Tax on corporate lending and bond issues in Switzerland: overview

A Q&A guide to tax on finance transactions in Switzerland.

This Q&A provides a high level overview of finance tax in Switzerland and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, securitisations, the Foreign Acount Tax Compliance Act (FATCA) and bank levies.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Lending and Bond Issues: Country Q&A tool.

This Q&A is part of the global guide to tax on transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-guide.

Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on finance transactions in your jurisdiction?

Switzerland is a federal union of 26 states called "cantons", which are divided into municipalities (also called communities). The federal power is referred to as the Confederation. There are authorities at each level of government responsible for the enforcement of taxes.

The following taxes may apply to finance transactions:

  • Corporate income taxes.

  • Withholding tax.

  • Stamp taxes.

The Federal Tax Administration (FTA) is responsible for the enforcement of the withholding tax and stamp taxes.

The various cantonal and communal tax authorities are responsible for the enforcement of, amongst others, corporate income taxes, levied on a federal, cantonal and communal level in accordance with their territorial jurisdiction.

 

Pre-completion tax clearances

2. Is it possible or necessary to apply for tax clearances from the tax authorities before completing a finance transaction?

Circumstances for obtaining clearance

Advanced tax rulings are common in Switzerland. To be binding, all the following conditions must be met:

  • The ruling refers to a concrete matter related to the applicants.

  • The facts described in the ruling were carried out as described.

  • The approval was given without any reservation.

  • The ruling was addressed to the competent authority or the applicant had sufficient reasons to consider the authority as competent.

  • If the ruling was not accurate, the applicant could not have readily detected the inaccuracy of the ruling.

  • The applicant, in trusting the ruling, has made arrangements that he cannot revoke without disadvantages.

  • The legal situation at the time of the realisation of the transaction is the same as at the date of the ruling.

Mandatory or optional clearance

There is no mandatory clearance in Switzerland. However, it is strongly advised to obtain an advanced ruling in complex transactions.

Procedure for obtaining clearance

There is no fixed procedure for obtaining clearance. Generally, a letter must be addressed to the competent tax authority.

 

Disclosure of finance transactions

3. Is it necessary to disclose the existence of any finance transactions to the tax authorities?

No disclosure to the tax authorities is required.

 

Taxes on corporate lending/borrowing

Taxes potentially chargeable on amounts receivable

4. What are the main corporate taxes potentially chargeable on interest and other amounts receivable under a loan?

Corporate income taxes

Key characteristics. Corporate income taxes are levied at the federal, cantonal and communal levels. As interest received by a Swiss resident company is included in its financial statements, it will be subject to corporate income taxes.

If the loan was granted to a shareholder or related party by a Swiss resident company, and the interest rate does not exceed a certain minimum threshold, the portion of unpaid interest will be considered as constructive dividend and be subject to both corporate income taxes and withholding tax (see Question 7). The minimum interest payment must be calculated based on the arm's length principle. To facilitate its determination, the Federal Tax administration (FTA) issues administrative guidelines each year regarding the minimum and maximum interests that must be paid.

However, lower interest rates that are economically justified and substantiated can be applied by the parties. The burden of proof lies with the taxpayer, and the FTA is very reluctant to approve interest rates that do not comply with its guidelines.

Calculation of tax. Corporate income taxes are levied on a company's profits resulting from its financial statements, after adjustments for tax purposes (for example, higher interest rate if a loan with an affiliated party provides for a rate that does not comply with the FTA's guidelines). The taxable profit is determined according to the Swiss generally accepted accounting principles (GAAP).

Triggering event. The basis for corporate income taxation is a company's financial statements. Therefore, taxes on interest will be due when such interest must be included in the financial statements according to the applicable accounting principles.

Applicable rate(s).The federal tax rate is of 8.5% (statutory tax rate), and 7.8% taking into account that taxes are deductible (effective tax rate).

