On 3 April 2020, the Swiss Federal Council released a proposed set of amendments to the Swiss withholding tax and securities transfer tax regimes. The reform primarily aims at strengthening the Swiss debt capital market and increasing tax honesty of Swiss resident individual investors.

The consultation period runs until 10 July 2020 and the rules will become effective as early as 2023.

In line with the announcements made last year (see our prior blog post), the key parameters of the proposed reform are:

• Introduction of a paying agent system,
• Abolition of the withholding tax on interest paid to Swiss corporate and all foreign investors,
• Harmonisation of the rules for direct and indirect investments, i.e. through collective investment vehicles and structured products,
• Clarification regarding substitute interest/dividends payments, and
• Abolition of the securities transfer tax on debt instruments.

As anticipated, the Federal Council has not included in this reform any amendments to the issue stamp duty or corporate income tax. Further, it also refrained from changing the withholding tax regime in relation to dividends.

Paying agent system

The basic principle of the new paying agent system is simple: Instead of the debtor, the Swiss paying agent closest to the recipient will deduct the withholding tax on Swiss and now also foreign source interest payments made to Swiss resident individual investors. On the other hand, interest payments to Swiss corporate and all foreign investors will be exempt from the Swiss withholding tax, which should stimulate the Swiss debt capital market.

Typically, the Swiss banks holding the relevant debt instruments in custody or paying interest on bank deposits will assume the paying agent role and the respective obligation to deduct the withholding tax. However, the following parties, if resident in Switzerland, may also qualify as paying agents and face respective obligations:

• Issuers of bonds that are not held in custody with a bank (e.g. in case of small and medium-sized enterprises or “SMEs”),
• Corporates offering employee accounts,
• Fiduciaries holding in-scope instruments on behalf of their clients, and
• Trustees (who will even need to deduct the withholding tax if relevant income is not distributed immediately to but nevertheless results in an income tax liability for the Swiss-resident settlor or beneficiaries).

While the paying agent model would always apply for foreign source interest as well as certain income from indirect investment and substitute payments (see below), debtors of Swiss source interest payments need to make a formal election with the Swiss Federal Tax Administration (SFTA) in order for the paying agent system to apply. The details of this election process is previewed in the explanatory document. It can be expected that large corporates issuing bonds that are held in custody with a bank as well as Swiss banks paying interest on deposits would typically make this election. On the other hand, SMEs issuing bonds that are not held in custody with a bank as well as corporates offering employee accounts may decide to continue with the debtor principle if the costs to identify the type and residence of recipients outweighs the potential benefits associated with the paying agent system.

The consultation draft also addresses various operational aspects of the paying agent system (while others will need to be clarified in the Ordinance or other guidance):

• A paying agent will generally be allowed to treat its contracting partner as the recipient of the payment, even where such person may not have an income tax liability with respect to the payment in question, e.g. in case of domiciliary companies. However, payments to Swiss sole proprietorships will be treated as payments to natural person and special rules will apply for usufruct and fiduciary relationships.
• Swiss paying agents will be required to deduct the withholding tax at the point in time when making the payment to the recipient. However, they will only need to deposit the tax with the SFTA within 30 days after the end of the respective quarter, which provides them with additional time to correct potential errors and thereby limit their liability and operational risks.
• Paying agents will only be subject to penalties if they deliberately fail to comply with their obligations.
• Finally, due to the fact that the paying agent system also covers foreign source interest payments, the additional tax retention (“zusätzlicher Steuerrückbehalt”) applied by Swiss banks in relation to US-source interest payments will become redundant.

Indirect investments and substitute payments

In addition to introducing the paying agent system, the Federal Council proposes to expand the Swiss withholding tax regime to:

• All types of Swiss collective investment schemes (instead of only those subject to the Collective Investment Schemes Act),
• Foreign collective investment schemes as well as structured products from Swiss and foreign issuers provided relevant income is credited to the recipient through a Swiss paying agent, and
• Substitute payments, which could e.g. arise in relation to securities lending or repo transactions, provided they reference Swiss- or foreign-source interest payments or Swiss-source dividends, and relevant income is credited to the recipient through a Swiss paying agent.

With respect to indirect investments through collective investment vehicles and structured products, it is foreseen that the distribution (or accumulation) of interest income will be subject to withholding tax in accordance with the paying agent system. In order to enable the paying agent to deduct the appropriate tax based on the type and residence of the investor, the issuer will need to inform the paying agent about the interest component of the income generated. If the paying agent is not informed about the interest component, it will be required to deduct the withholding tax on the full amount of income.

While income from foreign collective investment vehicles and all structured products will always fall under the paying agent regime, Swiss collective investment vehicles will need to make a respective election with the SFTA (see above). If no such election is made, the interest component remains subject to the debtor principle, which continues to apply anyway for the dividend component of the income generated (even though it is not entirely clear from the draft law and explanatory document whether it only applies to the Swiss-source dividend component or globally).

In relation to substitute payments, the Federal Council proposes that the paying agent principle captures those that replicate Swiss- or foreign-source interest payments as well as Swiss-source dividends (while the original dividends as well as the dividend component in case of Swiss investment funds generally remains subject to the current debtor principle).

Despite the Federal Council having outlined the general direction with respect to the indirect investment and substitute payments, there is still some work to be done in this area. First, the application of the withholding tax to accumulating funds may result in practical issues as there is no incoming cash flow from which the tax can be deducted. Second, it can be expected that not all foreign issuers will (timely) communicate information about the interest component, potentially resulting in substantial “overwithholding” coupled with liquidity implications. Third, it appears that there are certain discrepancies between the draft law and the explanatory document. Fourth, the interaction between various articles of the draft law (e.g. scope, exemptions, taxable person) is not yet seamlessly coordinated, resulting in potential conflicts or loose ends. Last but not least, the legislative material does not yet address how the proposed rules regarding structured products will be aligned with the current regime set out in the SFTA Circular No. 15.

Deloitte's view

Overall, the planned reform presented by the Federal Council definitely has the potential to increase the competitiveness of the Swiss debt capital market. Due to the abolition of the withholding tax on interest paid to Swiss corporate and all foreign investors as well as abolition of the securities transfer tax for debt instruments, it will be more attractive for Swiss corporates to issue bonds and perform group financing activities (e.g. treasury and cash pooling functions) out of Switzerland.

The foundations of the paying agent system outlined in the consultation draft seek to provide for a typical Swiss compromise between the interests of the various stakeholders. From a paying agent perspective, there are welcome practical solutions and measures limiting the operational burden and risks. Nevertheless, we believe that some fixes and further clarifications are still needed with respect to indirect investment and substitute payments, which admittedly form the most complex part of this legislative project.

Explore our collection of Swiss COVID- Tax & Legal insights designed to help companies in Switzerland to better navigate the COVID-19 crisis.

Join our series of COVID-19 virtual events to stay up to date on the developments and resources at your disposal to manage and mitigate the challenges stemming from COVID-19.

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.

Email

Brandi Caruso - Partner, Financial Services Tax 

Brandi heads the Tax Transparency offering within the Financial Services Tax practice across Switzerland, responsible for services related to QI, 871(m), FATCA, CRS, and DAC6. She is a technical advisor and a subject matter expert to a number of Swiss-based trust companies and banks and leads the Deloitte Trust Forum. She has more than 15 years of experience with Deloitte in the US, UK, and in Switzerland.

Email

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.

Email

Karim Schubiger – Director, Financial Services Tax 

Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax & Legal practice, responsible for services related to QI, FATCA, CRS, 871(m) and DAC6. He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas such as operations, project and change management as well as operational taxes.

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.

Email