On 26 June 2019, the Swiss Federal Council informed about its intentions to reform the Swiss withholding tax system. The need for such a reform is two-fold: Firstly, the reform aims at strengthening the Swiss debt capital market. Secondly, it strives to increase tax honesty of Swiss resident individual investors.

The key parameters established by the Swiss Federal Council in its 1.5-page communication partially piggyback on the ideas presented in an expert board’s report early this year, which was discussed in a prior blog post.

The Swiss Federal Council mandated the Federal Department of Finance to prepare a consultation draft, which should be available in autumn.

The key parameters established by the Swiss Federal Council for the reform of the Swiss withholding tax system are as follows:

1. In line with the expert group report, the Swiss debt capital market should be strengthened by abolishing the withholding tax on interest paid to Swiss corporate and all foreign investors.
2. Further, tax honesty of Swiss resident individual investors should be increased by expanding the withholding tax regime to include foreign interest income received by Swiss resident individual investors. The Swiss Federal Council’s communication indicates that this should be achieved through the introduction of a paying agent system with a continuous collection of taxes, which would be slightly different to the expert group report that suggested an annual collection of the withholding tax by the paying agents. Another deviation from the expert group report is that the Swiss Federal Council does not propose an expansion of the paying agent system to foreign dividend income received by Swiss resident individual investors.
3. Indirect investments in debt instruments (e.g. through an investment fund) should be treated equivalently to direct debt investments.
4. Transition rules should be established for “too big to fail” instruments.
5. A legal basis should be created to apply the Swiss withholding tax to substitute interest/dividend payments, which could e.g. arise in relation to securities lending or repo transactions or as part of derivatives or structured products.

However, the Swiss Federal Council for fiscal reasons rejected a more comprehensive reform, which may have included a reduction of the withholding tax rate for Swiss dividends to 15%. Nevertheless, it asked the Federal Department of Finance to examine whether the Swiss equity capital market can be strengthened through amending relevant income tax rules, in particular in the area of the participation exemption.

Finally, the Swiss Federal Council also turned down the idea of abolishing the turnover tax for Swiss securities. However, it indicated that it may agree to excluding Swiss debt instruments from the turnover tax.

Deloitte view

The withholding tax reform would significantly strengthen the position of Switzerland as an international finance and treasury center as it would allow Swiss resident entities to directly enter the debt capital markets via bond issuances without adverse withholding tax consequences. The Swiss Federal Council’s communication does not address yet many of the detailed technical aspects (e.g. in relation to indirect investments or substitute interest/dividend payments) and operational considerations (e.g. details of the paying agent system). Thus, affected parties should watch out for the consultation draft to be published in autumn to determine how they may be affected in practice and whether any lobbying efforts are needed.

By: Robin King, Senior Manager, Financial Services Tax

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

Key contacts

René Zulauf - Partner, International Tax

René has 20 years of experience in the field of international tax structuring, financial services tax and Mergers & Acquisitions. He specializes in cross-border tax planning and has assisted numerous multinationals in particular in the establishment of Swiss finance and IP structures, as well as in the structuring of Swiss trading and principal/headquarter operations.

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André Kuhn - Director, Financial Services Tax

André is a Swiss Certified Tax Expert with more than twelve years of experience in corporate international taxation. He leads the Swiss corporate tax team in Zurich that advises banks, insurance companies and asset managers on Swiss tax matters. As tax responsible for the investment management industry in Switzerland, he also acts as the subject matter expert on all tax aspects of collective investment schemes.

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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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Robin King - Senior Manager, Financial Services Tax

Robin is a Senior 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 , CRS and DAC6. 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.

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