SWISS TAXATION
Switzerland has a somewhat complex system of
federal taxation. Due to its federal structure, taxes
are levied concurrently by three different authorities:
the federal government, the cantons, and the
municipalities. Generally speaking, the Swiss federal
tax laws are uniform throughout the country but the
laws of the cantons and municipalities may differ.
Therefore, tax rules and tax liabilities are likely to
vary from one place to another.
In principle, Swiss companies are taxed at the
three levels -- federal, cantonal, and municipal -- on
their profit and capital; however, the rates as well as
the methods of taxation differ according to the firm's
legal structure. Although Swiss civil law acknowledges
only one form of joint stock company, there are three
different forms as regards fiscal treatment: the
operating company, the holding company, and the
domiciliary company.
An operating company is one that engages in an
industrial, manufacturing, or service activity. Such a
company is liable for a federal tax called a defense
tax, on net earnings, capital stock, and open and
undisclosed reserves. Stamp duties amount to 2% of the
paid-in capital stock.
Swiss law defines a holding company as one whose
main purpose is to participate in other companies
through investments. The holding company is almost
always legally structured as a corporation. The Swiss
federal tax system, as well as those of most of the
cantons, grants holding companies certain tax
privileges:
- The regular tax is reduced.
- The taxable capital is computed on a reduced
basis.
- In lieu of options one and two, a proportional
tax on capital, in combination with a tax exemption on
earnings, is applicable.
However, for the Swiss holding company to gain tax
privileges offered holding companies by the federal tax
system, a corporation must meet the requirements
outlined by federal tax regulations. Otherwise, the
federal tax system treats the holding company the same
as an operating company.
The domiciliary company has its legal domicile in
Switzerland, but has no office space. It does not
engage in business activities in Switzerland. Such a
company is usually limited by shares.
The domiciliary company is often established in
lieu of a holding company, when the requirements for a
holding company cannot be met. Domiciliary companies
are often sales agencies or patent and/or copyright
marketing companies.
Any tax benefits to the domiciliary company come
from the canton. The federal tax system does not
recognize it, but taxes it as an operating company (if
certain conditions are met, the federal system may
grant the domiciliary company similar deductions to
that of the holding company). As regards canton
taxation, the pure domiciliary company enjoys more
extensive tax advantages than the so-called mixed
company; however, variations on the domiciliary company
do obtain some tax advantages in the cantons.
Shareholders dividends paid by the domiciliary company
are subject to a withholding tax that is currently 35%.
The Withholding Tax
The Swiss impose a 35% withholding tax on interest
paid by a Swiss payor. You can recover this money by
the simple expedient of declaring the interest to the
IRS. You can either obtain a refund from the Swiss,
after getting the proper forms certified by the IRS, or
you can apply the amount as a credit on your U.S. taxes
under the foreign tax credit rules. Note that this is
a credit, not a deduction, so it comes right off the
amount of the check you would have paid to the IRS.
However, the Swiss do not issue 1099 forms, and it may
be difficult to determine the appropriate exchange rate
for the dollar, although the IRS eventually gets around
to printing an official rate for the preceding year.
One way to avoid the withholding tax is to have a
fiduciary account instead of a regular bank account.
This is really the equivalent of having the trust
department of an American bank handle your investments
for you instead of putting the money in a CD. More
information on fiduciary accounts is given in the Swiss
bank services section. All of the investments are made
outside of Switzerland, in whatever you tell the bank
to do -- mortgages, mutual funds, other banks. The
money is merely passing through Switzerland, and is not
taxed there.
