WHT proposed to be abolished on some debt instruments held by foreign investors
Switzerland Corporate Tax Alert
14 September 2011
The Swiss government has submitted a technical explanation to a draft law currently before the Parliament that would effectively abolish withholding tax for foreign corporate and individual investors on interest payments on Swiss collective fund borrowings, such as bonds or money market papers. This change would be accomplished by making a fundamental change to the Withholding Tax Act by shifting from the debtor principle to a paying agent principle. If approved by Parliament, the changes would become effective on 1 January 2013 at the earliest.
Under current law, interest on Swiss collective fund borrowings/public debt is subject to a 35% withholding tax. The Swiss issuer must withhold tax according to the debtor principle, regardless of the qualification of the creditor. Even in cases where a treaty ultimately results in a 0% final Swiss withholding tax, a reduced rate under a treaty can be obtained only via a refund procedure. Foreign investors, therefore, may face administrative burdens and costs in connection with the refund of the withholding tax, resulting in a competitive disadvantage as compared to public debt issued in certain other jurisdictions.
The proposed changes would shift from the debtor principle to a paying agent principle with regard to interest on Swiss collective fund borrowings/public debt. If approved, the issuer of a bond would no longer withhold tax on such items; instead a paying agent, typically a bank, would act as the withholding agent and impose withholding tax, depending on the residence and qualification of the creditor.
Foreign corporations investing in Swiss bonds or money market papers would not be charged with Swiss withholding tax on the interest payments if the investor provides a certificate of foreign domicile to the paying agent. Foreign private investors with proper documentation on their residence also would be exempt from Swiss withholding tax. For Swiss private investors, the paying agent would be required to levy withholding tax.
The proposed changes to the withholding tax law would allow foreign investment in Swiss collective fund borrowings to be free from Swiss withholding tax and, therefore, free from the administrative burden of refund procedures. Borrowings would become more attractive for foreign investors.
The proposed changes to Switzerland's withholding tax laws are part of the government's measures to enhance the country's position as an international finance center. Earlier this year, the government proposed to abolish the share issuance stamp duty on bonds and money market papers. Both proposals would make Switzerland attractive for the issuance of public debt instruments.