland 4 1. Qualifying Dividends and Capital gains 5 2. Newly established companies (tax holiday) 6 3. Holding companies 8 4. International commercial companies (domiciliary) Service companies Finance branches Principal companies Ernst & Young services Disclaimer The information contained in this document is exclusively for global description purposes, and does not intend to provide specific and detailed indications with respect to the considered tax treatments. For such elements, specific tax advisory is required. 2

3 Introduction Corporate Income and Equity Taxes in Switzerland Federal Cantonal Communal In Switzerland, corporate income and capital taxes are levied at three levels: federal, cantonal and communal. Federal corporate income tax is levied on net worldwide income generated by Swiss resident companies, with the exception of income attributable to foreign enterprises, permanent establishments or real estate. Corporate income is established on the basis of the financial statements of the company. Federal corporate income tax is levied at the rate of 8.5 % of the net corporate income, which is equivalent to a pre-tax rate of 7.83 % (considering the fact that taxes related to the financial year are deductible). Cantonal and communal corporate income taxes are levied, as a general rule, upon the same base as the federal income tax. Tax rates will depend on the canton and the commune in which the company is located. In most cantons, the combined cantonal/communal tax rate will range between 20 % and 24 %. Equity taxes are levied at the cantonal and communal levels, on the yearend equity. This annual equity tax is often called capital tax, although it has not to be mixed with the capital issuance tax levied on shareholders contributions. Safe for a very few exceptions, privileged tax rulings will apply only at cantonal and communal level. Such rulings will typically provide for a reduced income taxation, but will frequently also provide a lower equity tax rate. 3

4 1. Qualifying Dividends and Capital gains Switzerland has adopted a system whereby a company receiving dividends or capital gains derived from qualifying holdings may file for tax relief. Tax relief comes in the form of a reduction of corporate income taxes. It is computed based on the ratio that the net qualifying dividend income (or capital gains) bears to the total net profits of the recipient company. To qualify for relief on dividend income, a Swiss company must own at least 20 percent of the registered capital of another company, or a participation the value of which exceeds CHF 2 million. To qualify for relief on capital gains, a Swiss company must make a profit on the sale of a participation which represents at least 20 percent of the share capital of another company which it has held for at least one year and which does not result in an unjustified tax saving by a group. Losses incurred as a result of the sale of qualifying participations remain tax deductible. 4

5 2. Newly established companies (tax holiday) For some years, relief has been granted to new businesses as an incentive for investment in Switzerland. Whilst the Swiss Federal Government has a less generous approach to tax relief, nearly all cantons encourage the establishment of new industries within their territories by granting tax privileges to new active business enterprises. These incentives include exemptions from cantonal and communal income and capital taxes for periods of up to ten years after inception of business. They depend upon the type and amount of investment, the number of jobs created, the regional economic planning aspects, etc. Companies not receiving the maximum relief can expect tax reductions of % over varying periods of up to 10 years. The setting up or restructuring of a business must be in the interests of the economy of the canton concerned in order to qualify for relief. This depends on the appreciation of the competent authorities. The following criteria are usually taken into consideration: Relief is primarily aimed at businesses in the secondary sector, typically in manufacturing. However, commercial, financial and or service related businesses may also qualify if they are deemed to be complementary to the local and regional industrial sectors or other sectors which are essential to the economic development of the canton. The nature of the tax relief granted comes in different forms of which include the following which can be cumulative: Exemption from corporate income and capital taxes for five or ten years. In such cases, the exemption is progressively reduced with time. Constitution of tax-free reserves for future investments. Loss carryforward possible on all losses incurred during the period of tax relief. Creation of new jobs, Technological development, Opening of new markets, Production of new goods or production of goods that are complementary to existing products. 5

