The term 'offshore' is not used in Swiss legislation or in describing company forms. However, there are a number of specialised forms of the basic Stock Corporation which offer tax-privileged treatment equivalent to that obtainable in offshore jurisdictions.
The EU Savings Tax Directive has applied in Switzerland as from 1st July, 2005, through a separate agreement reached between the country and the EU, under which Switzerland is levying a withholding tax (initially at 15%) to returns on savings paid to the citizens of EU Member States, and which in various other ways is less onerous that the original Directive.
Although bank interest and dividends are caught by the Directive, payments made by what are called 'residual agents' (including for instance trusts) are apparently excluded in the Swiss agreement, which is not the case in Member States. And of course the Directive applies only to individuals who receive payments; companies and other organisational forms do not fall under its aegis.
Switzerland Forms of Tax-Privileged Operation
Tax-privileged operations may take place within the following forms, all of which are variants of the basic Stock Corporation:
- Holding Company
- Domiciliary Company
- Auxiliary Company
- Service Company
- Mixed Company
Tax Treatment of Offshore Operations
For federal tax purposes a company is defined as a holding company if it holds either a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least 2m Swiss Francs (known as a "participating shareholding").
The Swiss holding company was a particular target of the OECD's 'unfair tax competition' initiative, and in 2004 an agreement was reached between Switzerland and the OECD whereby information about holding companies would be shared by Switzerland in circumstances where there was prima facie evidence of fraud.
Although the definition of a holding company varies among cantons a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either
- derives at least 51%-66% of its income from dividends remitted by the subsidiary; or
- holds at least 51%-66% of the subsidiary's shares.
Generally speaking foreign dividends remitted to a Swiss company and any capital gains realized by a Swiss company on the sale of shares in a foreign entity in which it holds a stake are taxable in Switzerland unless they are remitted to a company which by Swiss fiscal law is defined as a Swiss "holding" company.
Swiss holding companies enjoy the following relief from corporate income tax:
- At federal level a holding company pays a reduced level of corporate income tax on any dividend income received from the subsidiary or the company in which it holds a "participating shareholding". The reduction in the level of corporate income tax payable depends on the ratio of earnings from "participating shareholding" to total profit generated.
- At cantonal or municipal level no corporate income tax is payable on income represented by dividends so long the corporate entity meets the cantonal definition of a holding company.
Furthermore holding companies which hold a minimum of 20% of the share capital of a subsidiary pay reduced corporation tax on any capital gains made on the sale of that shareholding so long as
- the shareholding was held for at least one year and was purchased after 1st January 1998; or
- the shareholding was purchased before 1st January 1997 and will be disposed of after 1st January 2007.
Fribourg is currently considered the best canton in which to locate a holding company for corporate income tax purposes.
Domiciliary companies are companies that:
- are both foreign-controlled and managed from abroad;
- have a registered office in Switzerland (i.e. at a lawyer's premises);
- have neither a physical presence nor staff in Switzerland;
- carry out most if not all of their business abroad;
- receive only foreign source income.
Domiciliary companies enjoy the following relief from corporate income tax:
- At a federal level there are no tax advantages in terms of corporate income tax payable on income and gains;
- At a cantonal and municipal level the corporate income tax rate may be substantially reduced or even reduced to zero; taxes levied by the cantons are calculated according to a formula which relates the company's paid up share capital and reserves to profit.
An auxiliary company is essentially a domiciliary company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary companies can exist in only seven cantons. An auxiliary company may:
- have Swiss offices and staff;
- be in receipt of Swiss income (which is taxed at normal rates) though most of its income must be from a foreign source.
Auxiliary companies enjoy the following relief from corporate income tax:
- At a federal level no exemptions are granted on corporate income tax;
- At a cantonal and municipal level the level of corporate income tax payable on income and capital gains varies among the 7 cantons who give favorable treatment. However, in general Swiss-sourced income is taxed at 5% whereas foreign-sourced income is tax exempt. The tax concessions can vary and an advance tax ruling should be sought.
Service companies are companies whose sole activity is the provision of technical, management, marketing, publicity, financial and administrative assistance to foreign companies which are part of a group of which the service company is a member.
Service companies may not in general derive income from third parties (i.e. companies outside their corporate group). Service company status is obtained by way of an advance tax ruling.
Service companies enjoy the following relief from corporate income tax:
- At a federal level relief is not available on corporate income tax payable;
- At a cantonal and communal level corporate income tax rates will be adjusted depending on the international orientation of the services provided. There are a number of ways of calculating annual taxable profit for cantonal and municipal purposes but generally speaking annual taxable profit will be the equivalent of 8.5% of the payroll or 5%-20% of overheads (unless overheads are very low in which case a higher percentage rate will be used).
Mixed companies are companies which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. A mixed company gets the following relief from corporate income tax:
- At federal level no relief is granted;
- At a cantonal and municipal level a mixed company may pay reduced tax or be totally exempt if it meets the following conditions:
- it is foreign controlled;
- a minimum of 80% of its total income comes from foreign sources;
- the company has close relationships to foreign entities.
