Because of its federal structure, Switzerland does not have a uniform taxation system. Taxes may be levied at federal, cantonal and communal levels. Some taxes, such as Value Added Tax (VAT), are levied exclusively by the Federal State, whereas other are simultaneously raised at several levels, for instance federal and cantonal (ex.: income tax).
Direct & Indirect Taxes
Switzerland levies both direct and indirect taxes. Indirect taxes include in particular VAT
– which, though with significantly lower rates, is based on the EU model –, withholding tax (“Impôt anticipé”) and stamp duty (“droits de timbre”) on certain transactions.
Individuals and corporations resident in Switzerland are normally subject to tax on their worldwide income and assets, respectively on their worldwide profit and equity.
As mentioned above, direct taxes are levied by the Federal State (Direct Federal Tax) and by the cantons and/or municipalities (Cantonal and communal tax). Direct Federal Tax is governed by the Direct Federal tax Act, whereas Cantonal/communal tax is levied pursuant to the cantonal law of the canton concerned. Although Switzerland has been undergoing a reform of its tax system with the aim of harmonizing the foundations of the cantonal tax systems, cantonal tax laws still vary from one canton to another, especially with respect to the applicable tax rates.
Tax Incentives Available to Corporations
The following survey is aimed at providing a general overview of tax privileges granted by Switzerland to certain categories of enterprises or revenues. It should not be regarded as exhaustive. Indeed, each privilege may be combined with other instruments resulting in a lower tax burden. Further, even if relatively clearly defined in the tax legislation, special tax regimes are often granted in the form of tailor-made tax rulings to be negotiated with the competent tax authorities.
The Tax Harmonisation Law, which had to be implemented by the end of the year
2000, resulted in substantial formal similarity, but the cantons and communities retain considerable autonomy in setting tax rates and allowances; the expected tax burden therefore continues to play a role when choosing a location within Switzerland.
Qualifying dividends received by a Swiss corporation from Swiss or foreign subsidiaries are almost tax exempt, for Direct Federal as well as cantonal/communal tax purposes (so called participation or holding relief”). Moreover, for the purpose of the Direct Federal tax and in most of the cantons, capital gains on the sale of qualifying holdings may also be received tax-free.
Participation relief is available for the following income:
- Revenues from participation where the Swiss company owns at least 20% of the other company or where the value of its participation exceeds 2 million Swiss Francs.
- Capital gains derived from the transfer of qualifying participations. Qualifying participations in this instance are holdings of at least 20% of another company (the alternative 2 million Swiss Francs value test is not applicable).
Service companies generally provide technical, administrative or scientific assistance, including research and promotional services to related companies. As services are mainly rendered to group companies, it is often difficult to determine whether transactions take place at arm’s length or whether profits are being improperly accumulated in a low tax jurisdiction.
Service companies do not really benefit from a privileged tax status, but are merely subject to specific rules with respect to the determination of their taxable profit, these rules being sometimes suitable for tax strategies. As a rule, taxable profit must correspond at least to 5% of the expenses incurred by the company. Nonetheless, taxpayers may demonstrate that in spite of a margin lower than 5%, services are rendered at arm’s length prices.
In practice, the specific rules governing the taxation of service companies are set forth in an advance ruling granted by the cantonal tax authority, being specified that the actual regime may vary from canton to canton.
The service company tax regime is available at the cantonal/communal as well as at the federal level. It may be advantageous and used in tax planning where the actual margin of the business is superior to 5%.
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