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04 October 2019

Swiss Government enhances the key figures for a paying agent tax

On 27 September 2019 (German only), the Swiss Government completed its key figures for the reform of the Swiss withholding tax and thus took a stand on open issues. This addition results in an overall concept. Contrary to previous planning, the consultation process will start until the 1st quarter of 2020.

Swiss Government wants to strengthen safeguarding purpose

For the Swiss Government, the safeguarding purpose for Swiss individuals remains a central element of Swiss withholding tax. As previously announced, the Swiss Government would like to maintain or strengthen this purpose adding the following elements.

  • Indirect interest investments will be subject to Swiss withholding tax. This includes domestic and foreign collective investment schemes, regardless of whether they distribute their income or reinvest it.
  • Exemption limits for bank interest will remain. The Swiss Government recommends no additional allowances.

From the perspective of Switzerland as a fund location, the equal treatment of domestic and foreign investment funds looks very positive. However, levying Swiss withholding tax on the income of foreign investment funds that reinvest their income will be an administrative challenge for Swiss paying agents. Unlike domestic investment funds, which are subject to Swiss withholding tax, the administrator of a foreign investment funds cannot be subject to Swiss withholding tax. Since reinvesting investment funds make no payment to the investor, the Swiss paying agent can only deduct Swiss withholding tax to one of the investor's financial accounts.

The unchanged exemption limits for bank interest enables banks to avoid having to adapt their existing accounting systems.

Further step towards abolition of Swiss stamp tax

The abolition of Swiss stamp tax on trades of domestic bonds will help to make it easier for Swiss issuers to raise funds from foreign investors.

Investment deduction to remain unchanged

The Swiss Government does not intend to make any further changes to the investment deduction, which is not part of withholding tax. The reform claims of various stakeholders and sectors decline the system of indirect exemption of investment income, which applies both to the Direct Federal Tax and to the cantonal taxes. The higher the financing costs, the lower the investment deduction in this system. This mechanism increases the tax burden accordingly.

The calculation method for banks classed as "too big to fail" has been amended shortly. The interest payments on too-big-to-fail instruments, i.e. the mandatory convertible bonds and bonds with debt waiver, will be excluded in the calculation of the investment deduction (Art. 70 para. 6 of the Direct Federal Tax Act, SR 642.11, effective 1 January 2020; Art. 28 para. 1quater of the Tax Harmonization Act, SR 642.14, effective 1 January 2020). In the consultation process at that time, several groups claimed these changes for other corporations as well.

Consultation in the first quarter of 2020

The consultation process should start in the first quarter of 2020. An entry into force on 1 January 2021 seems almost impossible in terms of time.

The tax team will be happy to answer any questions and provide further information.

Author: Marc-Antoine Bree

Topics: Capital MarketsTaxWithholding taxPaying agent taxStructured products

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