BLUM Attorneys at Law

BLUM Attorneys at Law CORPORATE TAXATION SYSTEM IN SWITZERLAND Outline of Swiss Corporate Tax System Levels of Taxation in Switzerland Resident companies are subject to: federal corporate income tax, and cantonal/communal corporate income taxes, and cantonal/communal capital taxes. Resident / Non-Resident Companies Corporate taxpayers are resident under Swiss domestic tax laws if either their corporate seat or place of effective management is located in Switzerland. Resident companies are subject to worldwide taxation, excluding income allocable to foreign permanent establishments and income from foreign real estate. Non-resident companies may be subject to Swiss corporate tax if they: are partners in a Swiss partnership; or have a permanent establishment in Switzerland; or own Swiss real estate; or have claims secured by a mortgage on Swiss real estate; or deal with Swiss real estate respectively act as a broker thereof. Non-resident companies are taxed only with respect to their Swiss income and Swiss assets. The income attributable to a Swiss permanent establishment of a foreign corporation is determined under the direct method, i.e. based on the books of accounting of said permanent establishment. Corporate Income Taxes Corporate income taxes are levied both at the federal and the cantonal/communal level. The federal corporate income tax is levied at the rate of 8.5%. Given that taxes themselves are treated as a tax deductible expense for purposes of determining the company's taxable income, the effective rate of federal corporate income tax amounts to 7.83%. Cantonal corporate income tax rates vary considerably from canton to canton. On average, they are around 13%. In the fiscal year 2007, the canton of Obwalden is the most favorable canton with a combined corporate income tax rate for the canton and the communes of 6.6% and an effective rate of 5.62%. Capital Taxes The cantonal/communal capital tax is levied annually on the fully paid-in share capital and the reserves (net equity) of a resident company or branch as of the end of the fiscal year. The tax rates vary from canton to canton; on average they are around 0.4%. Reduced tax rates apply to tax privileged companies. In the fiscal year 2007 the cantonal/communal capital tax rate in the canton of Obwalden amounts to 0.2%. Participation Exemption Swiss corporations and Swiss branches holding a qualified participation (at least 20% of the stock of another corporation, whether Swiss or foreign, or representing a fair market value of at least CHF 2 million) are granted a dividend received deduction both at the federal and cantonal/communal level. Accordingly, the corporate income tax is reduced in the proportion which the net dividend income from such participations bears to the total net taxable income. As a result, such dividend income is virtually exempt from tax. 500684/000226.doc

Capital Gains Capital gains realized upon the disposition of a qualified participation also qualify for the dividend received deduction both at the federal and cantonal/communal level, provided such participation has been held for at least one year. Holding Privilege In addition, all cantons grant a holding company privilege to pure holding companies which results in full tax exemption at the cantonal/communal level also for income other than dividends from qualifying participations. Generally, the requirements for the holding company privilege are: the articles of incorporation state that the company s exclusive or main purpose is the holding of participations (i.e. no active business activity); and either 2/3 of the total assets consist of qualifying participations; or 2/3 of the total income is derived from qualifying participations. Consequently, pure holding companies only pay federal corporate tax on the income that does not qualify for the federal dividend received deduction. Domiciliary Companies All cantons provide for a privileged tax regime for domiciliary companies. A resident company qualifies as a domiciliary company if its activities are predominantly performed abroad and the activities performed in Switzerland are of an administrative nature only (e.g. headquarters of multinational enterprises). The privileged tax regime for domiciliary companies is only available at the cantonal/communal level, but not at the federal level. Qualifying income from participations is tax-free. Only a small portion of foreign source income (up to 15%), which is determined in accordance with the importance of the administrative activities performed in Switzerland, is included in the company s tax base. The tax base so determined is subject to cantonal/communal corporate income tax at the ordinary tax rates. On the other hand, Swiss source income is fully included in the company s tax base. Business expenditures are deductible from the income to which they have a business correlation. Reduced capital tax rates apply to domiciliary companies. Auxiliary/Mixed Companies Auxiliary companies (also called mixed companies) are permitted to perform limited business activities in Switzerland. As a general rule, at least 80% of the total income must emanate from foreign sources. Hence, Swiss source income may not exceed 20% of the company s total income. Additionally, 80% of the expenses must be related to the business activities performed abroad. The tax regime applicable to auxiliary companies is the same as the domiciliary company tax regime, with the exception that the portion of foreign source income to be included in the tax base is determined in accordance with the importance of the business activities performed in Switzerland. Tax Losses For federal and cantonal/communal tax purposes, losses may be carried forward for seven years but cannot be carried back. Thin Capitalization Rules Under the federal thin capitalization guidelines, an asset base test is used to determine whether a company is adequately financed. For each type of asset, only a specific percentage may be financed with debt from related parties. Interest expense on related party debt in excess of the maximum debt-to-equity ratio is not deductible for federal corporate tax purposes. Only a few cantons have explicit provisions on minimum equity requirements. Many cantons apply the federal thin capitalization guidelines described above. In other cantons a debt-to-equity ratio of 6:1 may be used. Transfer Pricing Switzerland has no statutory transfer pricing rules. The Swiss tax authorities accept and apply the transfer pricing methods promulgated by the OECD. Hence, transactions between affiliated companies must observe the principle of dealing at arm's length. 000226.doc 2/5

