In the latest issue of the Swiss Banking Association’s (“SBA”) magazine “Insight #3.20” dated 1 October 2020 (available in German or French here), the SBA explains that the Swiss Federal Council will abandon its previously proposed paying agent concept and the related extension of the 35% withholding tax to non-Swiss sources of interest. The latest “unofficial” proposal of the Federal Council would be the abolition of the 35% withholding tax liability on interest from Swiss bonds and bond-like instruments. This move does not come as a surprise, since the paying agent concept and the extension of the 35% withholding tax liability to non-Swiss sources of interest does not make any sense in the current world of tax transparency and the very low level of interest rates (see the KPMG article in Expert Focus, August 2020).
However, the new “unofficial” proposal to abolish the Swiss withholding tax liability on interest only applies to bond interest and bond-like interest. It does not apply to interest from deposits held at Swiss banks, irrespective of the underlying currency. As a result, interest on deposits at Swiss banks paid to Swiss resident individuals will remain subject to 35% withholding tax. This restriction means that Swiss banks will have to properly classify their clientele and properly identify the Swiss resident clients who will continue to suffer from the 35% withholding tax on deposit interest. In addition, they will also have to keep on monitoring the repatriation of cash associated with fiduciary deposits made by Swiss individuals at related foreign entities and properly assess whether bond-like instruments could qualify as bank deposits. Indeed, Swiss tax regulations do not provide a clear definition of bonds, bond-like instruments and bank deposits.
Retaining the withholding tax liability on Swiss bank deposit interest is not particularly reasonable in the current environment, not only because of the very low, nil or even negative interest rates but also because of the withholding tax exemption applicable to annual bank deposit interest of up to CHF 200. For example, a Swiss bank will have to apply a 35% withholding tax on interest paid to an individual resident in Switzerland only if this client makes an interest-bearing deposit at the Swiss bank of more than e.g. USD 200,000 over one year, assuming a favorable interest rate of 0.1% or higher. Conversely, no withholding tax will apply on a deposit of e.g. CHF 1 million as such a deposit will likely suffer negative interest rather than generate any positive interest income.
This new proposal is probably not final, since keeping the 35% withholding tax liability on Swiss bank deposits will very likely create more costs than generate any meaningful tax revenue. We hope that the Federal Council will make the only reasonable decision: to fully abolish the 35% Swiss withholding tax liability on all interest income.
Please do not hesitate to contact us if you want to further discuss this matter or have any other questions on any Swiss and foreign taxes.