09 maggio 2013

Since January 1st, 2009, with the Corporate Reform II (Federal Law dated March 23, 2007), Switzerland, in order to make its marketplace even more competitive and attractive from a fiscal point of view, has mitigated in a focused way double taxation on dividends. See below for the main fiscal aspects concerning:
  1. Taxation of dividends paid by a company residing in Switzerland;
  2. Tax consequences for an individual residing in Switzerland or abroad;
  3. Tax consequences for a legal entity residing in Switzerland or abroad.

A) Taxation of dividends PAId by a company RESIDING in Switzerland

Based on the provisions contained in the Federal Law on withholding tax dated October 13, 1965, dividends paid by a company residing in Switzerland to its shareholders are subject to withholding tax at 35%. Withholding tax is a tax levied at source by the federal government whose primary purposes are to:
  1. "prevent" and curb tax misappriopration;
  2. induce taxpayers to declare to tax authorities their taxable income (i.e. dividends) and the assets that generated it.
If indeed the condition under b) is met, the recipients of dividends charged with the withholding tax would be entitled to refund it. Refund is granted to:
  1. individuals residing in Switzerland that have declared assets and related taxable income in their tax return;
  2. legal entities residing in Switzerland that have accounted the proceeds as income subject to withholding tax;
  3. individuals and legal entities residing abroad in the event of the respective Countries of residence have entered into an International agreement with Switzerland to avoid double taxation, under the conditions there provided.
An exception to the right of refunding of withholding tax to legal entities residing abroad according to letter c) is in case the entities are resident in an EU member State. According to the agreement between Switzerland and the European Union, indeed, in force since July 1st , 2005, which provides for measures equivalent to those contained in the Parent-Subsidiary Directive No. 90/435/EEC, if the Mother company (= Foreign company) holds a share of at least 25 per cent in the capital of the subsidiary (= Swiss company) for at least 2 years, the dividend paid by the subsidiary (Swiss company) will not be subject to any income tax in Switzerland (i.e. withholding tax).

B) Tax consequences FOR an individual residING in Switzerland or abroad

In case of a dividend collected by an individual residing in Switzerland, it will contribute to the determination of the taxpayer's total income as far as:
  • 60% if the share held represents at least 10% of the dividend and the same share falls within his personal assets category (= his private substance) according to art. 20 of the Federal Law on Federal Direct Tax . The remaining 40% is exempt from tax.
  • Theoretical 50% if the share held represents at least 10% of the dividend and it falls within his commercial substance according to art. 18b of the Federal Law on Federal Direct Tax. The percentage of reduction shall be calculated on income net of finance charges and administration costs. The remainder is exempt from tax. In all other cases not falling in the cases mentioned above, the dividend received will contribute to the calculation of total income to the extent of 100%.
In the case of a dividend collectd by an individual residing abroad, he will contribute to the determination of the income of the taxpayer in accordance with the rules and laws of the respective Countries of residence. The possibility to apply for a "refund" of withholding tax in accordance with domestic and international laws, is not affected.

C) Tax consequences FOR a legal entity residing in Switzerland or abroad

According to art. 69 e 70 of the Federal Law on Federal Direct Tax and to art. 77 of Tax Law, in the event that the company collecting the dividend is resident in Switzerland and:
  • It participates at the rate of at least 10% of the capital stock or social capital or profits/reserves of another company; or
  • It holds shares representing a market value of at least one million Swiss francs;
profit tax is reduced in the existing proportion between the net revenue of shares (i.e. dividend) and the total net profit. This tax benefit, known as "reduction for share", is justified by the attempt of the legislature to prevent the profit arising from investments to be taxed repeatedly. In the particular event of holding companies, whose social purpose consists primarily of shares administration without exerting a genuine commercial activity, the dividends received will be totally exempted of taxation at a federal, cantonal and municipal level. But concerning the case of a company collecting the dividend and residing abroad, it is necessary to distinguish among the following cases:
  1. A company residing in a Country with which Switzerland has concluded an international agreement to prevent double taxation;
  2. A company residing in a EU Country which holds in the swiss company a share of 25% minimum of its capital for at least two years and which meets the additional requirements established by the EU-Switzerland Agreement on intercompany dividends (according to the "Mother-Subsidiary", 90/435/EEC);
  3. A company residing in a Country with which Switzerland has not concluded an international agreement to prevent double taxation.
In the case sub a) to determine: (i) taxing powers of the dividend exerted by the Source Country ( that of residence) and (ii) the right to a partial or full refund of the withholding tax, it will be necessary to follow the provisions contained in the international agreements to avoid double taxation (the so-called CDI), concluded between Switzerland and the respective Countries of residence of the company collecting the dividend; In the case sub b) the dividend paid by the Swiss company will not be subject to any withholding tax in Switzerland if both, the foreign company collecting the dividend as well as the Swiss company paying it, meet the conditions contained in the Switzerland-EU Agreement on intercompany dividends and those are the following:
  • the mother company residing abroad has a minimum of 25% of the capital of the subsidiary which is resident in Switzerland for at least 2 years;
  • both companies are subject to direct taxation on profits without being exempted and are constituted as corporations;
  • a company is resident in a EU State while the other is resident in Switzerland;
  • according to an Agreement against double taxation no company can be considered as residing in a Third Country.
The company must submit to the Swiss Federal Tax Administration (FTA) the application for the authorization of the notification procedure (the so-called model 823C) for authorization to remit the withholding tax on dividends. In the end, in the case sub c) the dividend paid by the Swiss company will be subject to withholding tax at 35%. In such case withholding tax represents a definitive taxation because it cannot be recovered.