6 3. Holding companies Holding companies may obtain relief on qualifying dividend income for Swiss federal tax purposes (see section 1). Consequently, a pure holding company (i.e. a company whose income is entirely generated by qualifying dividend income or capital gains) is totally exempt from Swiss federal taxes. However, relief for qualifying dividend income and capital gains is subject to conditions. In addition, the relief does not apply to other income such as interest on loans to affiliates. In an attempt to attract both foreign and domestic investment, cantonal tax laws have the possibility of offering much more generous relief to holding companies. Indeed, companies which qualify for holding company status are completely tax exempt. The main purpose of the Holding company (as per its charter of incorporation) must be the management of long-term financial investments in affiliated companies, Holding companies are exempt from cantonal and communal corporate income tax. This is the case irrespective of whether the income is derived from long term investments or otherwise, or whether the income is generated abroad or in Switzerland. This general rule suffers a few exceptions. Holding companies may own real estate in Switzerland, however, any income or capital gains generated from such real estate is subject to ordinary taxation. Income for which treaty relief is obtained must be subject to ordinary taxation if required by the relevant tax treaty. Income earned from services rendered to affiliates may also be subject to ordinary taxation. For comparative purposes, below are a few examples of the tax rates applicable to Holding companies in certain cantons: At least two thirds of the assets (or income) must be derived from long term participations, and A Holding company may not be actively engaged in commercial activity in Switzerland. Geneva Vaud Zurich Zug Federal and Cantonal / Communal Income Tax effective ordinary rate % % % % % Federal and Cantonal / Communal effective rate under ruling 7.8 % 7.8 % 7.8 % 7.8 % Applicable Cantonal / Communal Equity Tax rate % % % % 6

7 4. International commercial companies (domiciliary) Domiciliary companies are those which have administrative activities in Switzerland but which are engaged in commercial activities primarily abroad. They can range from small letter-box companies with no personnel or infrastructure of any kind, to trading activities and the large operational headquarters of multinational companies. Although Swiss federal tax law does not provide any particular relief for domiciliary companies, there are special rules for cantonal and communal income tax purposes, which lead to a combined effective corporate income tax rate of between 10 and 14 %. These rules have been designed to attract foreign investors interested in sales, financing, intellectual property or other operations outside Switzerland. Each canton has its own particular interpretation of the law. Usually, the granting of the domiciliary company status is based on a minimum portion of foreign source income. However, certain cantons require also a minimum portion of foreign source expenses. The following example relates to the general situation. However other types of relief may be granted depending upon facts and circumstances. Income from qualifying participations: Dividend income: tax exempt. Capital gains realized on the disposal of long term investments: tax exempt (provided the gain does not arise on the sale of a real estate company which owns real estate in Switzerland). Other Swiss source income: Other Swiss source income is taxed at ordinary rates. Other foreign source income: Foreign source income: percent of such income is taxed at ordinary rates (80 90 % exemption). Higher exemption rates are applicable for certain specific types of income. For comparative purposes, below are a few examples of the tax rates applicable to Domiciliary companies in certain cantons: Geneva Vaud Zurich Zug Federal and Cantonal / Communal Income Tax effective ordinary rate % % % % % Federal and Cantonal / Communal Income Tax combined reduced effective rate Applicable Cantonal / Communal Equity Tax rate %* % % 8.61 % 9.18 % % % % % * Cantonal/Communal income tax rate is lower for certain specific types of income. 7

8 5. Service companies Service companies generally provide technical, administrative or scientific assistance including research and promotional activities. When such services are provided to group companies, it is very difficult to determine the taxable income generated by the service company i.e. the extent of the contribution of the Swiss resident company to the total profits of the group. In order to limit the number of litigious cases, the Swiss Tax Administration commonly attributes to service companies a profit based on the cost-plus method. Profit assessable in Switzerland must correspond to an arm s length margin. In practice, it is generally deemed to be at least 5 % of total expenses incurred or one twelfth (8.33 %) of total local payroll costs. This service company ruling merely indicates the method of calculating the taxable income. For cantonal and communal tax purposes it may be combined with the rules applicable to domiciliary companies (see section 4). Thus, reduced rates are applicable if the costs have incurred abroad. 8