The cantonal and communal tax rates vary depending on the canton/community, but generally range between 11.2% and 23.2% (effective and including federal taxes). If a company benefits from a special status (for example, holding, domiciliary or mixed company status), its effective tax rate will range between 7.8% and 12.5%.

Withholding tax

See Question 7.

 

Tax reliefs available for borrowing costs

5. What corporate tax reliefs are available for borrowing costs (including interest and other amounts payable under a loan)?

Corporate income taxes

Key characteristics. Interest and other amounts payable under a loan are generally considered as a commercially justified expense and are therefore deductible for corporate income tax purposes. However, deductibility is limited by the following principles:

  • Tax avoidance.

  • Arm's length interest rates.

  • Thin capitalisation rules.

If the debt has been provided or guaranteed by a shareholder or any other related parties, the thin capitalisation rules apply. If those rules are not respected, interest paid on debt reclassified as equity will also be requalified as a non-deductible constructive dividend and subject to corporate income taxes, as well as withholding tax. The following thresholds are applied to determine whether a portion of debt is considered as equity (the calculation is based on market values, if evidence is provided, and otherwise on book values):

  • 100% of cash.

  • 90% of bonds issued in Swiss francs.

  • 85% of receivables, inventory, current assets and loans.

  • 80% of bonds issued in foreign currencies and other movable property.

  • 70% of other intangibles, investment in participation, operating real estate, homes and construction land.

  • 60% of quoted shares.

  • 50% of other shares in companies, machinery and equipment.

  • 0% of incorporation expenses.

Finance companies must comply with a 6:1 debt-to-equity ratio.

In addition, the interest rate must be at arm's length for the other portion of the loan to be deductible (see Question 4).

Calculation of relief. Interest payments are entirely deductible, except in cases where safe harbour rules/thin capitalisation rules are not respected.

Triggering event. Interest payments are deductible as soon as they must be recorded in the financial statements according to the applicable accounting principles.

Applicable rate(s). See Question 4.

Withholding tax

See Question 7.

 

Tax payable on the transfer of debt

6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?

To determine if any corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan, the link between the parties involved must be identified. If the counterparty is a shareholder or a related party and the transfer is not considered to be made at arm's length, this may trigger income, withholding or issuance stamp tax.

Corporate income taxes

See Question 4, Corporate income taxes.

Withholding tax

See Question 7.

Issuance stamp tax

Key characteristics. The Federal Tax Administration (FTA) levies the Swiss stamp tax on shareholders' contributions to a Swiss company, regardless of whether they receive shares in exchange. Certain transactions are exempt (for example, certain restructurings).

Triggering event. The tax is triggered when the total amount contributed exceeds CHF1 million.

Liable party/parties. The tax is payable by the company to which the contribution is made.

Applicable rate(s). The rate is 1% of the total amount contributed exceeding the exempted amount of CHF1 million.

 

Withholding tax

7. Is there withholding tax on interest or any other payments under a loan?

When withholding tax applies

In principle, interest payments under a loan are not subject to withholding tax. However, such payment can be requalified for tax purposes as constructive dividends and be subject to Swiss withholding tax if both:

  • The loan agreement has been concluded between a Swiss resident company and a related party (for example, a shareholder).

  • The interest rate is too low or too high.

As for corporate income taxes, the withholding tax will be calculated on the basis of the difference between the interest rate paid and the interest due according to the administrative guidelines (see Questions 4 and 5).

If interest or any other payments under a loan is qualified as a constructive dividend, the withholding tax must be declared through an official form and paid within 30 days after maturity of the interest payment.

In addition, interest paid under a bond issued by a Swiss resident company is subject to Swiss withholding tax (see Question 8). However, to determine if the threshold of participants necessary to qualify as a bond has been reached, affiliated parties to which the bond has been issued do not count, subject to certain conditions.

Applicable rate(s) of withholding tax

The applicable rate is 35%. A partial or full refund is available if the requirements in the Swiss Withholding Tax Act are met or under an applicable double tax treaty. Depending on the circumstances, it may be possible to only declare the withholding tax due on the constructive dividend, rather than paying it.

