Double taxation refers to the fact that two countries collect simultaneously taxes on the same company. This situation often arises when companies have subsidiaries or branches in various countries. Switzerland has a corporate tax system in which a corporation and its shareholders or owners are individually taxed, causing economic double taxation.
In order to avoid a duplication of taxes for companies, Switzerland has signed double taxation treaties with most industrial nations, including USA and countries from the European Union. Switzerland applies the Organization of Economic Cooperation and Development (OECD) standard for its double tax treaties.
Switzerland has also signed tax information exchange agreements with 10 countries, which have the purpose of exchanging tax information between Switzerland and the respective countries.
These treaties cover the following aspects of tax:
- Exemption of profits from branches in Switzerland
- Reclaiming of source taxes
- Taxation of royalties and license fees
The general effect of those treaties for non – residents from treaty countries is that they can obtain a total or partial refund of the tax withheld by the Swiss paying agent. Also, no withholding tax is levied on royalties paid to foreign beneficiaries. Profits redistributed abroad by a Swiss branch or subsidiary don not attract withholding taxes irrespective of any double taxation treaty.
How to avoid tax treaties abuse
A repayment of withholding taxes will be denied if foreign – controlled legal entities that are doing business operations in Switzerland fail to meet the following regulations:
- The entity must have a reasonable debt / equality ratio, meaning that the total of interest – bearing loans should not exceed by times the company’s equity;
- The entity must not pay an excessive interest rate in debt;
- The entity must not pay more than 50% of its income for management fees, interests or royalties to non – residents;
- The entity must distribute at least 25% of the income, which can also be distributed as dividend.
How to benefit from the double tax treaties in Switzerland
Switzerland is constantly adapting its policy regarding information exchange, tax fraud and tax evasion, which is why many tax treaties were amended accordingly. In order to obtain benefits under one of Switzerland’s tax treaties, the income payer, the recipient and the tax authorities in the treaty partner country must sign a form to certify the residence of the recipient and to confirm that the information on the recipient is accurate. The form is afterwards submitted to the Federal Tax Administration, before the payment is made.
Situations in which treaty provisions don’t apply
Treaty provisions don’t apply to dividends, interests or royalties paid by a Swiss entity to German, Italian, French or Belgian entities, if the Swiss entity is partly or wholly exempt from cantonal tax, under tax incentives that are applicable to specific types of companies or industries, such as domiciliary, auxiliary, holding, mixed and service companies.
Considering all these aspects, it’s important to benefit from the double tax treaties existing between Switzerland and its partner – countries, as they offer a great opportunity for companies that want to avoid excessive taxes or double taxing for their profits.