• Charles Hermann, Partner |

The Swiss Federal Council announces a new proposal to amend the Swiss withholding tax and stamp tax regimes. But will these proposals achieve their objectives and enhance Switzerland’s competitiveness as a location for capital market and cash management activities?

Background

On 15 April 2021, the Swiss Federal Council issued a new Proposal to amend the Swiss Withholding Tax (“WHT”) and Swiss Stamp Transfer Tax (“SST”) legislation with the aim to enhance the competitiveness of Switzerland as a location for capital market and cash management activities.

The Federal Council proposes to:
 

  1. abolish the 35% WHT on bonds and bond-like instruments, while maintaining the WHT on interest from deposits at Swiss banks for Swiss resident individuals;
  2. abolish the SST liability on transactions with Swiss bonds;
  3. introduce a legal basis for the WHT liability on “manufactured payments”;
  4. facilitate the procedure for the notification instead of payment of the WHT on dividends paid to affiliated group companies; and
  5. allow the Swiss tax authorities (“STA”) the possibility to obtain information on transactions recorded in the central register of derivatives. 

The Proposal does not include any WHT and SST relief for Swiss shares, or Swiss and foreign funds.

No WHT on interest

The abolition of the 35% WHT liability on interest from bonds is definitely good news, but retaining the WHT liability on interest from deposits at Swiss banks for Swiss resident individuals does not make any sense in the current environment. This is not only because of the very low, nil or even negative interest rates, but also because of the WHT exemption applicable to interest on bank deposits of up to CHF 200 p.a., as well as the possibility to make fiduciary deposits at foreign banks without suffering WHT.

This Proposal will likely create more costs (notably the compliance costs to (i) identify, manage and control the addresses of the relevant account holders, and (ii) define and distinguish between bank deposits and revolving loans) than generating any meaningful tax revenue.

No SST on Swiss bonds

The proposed SST exemption is also good news but, unfortunately, this is not a material contribution to improve an effective cash management in Switzerland.

The Federal Council has lacked ambition and did not propose a WHT exemption for Swiss bond funds. This would have been a material contribution to improve the tax environment for Swiss funds and cash management activities in Switzerland.

WHT on “manufactured payments”

The introduction of a WHT liability on manufactured dividends in the WHT legislation makes sense since the requirement to account for and pay 35% on manufactured payments resulting from a naked short sale of Swiss shares did not have any proper legal basis.

However, the wording in the Proposal lacks clarity, notably because the term “manufactured payment” is not properly defined and thus could include other substitute payments, such as a payment reflecting a portion of a dividend embedded into a derivative on Swiss shares. Furthermore, the provision on manufactured payments should not include any reference to interest as this is not relevant.

Notification instead of payment of WHT

The required shareholding of 20% for the application of the notification procedure will be reduced to 10% for the WHT levied on dividends paid to affiliated group companies in Switzerland. For dividends paid to affiliated group companies outside of Switzerland the provisions of the applicable double tax treaty remain in place (typically 10% to 25% - if not specified the new domestic rate of 10% will apply). The administrative burden for the approval of the international notification procedure will however be reduced by extending the validity of the authorization granted for the application of the notification procedure from 3 to 5 years.

Information of transactions

The possibility for the STA to access information on transactions recorded in the central register of derivatives is legitimate, but this access should be qualified as the STA should not have the possibility to use and abuse this access to slow down and complicate legitimate refunds of WHT.

Summary

The Proposal is a step in the “right” direction. We hope that the Parliament will clarify the Proposal where necessary and amend it to include legitimate relaxations, such as for Swiss bond funds as a result of the relief of the WHT on interest. The final updates will not enter into force before 2024.

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