Exemptions from withholding tax

Generally, no withholding tax applies on interest payments under a loan, unless in the cases mentioned above.

 

Guarantees

8. Do any particular tax issues arise on the provision of a guarantee?

There are no particular tax issues arising on the provision of a guarantee. However, a guarantee may lead to a limitation of interest deductibility (see Question 5). Debts that have been provided or guaranteed by related parties may be requalified as equity according to the thin capitalisation rules. Consequently, interest on the portion of debts considered to be equity will be:

  • Non-deductible for income tax purposes.

  • Subject to withholding tax.

In addition, the exception under which affiliated parties are not taken into account when determining if a bond (which interest is subject to withholding tax) has been issued, does not apply if a foreign group entity has issued a bond guaranteed by a Swiss group entity.

 

Bond issues

9. For corporate taxation purposes, are bonds treated any differently from standard corporate loans?

For corporate taxation purposes, bonds and standard corporate loans are treated in the same manner. However, these two types of instruments are treated differently for withholding tax purposes, as standard loans are not subject to withholding tax, whereas interest payments made under bonds are subject to it (see Question 8).

 

Taxes payable on the issue and/or transfer of a bond

10. What stamp, transfer or similar taxes are payable on the issue and/or transfer of a bond?

Issuance stamp tax

The issue of bonds by a Swiss company does not trigger issuance stamp tax.

Transfer stamp tax

Key characteristics. The Federal Tax Administration (FTA) levies the Swiss transfer stamp tax when one of the parties or one of the intermediaries involved in a transfer of taxable securities (such as bonds) is a securities dealer according to the Swiss Stamp Tax Act. Taxable securities are securities issued by a Swiss person, or the equivalent issued by a foreign person. Certain transactions are exempt (for example, certain restructurings).

Securities dealers are, among others, banks and other financial institutions, as well as Swiss companies that hold, according to their latest balance sheet, taxable securities for a combined book value exceeding CHF10 million.

Calculation of tax. The tax is calculated on the consideration paid for the bond.

Triggering event. The triggering event is a change of ownership of the bond.

Liable party/parties. The tax is payable by the securities dealer.

Applicable rate(s). The applicable rates are:

  • 0.15% for Swiss securities.

  • 0.3% for foreign securities.

 

Exemptions

11. Are any exemptions available?

The following are exempt from transfer stamp tax (among others):

  • Restructuring.

  • Securities returned for cancellation.

  • Transfer of subscription rights.

  • Trade in Swiss and foreign money market papers.

In addition, the following entities (among others) are also exempted from transfer stamp tax:

  • Foreign social security institutions.

  • Foreign pension schemes.

  • Swiss and foreign collective investment schemes.

 

Plant and machinery leasing

Claiming capital allowances/tax depreciation

12. What are the basic rules for enabling the lessor or lessee of plant and machinery to claim capital allowances/tax depreciation?

Only the legal owner (that is, the lessor) can claim tax depreciation on plant or machinery. The Federal Tax Administration (FTA) publishes guidelines on the rates to which tax depreciation on plant and machinery can be claimed (see Question 13).

 

Rate of capital allowances/tax depreciation

13. What is the rate of capital allowances/tax depreciation; does it depend on the type of assets?

The rates of tax depreciation on plant and machinery depend on the type of assets and on the method used for depreciation. The two main methods are:

  • Depreciation on the accounting value of the asset.

  • Depreciation on the acquisition value of the asset.

The following rates apply in the case of depreciation on the accounting value (acquisition value) of the asset. This list is for guidance purposes only and is not exhaustive:

  • Commercial buildings:

    • building alone: 4% (2%);

    • building and land combined 3% (1.5%).

  • Equipment:

    • office furniture: 25% (12.5%);

    • machinery for production: 30% (15%);

    • computer hardware and software: 40% (20%).