SWITZERLAND TAXATION OF FOREIGN EMPLOYEES OF TAX-PREVILEGED OPERATION
There are no special rules applying to the foreign or Swiss employees of tax-privileged operations. The various exemptions from income tax described above do not apply to employees: any business employing and paying people in Switzerland will have to follow the normal rules for the taxation of individuals.
A person is deemed resident in Switzerland if:
- He has Swiss employment (to work in Switzerland a non-national needs a work permit - limited work permits of 90-120 days can be granted and where granted lead to limited taxation);
- He carries on a business in Switzerland; or
- He lives in Switzerland for not less 180 days in any one year. If however he remains in the same abode the time required to be a resident for tax purposes drops to 90 days.
Switzerland Exchange Controls
Switzerland has no exchange controls.
Switzerland Activities of Tax-Privileged Operations
The various tax-privileged forms described above are all subject to limitations on their activities or structures as set out. In approximate terms:
- Holding Companies must derive most of their income from subsidiaries;
- Domiciliary Companies must have only the smallest toe-hold in Switzerland;
- Auxiliary Companies (in 7 cantons only) may have some local activity;
- Service Companies must be active only within their own groups; and
- Mixed Companies combine Domiciliary and Service Company restrictions.
Switzerland Employment and Residence
There are no special privileges for the employees of non-resident or tax-privileged entities in Switzerland. Entry into Switzerland, residence in Switzerland and the right to work or purchase property in the country are all inextricably interlinked.
However, agreements with the EU are gradually putting EU freedom-of-movement rules into place which will eventually allow EU citizens to by-pass the quota permit system altogether.
EU citizens now have:
- a free choice of residence and work cantons;
- the right to change jobs and employers; and
- a right to work for their family members.
Eventually, EU-citizens will have complete freedom of movement within Switzerland and Swiss citizens within EU-countries. However, there will be a fixed quota for work permits until 31 May 2007 with a maximum of 15,000 new long-term residence permits a year and 115,500 new short-term residence permits a year.
On 31 May 2007, quotas for EU citizens wishing to work in Switzerland will be suspended. As of June 2009 Switzerland will make a decision on whether or not to extend the agreement. If the response is positive, freedom of movement will be fully introduced between Switzerland and the EU as of June 2014.
Obtaining Residence in Switzerland
The available types of permit are the '120-day' permit, the class A, B or C permits, the fiscal deal permit and the political refugee permit. The class A permit (for 'blue-collar' workers) and the political refugee permit are not described further here. Permits other than the '120-day' variety are subject to a quota system. However, agreements with the EU are gradually putting EU freedom-of-movement rules into place which will eventually allow EU citizens to by-pass the quota permit system altogether.
The '120-Day' Permit
This permit allows a managerial or specialist worker to work in a specified position for up to 120 days in a particular year; rotation among a number of individuals is not allowed.
The Class B Permit
The class B permit is the most commonly issued permit and gives the right to live and work in Switzerland. It is the permit of choice for professional and managerial people, self employed individuals who wish to start their own company in Switzerland, people who wish to reside in Switzerland and are wealthy enough to live off their own resources (but see the Fiscal Deal Permit below). The Class B permit has the following characteristics:
- It is usually granted for a period of up to one year at a time;
- If the permit is for work purposes then the applicant must have a job to go to in Switzerland;
- The granting of his permit must not have the effect of depriving a Swiss national of employment. Since many trades in Switzerland are protected by guilds which prohibit the recruitment of foreign workers an application for a class B permit is not always successful;
- The class B permit allows the applicant to bring his wife and children into the country but not his extended family;
- The application is not prejudiced by inability to speak the official languages of Switzerland;
- It takes about 3 months to obtain a Class B permit.
The Class C Permit
The class C permit is a longer-term residency permit which gives the applicant almost the same rights as Swiss citizens and allows the applicant to buy real estate in Switzerland. To obtain a class C permit one must have had a class B permit for between 5 and 10 years depending on country of origin. The class C permit is the last step before applying for Swiss citizenship. It is subject to the same conditions as the class B permit.
The 'Fiscal Deal' Permit
This is a variant of the class B permit and is primarily for wealthy individuals who wish to live in Switzerland off income earned outside Switzerland (e.g. international tennis players and formula 1 drivers) but who have no need or desire to work in the country. To obtain a fiscal deal permit the applicant needs a certified net wealth of at least 2m Swiss Francs and must be willing to spend at least 180 days a year in the country. The fiscal deal permit allows the applicant to pay considerably less tax than a Swiss national of his income bracket would normally pay since the assessment to tax is not based on the applicant’s real income but rather on a much lower notional amount.
The amount of tax payable by the holder of such a permit is a matter of personal negotiation with the canton in which the applicant resides. Switzerland is already a low tax country by OECD standards and the 'fiscal deal' results in extremely low levels of taxation. It takes about 3 months to obtain a fiscal deal permit.
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