All’s well that ends well? Next attempt to reform the Swiss withholding tax system - Tax and Legal blog

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Reforming the Swiss withholding tax system is key to strengthening the Swiss debt capital market. Recent developments such as the OECD’s Base Erosion and Profit Shifting initiative, which will complicate the use of offshore finance structures, and the upcoming expiration of the withholding tax exception for too-big-to-fail instruments make substantial changes to the Swiss withholding tax regime inevitable.

In the course of its meeting on 8 March 2019, the Swiss Federal Council took note of the findings of an expert board’s report with recommendations on the planned Swiss withholding tax reform. The report mainly aims at strengthening the Swiss debt capital market as well as securing tax honesty and rests on two main pillars: firstly, the abolishment of withholding tax on interest paid to Swiss corporate and all foreign investors and secondly, the introduction of a paying agent model combined with the expansion of the withholding tax regime to include income Swiss resident individual investors receive from foreign investments.


The withholding tax regime in Switzerland is currently following the debtor principle. This means that the Swiss obligor of interest or dividend deducts the withholding tax (at 35%), deposits it with the Swiss Federal Tax Administration and credits only the net amount (that is 65%) to the investor.

In 2014, the Federal Council received negative feedback on a preliminary draft to amend the Federal withholding tax act. Subsequently, and considering a popular initiative demanding to codify the Swiss banking secrecy on a constitutional level, it instructed the Federal Department of Finance to create an expert board with the task to develop suggestions for a withholding tax reform.

Parallel to the Federal Council’s work on revising the Swiss withholding tax system, the National Council’s Economic Affairs and Taxation Committee created a subcommittee with the task of drafting a bill to revise the federal withholding tax act. The subcommittee intends to coordinate its work with the Federal Council.

Strengthening the Swiss debt capital market

The first suggestion of this expert board is that interest paid to Swiss corporate and all foreign investors should no longer be subject to the Swiss withholding tax. This measure would make it more attractive for investors to purchase Swiss bonds. At the same time, it would make it more attractive for Swiss companies to perform cash pooling and treasury functions domestically.

The paying agent principle

As the debtor of the interest generally does not know the recipient of the interest, the second key element of the report is the proposal to implement a paying agent model and shift partially away from the debtor principle. Under this new model, the Swiss paying agents, that is the Swiss banks that hold the respective investments in custody for the investors, play a key role. Because of the information they hold, they can distinguish between Swiss resident individuals and other investors and thus ensure the envisaged withholding tax consequences apply depending on the type of investor. For those types of payments falling under the paying agent system (see below) to a Swiss resident individual investor, they would deduct the withholding tax and deposit it with the Swiss Federal Tax Administration, which in principle is similar to how the US withholding agent regime works.

To use the full potential of the paying agent model, the expert board suggests that the income Swiss resident individuals receive from foreign investments should also become subject to Swiss withholding tax (provided that such investments are held through a Swiss paying agent). This would strengthen the securing function of the withholding tax and consequently should increase tax honesty. If a Swiss resident individual holds the relevant investments with a paying agent outside of Switzerland, the investor should be subject to disclosure via the automatic exchange of information.

In summary, the following types of income should fall under the paying agent system:

  • Interest from Swiss and foreign bonds
  • Dividends from foreign stocks or similar equity instruments
  • Interest from domestic bank accounts

Under the report, the following will remain subject to the current debtor principle:

  • Dividends from Swiss stocks and similar equity instruments
  • Domestic lottery wins
  • Domestic insurance benefits

Indirect investments will generally be treated the same way as direct investments, which means that their income will fall under the paying agent principle, except for the share of income allocable to dividends from Swiss stocks and similar equity instruments.

This new system would obviously impose significant administrative efforts and processing risks on Swiss paying agents. However, introducing a reporting procedure for all Swiss clients holding their investments domestically, which would probably be much easier to handle for Swiss paying agents, is highly unlikely in the current Swiss political landscape according to the report.

In order to nevertheless reduce complexity of the paying agent model the expert board suggests the following auxiliary measures:

  • Annual collection of the withholding tax by the Swiss paying agent based on the information in the tax statement (currently, the withholding tax is levied on a payment-by-payment basis)
  • The withholding tax will be imposed based on the status of the legal owner of the investment (and not a potentially different ultimate beneficiary), which means it will not apply to Swiss resident individuals who are the beneficial owners of offshore private investment vehicles (for instance trusts or corporations)
  • An increase of the threshold to trigger the withholding tax from the current CHF 200 to CHF 500 or potentially CHF 1’000, which means that most retail investors may not be affected by the paying agent tax

Strengthening the Swiss equity capital market?