9 6. Finance branches Finance branches may take advantage of a very favorable tax ruling whereby foreign source financial income is taxable in Switzerland at rates between 2% and 5% on EBIT. Special relief is granted to branches of foreign head offices which have a banklike activity. According to guidelines issued by the Federal Tax Administration, the conditions required to be treated as a Finance Branch are as follows: The assets of the branch should amount to at least CHF 100 million (lower if justified by circumstances) (start-up phase). The activity of the branch should be primarily a financing activity. Indeed, 3/4 of its gross profits should be derived from financing activities and 3/4 of its assets should be invested in financing activities. Loans or advances granted by the branch to any Swiss subsidiary may not exceed 10% of the total assets of the branch. For Swiss federal and cantonal/communal tax purposes, it is possible to deduct a significant portion of accounting profits on a notional basis. The underlying assumption behind this deduction is that, if the branch was a bank, it would be able to be capitalized in such a manner as to allow for a significant interest deduction. For purposes of calculating the notional interest deduction of the branch, the branch is deemed to have a notional share capital equal to 1/11th of its total assets. Accordingly, the notional interest is calculated on the balance of 10/11ths of the assets, which is deemed to be financed by a loan from the head office (less a commission). A further 10% (approx.) is deducted by way of a praecipuum (allocation to head office) to determine the net taxable income. Much more beneficial methods of calculating the national interest deduction may also be possible depending on cantonal administrative practice. Net income is subject to Swiss Federal income tax at ordinary rates. However, for cantonal and communal tax purposes, net income as defined may often be further reduced depending on the type and source of income. In this respect, please find below a comparison of the applicable tax rates for finance branches in several cantons: Geneva Vaud Zurich Zug Federal and Cantonal / Communal Income Tax effective ordinary rate % % % % % Federal and Cantonal / Communal Income Tax combined reduced effective rate on EBIT 1.4 % 2.79 % 1.5 % 2.5 % 1.5 % 2.5 % Applicable Cantonal / Communal Equity Tax rate % 0.16 % % on total assets % on total assets 9

10 7. Principal companies In a typical Cost Sharing Structure, in which a Swiss company is to be the principal in foreign manufacturing and sales, the Swiss company will usually contract with manufacturing companies within or outside the group. These so-called Contract Manufactures will be provided with the raw material by the Swiss Principal and will only be charged with the pure production of the goods. During the entire manufacturing process the goods remain the property of the Swiss Principal and the Contract Manufacturers are usually remunerated for their service on a cost-plus basis. In order to license technology or to sell the finished goods, the Swiss Principal can enter into commissionaire arrangements with group companies in the jurisdiction into which the products are to be sold. According to these commissionaire arrangements, the local sales companies will sell the products to the local customers in their own name on behalf of the Swiss Principal. The Swiss Principal will retain ownership over the goods until they are sold to the customer. The Sales companies will not bear any risk associated to the product sales. Consequently, the entire sales proceeds flow directly to the Swiss Principal. The Sales companies are usually reimbursed for their marketing efforts on a cost-plus basis. In countries such as the U.K. whose domestic commercial law does not provide for commissionaire arrangements, so called stripped buy-sell agreements are entered into with very similar results. Typically in such structures, the bulk of the profit of the non-swiss sales will remain with the Swiss Principal where there are very favorable tax incentives. Indeed, if correctly structured, a substantial portion of income can be deemed to be allocated to non-swiss activities and can therefore be taken out of the Swiss tax net for both Swiss federal and Geneva cantonal and communal tax purposes (factual branch exemption). This can lead to a total combined corporate income tax rate of between 5 and 9 % on non-swiss sales income. 10

11 8. Ernst & Young service In relation to the implementation of new structures in Switzerland, Ernst & Young can assist you through a wide range of services, especially: Corporate Tax advisory: Feasibility analysis and preparation of the various contemplated tax rulings; Transfer Pricing (TP): Analysis of intra-group transfer pricing policies and related advisory in order to comply with the arm s length principle within the commercial objectives of the group; Tax Effective Supply Chain Management (TESCM): Integration of inter national tax planning into current business change initiatives and development of an optimal tax structure that the business can implement and sustain within the restructuring of supply chains; Legal services: Assistance in the course of the legal issues resulting from the implementation of a new company in Switzerland, in particular with respect to the incorporation steps; Human Capital: A multi-disciplinary practice, providing international tax and social security advisory and compliance; international HR compensation and benefits as well as HR in transactions; Value Added Tax services (VAT): Advisory with respect to the tax opti mization of the new structure on the level of VAT issues and compliance requirements. For more information, and in order to find the Ernst & Young office within Switzerland which you will find the most suitable, please refer to our website: 11

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