One week before Christmas, the Swiss Parliament adopted a reform of the Swiss withholding tax (“WHT”) and Swiss stamp tax (“SST”) legislation. The key question now is whether this reform will enter into force on 1 January 2023. This is important for potential Swiss borrowers and Swiss banks as well as other financial institutions.
The purpose of this blog is to remind you of the proposed WHT and SST changes and provide you with some insight on the chances that this reform will be subject to a referendum.
Proposed WHT and SST changes
The relevant, proposed changes to the current WHT and SST regime are as follows:
||Impact for financial institutions
|Interest on Swiss bonds issued on or after 1 January 2023, and distributions of qualifying interest from Swiss investment funds, will no longer be subject to 35% WHT||This means that Swiss borrowers (including financial institutions issuing structured products) may issue bonds and bond-like instruments, e.g. reverse convertibles, (“bonds”) from Switzerland without any Swiss WHT implications. This WHT exemption will, however, cover only bonds issued on or after 1 January 2023. The payment of interest from existing bonds will therefore remain subject to 35% WHT after 1 January 2023.
This means that Swiss banks and custodians will need to distinguish between “new” and “old” bonds to properly manage and control the WHT treatment of the coupons and capitalized interests. Swiss funds will only marginally benefit from this WHT exemption, since they will only be able to distribute to investors interest from “new” bonds without triggering any WHT (distributions to investors of interest from “old” bonds, or non-Swiss bonds, will be subject to 35% WHT).
|Manufactured payments on an underlying Swiss source of income will be subject to 35% WHT, even if the payor is a non-Swiss entity||If enacted, this change should not have any relevant impact for Swiss financial institutions, as its rationale is to properly regulate the Swiss manufactured payments rules.
This change will, however, have a relevant impact for non-Swiss financial institutions as they will have a liability under Swiss WHT legislation to account for and pay 35% WHT on manufactured payments in respect of a Swiss source of income, unless the future WHT Ordinance (if any) includes some clarifications or exemptions on this matter.
The proposed new WHT legislation does not properly define the term “manufactured payments” in respect of a Swiss source of income (notably Swiss dividends). Thus, we cannot exclude the possibility that the Swiss Tax Authorities may, in the future, consider that certain compensation or substitute payments in respect of Swiss dividends from structured products may become subject to WHT.
|Transactions in domestic bonds, the issuance of units in qualifying foreign money market funds and the transfer of equity investments of more than 10%, will no longer be subject to SST.||Swiss and Liechtenstein (“Swiss” or “domestic”) bonds will no longer be a taxable security for SST purposes, and thus transactions in Swiss bonds will no longer trigger any SST. However, the transfer of non-Swiss bonds by domestic counterparties will remain subject to SST as non-Swiss bonds remain taxable securities for SST purposes.
The Swiss Parliament did not propose to exempt all transactions with money market funds. Instead, the issuance of units in qualifying non-Swiss money market funds will be exempt from SST only if the fund does not hold bonds with a remaining maturity exceeding 397 days.
Swiss securities dealers holding at least CHF 10 million of taxable securities can claim a new SST exemption applicable on the transfer of equity investments of more than 10%. This exemption applies only if the Swiss securities dealer records the equity investment as a fixed asset on its balance sheet.
The Swiss Socialist Party has launched a referendum campaign and has started to collect signatures against this WHT and SST reform. They have until 6 April 2022 to collect at least 50,000 signatures and file the referendum request. If the deadline is met and a public referendum is called, the WHT and SST reform will not enter into force on 1 January 2023. The public vote would likely not take place until 2023, meaning the reforms would not be able to enter into force before 1 January 2024 (if approved).
We note that approximately 8,500 signatures have been collected as of the date of this blog. You can track the latest number of signatures collected via this link (website not available in English).