SWITZERLAND Law and Practice Contributed by: Joseph Merhai, Thomas Pasquier and Laurent Schenker, Aegis
3.2 Business Profits In a cross-border context, business profits are taxed in Switzerland based on the distinction between unlimited and limited tax liability and, in treaty cases, by reference to the allocation rules for business profits (in particular, the permanent establishment threshold). A Swiss-resident corporation is, in principle, subject to unlimited tax liability and is taxed on its worldwide business profits, subject to the usual exclusions for profits attributable to foreign permanent establish - ments and foreign immovable property, which are generally exempt from Swiss corporate income tax under the exemption method. Conversely, a non-resident legal entity is subject to Swiss corporate income tax only to the extent it has a Swiss nexus – typically a permanent establishment in Switzerland. In that case, Switzerland taxes only the profits attributable to the Swiss permanent establish - ment, in line with the applicable treaty framework and domestic profit allocation principles. The Swiss tax base is generally based on the com - pany’s statutory financial statements prepared under Swiss commercial law, subject to specific tax adjust - ments. In cross-border situations, these adjustments often include corrections related to intra-group trans - actions, in particular transfer pricing adjustments and recharacterisations, such as hidden profit distri - butions, as well as the application of domestic safe harbour practices related to intra-group financing (eg, interest rates or thin capitalisation parameters). 3.3 Passive Income In Switzerland, dividends, interest and royalties are, in principle, part of the taxable income base of both individuals and corporate taxpayers. In a cross-border context, the tax outcome is largely driven by: • the domestic rules on ordinary income/profit taxa - tion; • the scope of the Swiss withholding tax (WHT); and • the relief mechanisms available under the applica - ble DTA. From a direct tax perspective, Switzerland provides relief to mitigate economic double taxation on quali -
fying participations. Corporate taxpayers may ben - efit from the participation relief on qualifying dividend income (and, under the relevant conditions, on capital gains – see 3.4 Capital Gains ), which reduces the tax - able profit proportionally; for dividends, a participation generally qualifies if it represents at least 10% of the share capital (or profit and reserves) of the distribut - ing entity or has a fair market value of at least CHF1 million. Private individuals benefit from partial taxation of divi - dends from qualifying participations (generally a mini - mum shareholding of 10%), with an inclusion rate of 70% at the federal level and a cantonal inclusion rate that must be at least 50% (subject to cantonal law). Switzerland levies a federal WHT, which operates either as a safeguard tax or as a final tax, depending on the context. It is generally levied at a rate of 35% on Swiss-source investment income and lottery win - nings, and at lower rates for certain insurance-type benefits. The tax is notably levied on: • dividends and comparable profit distributions by Swiss corporations; • certain categories of interest – notably, interest on Swiss bonds and “bond-like” financings (including structures that fall under the Swiss “bond/bond- like loan” practice); • interest paid by Swiss banks (and entities treated as banks for these purposes) to non-banks; and • income paid by Swiss collective investment schemes (ie, funds). Royalties are generally not subject to Swiss WHT; however, in related-party contexts an excessive roy - alty (or other excessive remuneration) may be rechar - acterised as a hidden profit distribution and trigger WHT at the level of the Swiss payer. From a technical perspective, Swiss WHT is a self- assessment tax collected at source by the Swiss debt - or/paying agent; late-payment interest can accrue if the tax is not duly reported and paid. Swiss-resident recipients are, in principle, entitled to a full refund of WHT, provided the conditions are met. In particular, the claimant must be the beneficial owner
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