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Swiss Taxation Part1

The term 'offshore' is not used in Swiss legislation or in describing company forms. However, there are a number of specialised forms of the basic Stock Corporation [Corp] which offer tax-privileged treatment equivalent to that obtainable in offshore jurisdictions.

The EU Savings Tax Directive has applied in Switzerland as from 1st July, 2005, through a separate agreement reached between the country and the EU, under which Switzerland is levying a withholding tax (initially at 15%) to returns on savings paid to the citizens of EU Member States, and which in various other ways is less onerous that the original Directive.

Although bank interest and dividends are caught by the Directive, payments made by what are called 'residual agents' (including for instance Trusts) are apparently excluded in the Swiss agreement, which is not the case in Member States. And of course the Directive applies only to individuals who receive payments; companies and other organisational forms do not fall under its aegis.

Switzerland Forms of Tax-Privileged Operation

Tax-privileged operations may take place within the following forms, all of which are variants of the basic Stock Corporation:

      ·        Holding Company  (Part 1)

·         Domiciliary Company  (Part 1)

·         Auxiliary Company  (Part 2)

·         Service Company  (Part 2)

·         Mixed Company  (Part 2)

Switzerland Tax Treatment of Offshore Operations

The general principles of Swiss corporate taxation apply to offshore entities except as indicated below.

·       Holding Companies:

For federal tax purposes a company is defined as a holding company if it holds either a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least 2 million Swiss Francs (known as a "participating shareholding").

The Swiss holding company was a particular target of the OECD's 'unfair tax competition' initiative, and in 2004 an agreement was reached between Switzerland and the OECD whereby information about holding companies would be shared by Switzerland in circumstances where there was prima facie evidence of fraud.

Although the definition of a holding company varies among cantons a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either

§        derives at least 51%-66% of its income from dividends remitted by the subsidiary; or

§      holds at least 51%-66% of the subsidiary's shares.

Generally speaking foreign dividends remitted to a Swiss company and any capital gains realized by a Swiss company on the sale of shares in a foreign entity in which it holds a stake are taxable in Switzerland unless they are remitted to a company which by Swiss fiscal law is defined as a Swiss "holding" company.

Swiss holding companies enjoy the following relief from corporate income tax: 

§        At federal level a holding company pays a reduced level of corporate income tax on any dividend income received from the subsidiary or the company in which it holds a "participating shareholding". The reduction in the level of corporate income tax payable depends on the ratio of earnings from "participating shareholding" to total profit generated.

§        At cantonal or municipal level no corporate income tax is payable on income represented by dividends so long the corporate entity meets the cantonal definition of a holding company.

Furthermore holding companies which hold a minimum of 20% of the share capital of a subsidiary pay reduced corporation tax on any capital gains made on the sale of that shareholding so long as

§        the shareholding was held for at least one year and was purchased after 1st January 1998; or

§        the shareholding was purchased before 1st January 1997 and will be disposed of after 1st January 2007.

Fribourg is currently considered the best canton in which to locate a holding company for corporate income tax purposes.

  •   Domiciliary Companies:

    Domiciliary companies are companies that:

    §        are both foreign-controlled and managed from abroad;

    §        have a registered office in Switzerland (i.e. at a lawyer's premises);

    §        have neither a physical presence nor staff in Switzerland;

    §       carry out most if not all of their business abroad;

    §         receive only foreign source income.

    Domiciliary companies enjoy the following relief from corporate income tax:

     §         At a federal level there are no tax advantages in terms of corporate income tax payable on income and gains;

    §        At a cantonal and municipal level the corporate income tax rate may be substantially reduced or even reduced to zero; taxes levied by the cantons are calculated according to a formula which relates the company's paid up share capital and reserves to profit.

    Follow up on Part 2