  • Other assets:

    • non-motorised means of transport: 30% (15%);

    • motor vehicles: 40% (20%);

    • intangible assets: 40% (20%).

In addition, investments in plant and machinery designed to save energy/protect the environment benefit from a more favourable treatment. During the first and second year, the rate of depreciation is 50%.

Various cantonal specificities must be taken into account. For example, certain cantons provide for an immediate amortisation of up to 100% of the acquisition costs in the first year.

 

Lessees not carrying on business in the jurisdiction

14. Are there special rules for leasing to lessees that do not carry on business in your jurisdiction?

There are no special rules for leasing to lessees that do not carry on business in Switzerland. A foreign legal entity that has neither its registered office nor place of effective management in Switzerland may however be subject to taxation if:

  • The leasing is of plant and machinery.

  • These are used in a factory or sales agencies located in Switzerland, as a company may in such circumstances have a permanent establishment in Switzerland.

 

Taxation of rentals

15. How are rentals taxed?

Rental income is subject to corporate income taxes. Rental expenses are deductible for the lessee.

 

Rulings and clearances

16. Is a ruling or clearance necessary or common?

Ordinary leasing does not require a ruling or clearance from the tax authorities. In more complex situations, it is always possible to require an advance tax ruling from the competent tax authority.

 

Restructuring debt

Unpaid or deferred interest or capital

17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?

The tax treatment depends on whether the loan agreement has been concluded between related parties (such as a shareholder or another group company), and whether the parties are overindebted.

Unpaid or deferred loans between related parties may be requalified as a constructive dividend (see Questions 4, 5 and 7), on which income and withholding taxes can be levied, provided that the company is not overindebted.

Case law has developed the following non-cumulative factors to determine if a loan can be considered as a constructive dividend:

  • No written loan agreement.

  • No sufficient guarantees.

  • Interest is considered as an increase of the loan.

  • Borrower's creditworthiness.

  • Interest rate applied on the loan (no arm's length principle).

  • Excessive loan-to-total assets ratio.

  • Loan does not correspond to the company's purpose.

 

Debt write-off/release and debt for equity swap

18. What is the tax treatment of the borrower and lender if a loan is:
  • Written off or released (wholly or partly)?

  • Replaced by shares in the borrower (debt for equity swap)?

The tax treatment of a loan write-off or a debt for equity swap depends on the link between the parties and on their level of indebtedness (see Question 17).

Loan write-off or release

Generally, loan write-offs or releases to an overindebted company are considered as income and must be set off against losses and losses carried forward. If one of the following requirements is fulfilled, loan write-offs are not treated as income and will therefore be tax-neutral:

  • The loan is granted by a shareholder and has been treated fiscally as hidden equity (before the write-off).

  • At the time when the loan was granted by a shareholder, a third party would not have granted such a loan due to the poor financial situation of the company.

For the lender (corporate shareholder or third-party), the loan that has been written off or released can be depreciated. However, if the loan is tax-neutral according to one of the above criteria, the write-off will have the following tax consequences for the lender:

  • Increase of the accounting value of the participation in the borrowing company.

  • Reduction of the taxable income, if the participation must be depreciated according to the applicable accounting principles.

Debt for equity swap

A debt for equity swap is composed of two steps:

  • First, a loan write-off, following the above principles.

  • Second, new shares are issued by the former borrower in the amount of the written-off loan. This step may trigger the issuance stamp tax.

However, if existing losses are eliminated and the shareholders' contributions do not exceed CHF10 million, the company is exempt from issuance stamp tax. Additionally, the Swiss legislation allows a further exemption from issuance stamp tax if the levy of such tax would result in serious hardship for the company.

Neither of the two steps involved in a debt for equity swap is subject to withholding tax.

 

Securitisation

19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues that arise in relation to securitisations.

Securitisation can be defined as the process through which an issuer creates a financial instrument in order to transform illiquid debts or other assets into liquid securities by using ad hoc vehicles. Securitisations are not subject to specific tax regulations in Switzerland. Therefore, each transaction must be analysed in order to determine its tax treatment. Securitisation requires two steps.