Apart from strengthening the Swiss debt capital market and securing the taxation of investments in foreign instruments, the expert board further suggests also considering measures to make the Swiss equity capital market more attractive, for example reducing the withholding tax on Swiss dividends to 15% (while generally remaining with the debtor principle).

  • For Swiss corporate investors (entitled to reclaim the 15% withholding tax), this would result in a reduction of liquidity shortage.
  • The same holds true for all foreign investors (both corporate and individual) residing in a country that has a double tax treaty with Switzerland. For these investors, the withholding tax reduction would usually make a reclaim obsolete as 15% is the residual tax rate stipulated in most Swiss double tax treaties. Foreign investors could still apply for a reclaim of withholding tax in case the applicable double tax treaty entitles them to a lower rate. Investors from non-treaty countries though would effectively benefit from the withholding tax reduction as their ultimate tax burden is reduced.
  • For Swiss resident individual investors there will be no change. The Swiss paying agent would receive 85% of the dividend and then “fill the gap” to the residual 35% rate by deducting another 20 percentage points.
    However, there is no consensus in the expert board about this suggestion to strengthen the Swiss equity capital market, and the future will show whether this idea is pursued any further or not.


The proposed withholding tax reform would significantly impact both Swiss paying agents and Swiss investors in various areas:

  • Firstly, Swiss paying agents would need to implement processes and procedures to comply with their new obligations.
  • Secondly, the annual withholding tax collection would expose investors to the risk of being short of liquidity when the withholding tax is due.
  • Thirdly, as mentioned above, the Swiss paying agent will collect the withholding tax based on the status of the legal owner of an investment (and not a potentially different ultimate beneficiary). The expert board suggests not imposing further tax due diligence obligations on Swiss paying agents in such situations.
  • Finally, while the expert board suggests creating a legal basis for raising the withholding tax on the income from structured products and manufactured payments, the report remains silent on how the solution could potentially look. Swiss paying agents need to keep in mind that structured products and manufactured payments may find their way into the Swiss withholding tax legislation and should think about lobbying for a practical solution.


The suggestions in the expert board report address a long-standing reform backlog and an urgent concern of capital market participants.

Many aspects of the proposal are undoubtedly appealing and support the intended objective. However, the suggested reform is lacking any positive features for wealthy Swiss resident individuals who already declare all of their investments and related income. The planned 35% withholding tax on foreign dividend and interest income coupled with liquidity implications around year end and the absence of a voluntary domestic disclosure regime might rather play into the hands of other financial centres.

Finally yet importantly, we would like to highlight that other tax types should not be ignored when discussing measures to make the Swiss capital market more attractive, especially the stamp tax and the income tax. These were not considered in detail in the report. Neither are they part of the above mentioned legislation process currently pending in the Federal parliament. However, strengthening the Swiss capital market’s international position requires reconsideration of more than just withholding tax.

This is just the beginning of a longer project but it seems “there ain’t no such thing as a free lunch”.


By: Seda Bastas, Robin King & Steven Gruendel, Financial Services Tax

If you would like to discuss more on this topic, please do reach out to one of the key contacts below:

Sponsoring Partner


Markus Weber - Partner, Financial Services Tax & Legal Leader Switzerland

Markus heads the Financial Services Tax practice. He has more than ten years of experience in advising financial institutions in the banking, insurance and asset management sector, covering the full range of relevant taxes. Prior to joining Deloitte, he was the managing director of a fund management company, followed by a role as executive director in the group tax department of a leading Swiss bank, where he was responsible for compliance with cross-border U.S. tax regulations.


Key contacts

Robin King blog

Robin King - Senior Manager, Financial Services Tax

Robin is a Manager working in Financial Services Tax. He is currently advising leading Swiss universal and private banks, acting as subject matter expert in the area of QI, FATCA and CRS. Robin is the author of several articles on CRS. Prior to joining Deloitte, he worked as a cross-border tax compliance expert at a Swiss private bank.


 Seda Bastas_blog

Seda Bastas - Senior Manager, Financial Services Tax

Seda is a Senior Manager in the Financial Services Tax Team with over 14 years of experience in the international corporate tax field. She advises Swiss and foreign financial institutions on Swiss taxes and is a subject matter expert on Swiss and foreign insurance and reinsurance companies on cross-border transactions as well as on their Swiss tax compliance duties. Prior to joining Deloitte, Seda worked in a group tax department for a leading Swiss-based insurance company and was responsible for Swiss tax matters.



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