Withholding tax and transfer stamp tax are obstacles for the Swiss capital market. At the same time, there are gaps in the current withholding tax system. This reform can alleviate both problems.
Withholding tax reform
Swiss capital market (interest-bearing investments)
Withholding tax is an obstacle for economic policy particularly in the case of interest-bearing investments (bonds). Under current law, interest-bearing investments are subject to withholding tax of 35%, which is levied irrespective of who the investor is. It applies equally to private and institutional, domestic and foreign investors.
Foreign investors are entitled to a full or partial refund of withholding tax, depending on the applicable double taxation agreement (DTA) between Switzerland and their country of residence. However, asserting this right entails an administrative burden and a temporary liquidity shortage for the investor.
As a result of withholding tax, Swiss groups generally issue their bonds abroad rather than in Switzerland, preferably in a country without withholding tax. This ensures that the securities are attractive for investors, and also means that the value added and the associated jobs are located abroad as well.
Transfer stamp tax is levied on trading in certain securities, including bonds. The tax is due if at least one of the parties involved in the trade is a Swiss securities dealer. Each securities dealer involved is subject to half the tax. The total tax amounts to 0.15% of the sales proceeds in the case of domestic bonds, and 0.3% of the sales proceeds for foreign securities.
Domestic investors are fully entitled to a refund of withholding tax. Withholding tax thus serves a safeguarding purpose in Switzerland. It safeguards the income and wealth tax of the Confederation, the cantons and the communes. The current system contains deficiencies in this protection. No withholding tax is levied on foreign securities, although these securities are subject to income and wealth tax in the same way as domestic securities. Bonds issued abroad by Swiss groups of companies are also considered to be foreign securities.
Withholding tax contributes to the tax receipts of the Confederation and the cantons (they receive 10% of the revenue). It pursues a fiscal purpose particularly at the international level. In addition, there are cases in which a withholding tax refund is not claimed, e.g. because foreign investors entitled to a refund dread the administrative burden.
In 2019, the FTA recorded a total of CHF 38.7 billion in withholding tax receipts and reimbursed CHF 28.9 billion. Moreover, Switzerland formed provisions totalling CHF 1.5 billion. The Confederation and the cantons booked CHF 8.3 billion in tax receipts.
Transfer stamp tax receipts amounted to just under CHF 1.3 billion in 2019. Almost CHF 200 million of this was attributable to trading in domestic securities, of which a small percentage was again attributable to domestic bond turnover.
Several attempts have already been made to reform withholding tax.
Most recently, the Federal Council proposed in 2014 to exempt Swiss interest-bearing investments from withholding tax for institutional and foreign investors. As a result, Swiss groups would be able to issue their bonds in Switzerland and also locate intragroup financing activities in Switzerland. In the case of individuals resident in Switzerland, withholding tax would continue to be levied, and foreign securities would also be included. That would secure tax much more robustly in Switzerland and combat tax evasion. The reform would have had a positive economic impact. At the very least, it should have been budget-neutral for the Confederation, the cantons and the communes. Due to the controversial reactions to this proposal in the consultation, the Federal Council postponed the planned reform.
The Federal Council addressed the reform of withholding tax twice in 2019 and adopted its key parameters in that regard. It instructed the Federal Department of Finance (FDF) to prepare a consultation draft.
- Key parameters press release (in French, German, Italian)
- Further key parameters press release (in French, German, Italian)
Current developments: Federal Council consultation draft
During its meeting on 1 April 2020, the Federal Council initiated the consultation on the withholding tax reform (press release). The consultation will run until 8 July 2020.
The core elements of the Federal Council consultation draft are as follows:
- Exemption of domestic legal entities and foreign investors from withholding tax on Swiss interest income
- Strengthening of the safeguarding purpose by including foreign interest income with withholding tax for individuals in Switzerland, thereby eliminating a significant gap and making an effective contribution to combating tax evasion in Switzerland
- Equal treatment of direct and indirect investments, which will also strengthen Switzerland as a fund location
- Abolition of transfer stamp tax on domestic bonds
Technically, this will be implemented by introducing withholding tax according to the paying agent principle for interest income. Under the paying agent principle, withholding tax is no longer paid by the debtor (e.g. a company that issues a bond and pays interest on it), but by the investor's paying agent (e.g. the bank where the investor holds the bond in a custody account). The new withholding tax applies if the paying agent is domiciled in Switzerland.
