On 3 October 2017, the Swiss Federal Tax Administration (“SFTA”) has updated Circular No. 15 regarding the taxation of bonds and derivative financial instruments.
Modifications have been made regarding mostly one-time interest bearing bonds, capital-guaranteed derivatives, bonds issued by foreign group companies with the guarantee of a related Swiss group parent company and structured products. Furthermore, welcome clarifications have been included regarding the tax impact of negative interest rates.In addition to editorial changes, the following modifications have been made:
- Bonds with principally periodical interest, which by virtue of the current low interest environment have no or even a negative yield upon issuance, do not qualify as securities that are mostly or solely one-time interest bearing (IUP bonds).
- Capital Protected Units/Notes, in short CPU(N), qualify among others as capital-guaranteed derivatives. The term of the obligation – contrary to option and convertible bonds – is generally only one to two years.
- Bonds issued by foreign group companies with the guarantee of a related Swiss group parent company have to be qualified as domestic bonds, in case the principal amount of the bond flows back to the Swiss entity either directly or indirectly. In this case, the income from such bonds is subject to withholding tax. The flow-back into domestic territory is permitted in case the funds passed on by the foreign group entity (issuer) to the domestic group entity do not exceed the equity capital of the foreign group company at the balance sheet date.
- Gains on structured products such as mini futures held as private assets do not qualify as tax free capital gains in cases where the degree of pre-financing surpasses the admissible limit of 25% of the contract value or in cases where the underlying assets are not an underlying asset that can generate a capital gain, such as bonds.
- The non-technical term “negative interest” is used for the commission or premium the investor is willing to accept for the safety of his investment. Private investors are therefore not allowed to deduct this premium as an expense from the income or offset it with interest receivables or other income components. Consequently, this premium qualifies as a capital loss for tax purposes.
- Negative interest on credit balances held as private assets (caused by the negative interest of deposits held with the Swiss National Bank) can be deducted as capital expenditures. Such credit balances held as private assets are bank deposits (savings, deposits and current account balances, payroll accounts as well as time deposits and call deposits). For these types of deposits, the evidence of negative interest is possible as the amount, period and hence the sum of the negative interest can be determined. This is not possible in the case of marketable debt securities (regardless if mostly one-time interest bearing or not) given that the price formation of these securities is defined by various influencing factors thereby making it impossible to determine the portion of the chargeable negative interest for the individual holding period.
We recommend that financial services providers take the above modifications by the SFTA into account and assess a potential impact on their business activities. In particular, we recommend that banks and other issuers of financial products assess whether their term sheets and client tax reports need to be amended to factor in these changes.