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?
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:
- 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;
- abolish the SST liability on transactions with Swiss bonds;
- introduce a legal basis for the WHT liability on “manufactured payments”;
- facilitate the procedure for the notification instead of payment of the WHT on dividends paid to affiliated group companies; and
- 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.