  • First, the transfer of debt or other asset to the ad hoc vehicle for consideration is considered as an ordinary sale. Provided that the arm's length principle is complied with, the ordinary tax principles apply regarding the purchase price (that is, income for the seller and tax deductible expense for the buyer), and no withholding tax applies.

  • Second, for the issuance of new securities by the ad hoc vehicle, the following factors must be taken into account (among others):

    • the type of legal entity used; and

    • the place of residence of the vehicle.

    Under the Swiss legislation, the issuance of share in a Swiss entity is subject to the 1% issuance stamp tax. The issuance of foreign securities may be subject to the transfer stamp tax (see Question 10, Transfer stamp tax).

 

Foreign Account Tax Compliance Act (FATCA)

20. Has your jurisdiction entered into an intergovernmental agreement (IGA) to implement FATCA, or do you intend to enter into an IGA to implement FATCA?

Switzerland entered into an IGA with the US to implement FACTA on 2 June 2014. The Federal Council brought the corresponding implementing act into force on 30 June 2014. The implementation follows Model 2, under which Swiss financial institutions must directly provide the Internal Revenue Service (IRS) with the data of consenting US clients. The US must use the ordinary administrative assistance procedure for reluctant US clients.

On 8 October 2014, Switzerland entered in another round of negotiations with the US in order to switch to Model 1. Currently, it is still unknown when the new agreement will enter into force.

 
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA requirements?

The administrative and financial burden associated with the implementation of FATCA is considerable for foreign financial institutions. In addition to the IGA, Switzerland and the US signed a Memorandum of Understanding on interpretations regarding the FATCA agreement on 14 February 2013.

 
22. Are there any provisions of your jurisdiction's IGA and/or domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?

There are no provisions in the Swiss IGA or in the domestic implementing legislation which impose more onerous conditions than those in FATCA.

 

Bank levies

23. Are there any bank levies or similar taxes imposed specifically on financial institutions?

Under the Agreement on the Taxation of Savings, Swiss paying agents (such as banks) must levy a retention tax on interest payments, if both:

  • Swiss withholding tax is not levied.

  • The beneficial owner is a resident of an EU member state.

The beneficial owner can choose between:

  • The retention tax.

  • Voluntary disclosure to the competent tax authorities.

Switzerland and the EU signed an agreement on the automatic exchange of information in tax matters, which is expected to enter into force in 2017 (first exchange of information in 2018). This agreement should have an impact on the current discussions on the revisions of the Agreement on the Taxation of Savings.

In addition, Switzerland has concluded additional agreements with Austria and the UK to provide for a final withholding tax on income payments. Those agreements entered into force on 1 January 2013. The final withholding tax is levied by a paying agent and passed on anonymously to the tax authorities. This tax has the effect of finally settling any income tax due on investment income.

 
24. On what are any such levies or taxes charged?

Swiss paying agents levy a retention tax on interest payments if the conditions outlined in Question 23 are fulfilled (Agreement on the Taxation of Savings with the EU).

Under the tax agreements with Austria and the UK, the final withholding tax is levied on (definitions are non-exhaustive):

  • Interest income.

  • Dividend income.

  • Other income.

  • Capital gains.

 
25. At what rate(s) are the levies or taxes charged?

The rates are as follows:

  • Retention tax rate under the Agreement on the Taxation of Savings with the EU: 35%.

  • Final withholding tax rate under the tax agreement with Austria: 25%.

  • Final withholding tax rate under the tax agreement with the UK:

    • interest income not covered by the Agreement on the Taxation of Savings with the EU: 43%;

    • dividend income: 35%;

    • other income: 43%;

    • capital gain: 27%.

