SWITZERLAND Law and Practice Contributed by: Joseph Merhai, Thomas Pasquier and Laurent Schenker, Aegis
2. Territoriality, Residence and Permanent Establishment
DTAs typically have a “negative” effect only: they restrict and allocate taxing rights between the con - tracting states to avoid double taxation but do not, in themselves, create a tax liability. Taxation in Switzer - land therefore always requires a legal basis in Swiss domestic law. 1.3 OECD Model/United Nations Influence on Treaty Practice In Switzerland, treaty practice is essentially based on the OECD Model Tax Convention (OECD MTC). Swit - zerland has been a member of the OECD since its creation, and most Swiss DTAs follow the OECD MTC in terms of structure and core concepts. Even if the OECD MTC and the OECD Commentary are not formal sources of law, they are widely used as interpretative guidance for the application of Swiss DTAs. This guidance is reflected in federal and can - tonal administrative practices, and is regularly men - tioned in case law. The UN Model does not drive Swiss treaty policy. Ele - ments that are more typical for UN-oriented treaties may nevertheless be found in individual agreements, depending on the treaty partner and the negotiated balance of taxing rights. In Switzerland’s tax treaty network, there are no sys - tematic deviations from the OECD MTC. Rather, devi - ations are treaty-specific and can concern: • the scope of covered taxes; • residual withholding tax rates and specific source- state taxing rights; and • the inclusion of specific anti-abuse and administra - tive assistance/exchange of information provisions, which have been increasingly aligned with BEPS minimum standards through protocols and treaty updates. 1.4 Multilateral Instrument Switzerland signed the Multilateral Instrument on 7 June 2017 and deposited its instrument of ratification on 29 August 2019. The MLI entered into force for Switzerland on 1 December 2019.
2.1 General Principle of Territorial Taxation In Switzerland, the territorial scope of taxation is determined by the distinction between unlimited tax liability based on a personal connection and limited tax liability based on an economic connection. Individuals who have their tax residence in Switzer - land (domicile or “tax relevant stay” – see 2.2 Tax Residence of Individuals ), and legal entities whose registered seat or place of effective management is in Switzerland (see 2.5 Tax Residence of Legal Entities ), are in principle subject to unlimited tax liability and are taxed on their worldwide income/profits and wealth/ capital, subject to the usual limitations and relief for certain foreign items (eg, foreign permanent establish - ments and foreign immovable property). By contrast, persons and entities without such per - sonal affiliation are subject to limited tax liability and are taxed only on Swiss-source income and assets to the extent a sufficient Swiss nexus exists (typi - cally Swiss-based real estate, a Swiss permanent establishment or business operation, or other taxable Swiss-source items). Switzerland’s structure as a federal state is an impor - tant feature of taxation. As taxes are levied at federal, cantonal and coaligned levels, the effective tax bur - den largely depends on the canton and municipality of residence or seat, despite the fact that the condi - tions to determine unlimited and limited tax liability are mostly aligned. 2.2 Tax Residence of Individuals Domestic Provision From a domestic standpoint, individuals’ tax residence in Switzerland (unlimited tax liability) is triggered if they are domiciled in Switzerland or have a “tax-relevant stay” in Switzerland. A person is considered to be domiciled in Switzerland for tax purposes if they reside in Switzerland with the intention of remaining there on a durable basis. This assessment is based on objective circumstances; a tax domicile may also arise from a special legal
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