Issuance Stamp Tax At the federal level a 1% issuance stamp tax is levied on the issuance as well as the increase of participation rights, against consideration or gratuitously, with the amount of CHF 1,000,000.00 remaining exempt from tax. The establishment of a Swiss branch, however, does not trigger the issuance stamp tax. Transfer Stamp Tax At the federal level a transfer stamp tax is levied on the transfer of title to taxable securities for consideration, if at least one of the parties to the transaction or an intermediary involved in the transaction qualifies as a domestic securities dealer. Federal Withholding Tax The federal withholding tax is levied at the rate of 35% on the distribution of profits (including constructive dividends) and liquidation proceeds by a Swiss joint stock-company. A distribution is any payment by the company to its shareholder other than a repayment of stated capital. Profits distributed by a Swiss branch to its foreign head office are not subject to withholding tax No withholding tax is levied on royalties. As from July 1, 2005 the Savings Tax Agreement between Switzerland and the EU has been in force, which has introduced measures equivalent to those laid down in the EU Parent-Subsidiary Directive and the EU Interest & Royalty Directive, namely the abolition of withholding tax on crossborder payments of dividends and on cross-border interest and royalty payments between associated companies. Value Added Tax The standard VAT rate is 7.6%. The tax base is, generally, the consideration received from the contracting party. Taxable Year For each fiscal period only one tax return, which serves for federal, cantonal and communal taxes, must be filed. Ruling Practice Binding rulings may be obtained from the Swiss tax authorities within a few weeks. Treaty Withholding Tax Rates at a Glance For treaty countries, the rates below reflect the withholding tax rates applicable to outbound payments. A zero rate applies to royalties. Countries Dividends % Interest % Albania 5/15 (N1) 5 Algeria (N2) 5/15 (N3) 10 Argentina (N4) 10/15 (N1) 12 Armenia (N2) 5/15 (N1) 10 Azerbaijan (N11) 5/15 (N3) 10 Australia 15 10 Austria 0/15 (N3) 0 Belarus 5/15 (N1) 8 Belgium 10/15 (N1) 10 Bulgaria 5/15 (N1) 10 Canada 5/15 (N5) 10 China 10 10 Croatia 5/15 (N1) 5 Czech Republic 5/15 (N1) 0 Denmark 0 0 Ecuador 15 10 000226.doc 3/5

Egypt 5/15 (N1) 15 Estonia 5/15 (N3) 10 Finland 0/10 (N3) 0 France 0/15 (N6) 0 Germany 0/15 (N3) 0 Greece 35 10 Hungary 10 0 Iceland 5/15 (N1, N7) // 15/10 (N8) 0 India 10 10 Indonesia 10/15 (N1) 10 Iran 5/15 (N9) 10 Ireland 0 0 Israel 5/15 (N6) 10 Italy 15 12.5 Ivory Coast 15 15 Jamaica 10/15 (N6) 10 Japan 10/15 (N1) 10 Kazakhstan 5/15 (N6) 10 Kirgizstan 5/15 (N1) 5 Kuwait 15 10 Latvia 5/15 (N3) 10 Liechtenstein - 0 (N10) Lithuania 5/15 (N3) 10 Luxemburg 0/15 (N1) 10 Macedonia 5/15 (N1) 10 Malaysia 5/15 (N1) 10 Mexico 5/15 (N1) 10/15 (N11) Moldova 5/15 (N1) 10 Mongolia 5/15 (N1) 10 Morocco 7/15 (N1) 10 Netherlands 0/15 (N1) 5 New Zealand 15 10 Norway 0/15 (N3) 0 Pakistan 35 // 10/20 (N12) 0/30 (N13) Pakistan (N14) 10/20 (N3) 10 Philippines 10/15 (N6) 10 Poland 5/15 (N1) 10 Portugal 10/15 (N1) 10 Rumania 10 10 Russia 5/15 (N3) 10 Serbia-Montenegro 5/15 (N3) 10 Singapore 10/15 (N1) 10 Slovakia 5/15 (N1) 10 Slovenia 5/15 (N1) 5 South Africa 7.5 10 South Korea 10/15 (N1) 10 Spain 10/15 (N1) 10 Sri Lanka 10/15 (N1) 5/10 (N15) Sweden 0/15 (N1) 5 Thailand 10/15 (N6) 10/15 (N16) 000226.doc 4/5

Trinidad & Tobago 10/20 (N6) 10 Tunisia 10 10 UK 5/15 (N1) 0 Ukraina 5/15 (N3) 10 USA 5/15 (N6) 0 Uzbekistan 5/15 (N3) 10 Venezuela 0/10 (N1) 5 Vietnam 7/10 // 15 (N17) 10 Notes: (1) The higher rate applies if the payment is received by a company holding directly less than 25% of the (2) Not in force yet. (3) The higher rate applies if the payment is received by a company holding directly less than 20% of the (4) Not in force yet, but has been implemented provisionally. (5) The higher rate applies if the payment is received by a company holding directly less than 10% of the stock and the voting rights of the payor company. (6) The higher rate applies if the payment is received by a company holding directly less than 10% of the (7) The 15% rate applies to the dividend payment deducted from the net profit of the payor company; in all other instances the 5% rate applies. (8) The 10% rate applies if the payee is an individual; the 15% applies to legal entities. (9) The higher rate applies if the payment is received by a company holding directly less than 15% of the (10) Applies only to real security claims. (11) The 10% rate applies to interest paid to a bank after the expiration of 5 years as of the implementation of the treaty. (12) The lower rate applies if the payee is a company holding at least 1/3 of the (13) Approved loans: limitation of Swiss withholding tax to 10% of gross interest payment. (14) Entered into force on July 13, 2007 and will be implemented as of January 1, 2008. (15) The 5% rate applies to interest on bank loans. (16) The 10% rate applies to interest paid to financial institutions. (17) The 7% rate applies if the payee is a company holding at least 50% of the The 10% rate applies if the payee is a company holding at least 25% of the stock of the payor company. 000226.doc 5/5