 
26. Are there any thresholds or exemptions?

Retention tax

Interest payments made on debt claims issued by debtors who are residents of Switzerland or those relating to permanent establishments of non-residents located in Switzerland are excluded from the retention tax under the Agreement on the Taxation of Savings with the EU.

In addition, a beneficial owner that opts for the voluntary disclosure procedure for interest income obtained from a Swiss paying agent will not be subject to the retention tax.

Final withholding tax

Where a person subject to the tax agreement with the UK or Austria expressly authorises the Swiss paying agent to disclose relevant information to the competent foreign authority (for example, identity, name and address of the Swiss paying agent and so on), the Swiss paying agent must disclose such source of income instead of levying the withholding tax.

 

Reform

27. Please summarise any proposals for reform that will impact on the taxation of finance transactions described above.

In September 2014, the Federal Council initiated a consultation of a legislative draft for the Swiss Corporate Tax Reform III, which was submitted to Parliament on 5 June 2015. It is expected that this reform will enter into force on 1 January 2019.

This reform aims to align Swiss law with international standards regarding corporate taxation, in particular by suppressing special tax statuses, such as the cantonal and municipal holding, domicile and mixed company status, as well as the principal and finance branches status at the federal level. To keep Switzerland a global attractive business location, the reform is expected to introduce the following measures:

  • Introduction of a patent box on a cantonal level to lower the taxation of income from patents, based on a "modified nexus approach" in order to ensure that only the income related to Swiss research and development (R&D) expenses will benefit from a reduced taxation.

  • Tax deductions relating to expenses incurred for R&D will be increased.

  • Step-up of the unrealised gains when switching from a special status to an ordinary one (that is, when the Corporate Tax Reform III enters into force). The step-upped reserves will need to be written down tax-effectively according to ordinary rules.

  • Lower cantonal corporate income taxes (for example, Vaud intents to lowers its tax rates to 13.79%, Geneva to 13 to 15% and Zürich to 14%).

  • Abolition of the securities issuance stamp tax.

 

Online resources

Official Website of the Swiss Confederation

W www.admin.ch/gov/en/start.html

Description. This website is maintained by the Swiss administration and provides official and up-to-date information about federal legislation. The website usually provides unofficial translations in English.

Swiss Federal Tax Administration

W www.admin.ch/gov/en/start.html

Description. This website contains publications, circular letters and other tax information. English translations are generally not available.



Contributor profile

Jean-Blaise Eckert, Partner

Lenz & Staehelin

T +41 58 450 76 00
F +41 58 450 70 01
E jean-blaise.eckert@lenzstaehelin.com
W www.lenzstaehelin.com

Professional qualifications. Switzerland, Neuchâtel Bar, 1989; Certified Tax Expert, 1994

Areas of practice. Tax; private clients; contract and commercial; internal investigations.

Non-professional qualifications. Master in Law (lic. iur.), University of Neuchâtel; MBA, Berkeley University, 1991

Languages. French, English, German

Professional associations/memberships.

  • Member of the Executive Committee and Vice-President of the International Fiscal Association (IFA).
  • Member of the Committee of the Swiss Branch of the International Fiscal Association (IFA).
  • Reporter to the IBA and IFA congress on Swiss tax matters.
  • Teacher in the Masters programmes of the University of Geneva and University of Lausanne.

Publications (selection)

  • Hinny, P., Eckert, J.-B., Droit fiscal 2015, Recueil de textes avec renvois, index et remarques, Zurich 2015.
  • Rüdisühli, H., Eckert, J.-B., Corporate Tax 2015 - Switzerland, in: The International Comparative Legal Guide to Corporate Tax 2015, 239-247.
  • Jean-Blaise Eckert, Floran Ponce, Archives de droit fiscal Suisse 83, n°11-12, 2014/2015, Swiss withholding tax aspects of financing, pages 969-992.
  • Hinny, P., Eckert, J.-B., Corporate tax: Is Swiss corporate tax system still attractive despite EU pressure?, in: International Tax Review, Switzerland (2nd edition), 2013, 3 et seqq.

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