By Dr. Stephan Baumann, Jacqueline Hess, Jacques Kistler and Rene Zulauf
On 24 February 2008, the Swiss populace approved the so-called “Corporate Tax Reform II” (the “Reform”). The respective changes will, therefore, enter into law, and likely will be effective as of 1 January 2009.
The Reform’s main focus is further improving the tax position of domestic small- and medium-size companies and their shareholders. The Reform, among other measures, mitigates the current double taxation of distributed profits for individual shareholders and provides various improvements for domestic partnerships and sole proprietorships. Also, dividends from shareholders holding at least 10% of a company’s share capital will be taxed only to the extent of 60% or 50%if the shares are held as private or business property, respectively.
Highlighted below are improvements to the tax law from an international corporate tax perspective that are of particular interest to foreign groups operating or considering establishing a presence in Switzerland.
Withholding Tax Abolished on Repatriated Paid-In Surplus
Currently, repatriation of equity contributions by shareholders into paid-in surplus or into reserves of a Swiss corporation, a Swiss limited liability company or a Swiss cooperative is subject to a 35% withholding tax. The 35% withholding tax is fully recoverable for domestic recipients and can be eliminated or reduced for foreign recipients based on an applicable double tax treaty. To date, only the repayment of nominal share capital is free of withholding tax and free of income tax consequences for domestic private shareholders.
Under the amended withholding tax law, repayments of equity contributions into paid-in surplus/reserves of a Swiss corporation, a Swiss limited liability company or a Swiss cooperative where the equity contribution was made after 31 December 1996 are no longer subject to Swiss withholding tax. Equally, the repayment of such paid-in surplus/reserves does not lead to income tax consequences for domestic private shareholders. As opposed to the repayment of nominal share capital, repayment of paid-in surplus will not require a formal capital reduction procedure or a creditor call.
The abolishment of the withholding tax on paid-in surplus provides new structuring opportunities for offshore investors and for foreign investors that are subject to a treaty that does not fully eliminate Swiss dividend withholding tax in regard to both new and existing Swiss structures. The law change will allow reorganizations and repatriations in the future that may formerly have been prevented by prohibitive withholding tax consequences and will facilitate the establishment of new structures in Switzerland.
Required Participation Exemption Thresholds Reduced
The required threshold for the participation exemption on dividends was lowered to 10% or, alternatively, CHF 1 million (formerly 20% or CHF 2 million). The participation exemption also will be available in cases where a shareholder is entitled to at least 10% of the profits. There is no holding period or subject to tax requirement and no controlled foreign company (CFC) rules apply in regard to the participation exemption on dividends.
The required threshold for the participation exemption on capital gains was lowered to 10% (from 20%). The alternative CHF 1 million threshold does not apply. While the required holding period of at least one year remains, a further improvement applies after a first sale of at least 10% held for a year. Further sales below the 10% quota will then benefit from the participation exemption if the fair market value of the respective participation at the end of the tax year prior to the sale equals at least CHF 1 million. As with the participation exemption on dividends, there is no subject to tax requirement and no CFC rules apply.
Offsetting Annual Cantonal Net Wealth Tax with Income Tax
Cantons will be able to credit cantonal/communal income tax against the cantonal/communal annual net wealth tax of companies. As a consequence, no annual net wealth tax would apply if income tax exceeds the amount of annual net wealth tax payable. This means in essence that the annual net wealth tax is abolished for sufficiently profitable companies. The Federation does not levy any annual net wealth tax.
Restructuring-Related Stamp Duty Exemption
A stamp duty/capital issuance tax applies on all equity contributions (apart from the first CHF 1 million of nominal share capital created) irrespective of whether the contribution is in cash or in kind. There are various exemptions in case of business reorganizations.
Under the new law, no capital issuance tax will become due when a company is recapitalized after losses, provided that existing losses are eliminated and restructuring payments or contributions by the shareholder do not exceed CHF 10 million.
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