Compared with previous reform efforts, the Federal Council is proposing various measures to reduce the complexity and thus the settlement and liability risks:
- The reform is limited to interest-bearing investments
- Withholding tax on interest income is levied exclusively in the case of individuals in Switzerland
- Banks only have to deliver it on a quarterly basis
- Accrued interest (interest accrued but not yet paid at the time of the sale of a bond) is not subject to withholding tax
- Companies can choose between the old and the new withholding tax
- Paying agents are criminally liable only in the case of intent
- Paying agents should be entitled to compensation for the implementation work involved
In advance of its decision, the Federal Council consulted two studies commissioned by the FDF and carried out by BAK Economics and KPMG:
- BAK Economics examined the dynamic effects of abolishing stamp duty and of a comprehensive withholding tax reform, as well as a staggered scenario in which the debt-related elements would be implemented first and only later the equity-related elements.
- KPMG focused primarily on the static financial impact of reducing the withholding tax rate on domestic participation rights.
In the Federal Council's view, the implementation of a comprehensive tax reform is currently ruled out due to the reduction in receipts totalling billions of Swiss francs. Such a reform would involve the complete abolition of transfer stamp tax (a statically estimated receipt reduction of as much as CHF 1.2 bn) and/or the lowering of the rate of withholding tax on participation income (a static receipt reduction of CHF 1.6 bn according to the KPMG study).
In contrast, the fiscal risks are substantially lower in the case of a less comprehensive reform that focuses on strengthening the debt market. Exempting domestic legal entities and foreign investors from withholding tax on interest-bearing investments would lead to a statically estimated receipt reduction of CHF 130 million per year. This estimate also includes the potential additional receipts from the strengthening of the safeguarding purpose in the case of individuals in Switzerland (CHF 35 mn). 90% of the lost receipts would concern the Confederation and 10% the cantons. Moreover, the transfer stamp tax on domestic bonds is to be abolished. This measure would lead to a reduction in receipts of an estimated CHF 50 million, which would affect only the federal budget. This stands against dynamic additional receipts for the Confederation, cantons and communes arising from the strengthening of the capital market. The reform would certainly lead to additional receipts for the cantons and communes when the dynamic effects are taken into account. But even for the Confederation, the reform could finance itself after about 5 years. All in all, this reform's cost-benefit ratio can be considered to be extremely favourable.
Selected further developments
A sub-committee (Sub-Co) was set up within the framework of the parliamentary initiative 17.494, which was endorsed by both chambers. Its task is to draw up a proposal and coordinate its work with that of the Federal Council. The sub-committee published its key parameters for a withholding tax reform in June 2019. It has currently suspended its work on its own proposal in favour of the Federal Council's proposal.
In January 2020, the advisory board for the future of the Swiss financial centre submitted a strategic roadmap for financial market policy to the Federal Council. In this, the advisory board recommended that priority be given to an unshackling of the Swiss capital market in tax terms. By restructuring withholding tax, as proposed by the Federal Council in 2019 in its key parameters, Switzerland could become much more appealing for capital market transactions. In the medium term, moreover, the reform of withholding tax on equity issues and of transfer stamp tax could result in the attractiveness of the Swiss financial centre increasing still further.
The informal platform for domestic banks called Koordination Inlandbanken (KIB) presented its own reform concept with two components:
- External settlement: the concept envisages settlement of the new withholding tax by the depository (e.g. SIX Swiss Exchange), which acts on behalf of the paying agents, while liability for the withholding tax remains with the paying agents. This is a contractual relationship under private law between the paying agents and SIX.
- Indirect investments: according to KIB, the new withholding tax should in principle be introduced only for direct interest-bearing investments. This should make the new withholding tax as simple as possible and minimise the liability and settlement risks of banks. The current system should be retained for indirect investments.
Last modification 06.04.2020