The United States of America and the Swiss Confederation have signed a convention regarding the avoidance of double taxation concerning income taxes, which became effective on January 1 1998.
The Convention and the additional Protocol provide maximum taxation rates applicable to various types of income for individuals who earn profits in both countries. It also offers protection against double taxation of income and has certain provisions regarding the exchange of financial information.
American individuals and companies interested in investing in Switzerland should be aware of the provisions of the double taxation treaty, as it may offer various advantages for those who want to avoid excessive taxation.
General provisions of the double taxation treaty
The treaty signed by the US and Switzerland applies mostly to individuals who are residents of both states and is applicable on taxes on income imposed in one of the two contracting states.
A taxable person, according to the treaty, includes an individual, a company, a partnership, estate, trust or body of persons. Companies are legal entities considered as corporate taxpayers under the laws of the state in which it has its headquarters. This means that if a company has it headquarters in the USA, it must pay taxes on income there, while if it has its headquarters in Switzerland, it liable for taxes in this country. A national is an individual that has the citizenship or nationality of one of the contracting states.
Taxes covered by the double taxation treaty
In the USA, the treaty covers the federal income taxes imposed by the Internal Revenue Code and certain excise taxes. In Switzerland, the treaty covers the federal, cantonal and communal taxes on income, which include total income, earned income, property income and business profits.
Dividends from direct investments are subject to tax by the source country at a rate of 5%. The threshold criterion for direct investment has been reduced from 95% ownership of the equity of a firm to 10%, in order to facilitate foreign investments. Other dividends are generally taxable at a tax rate of 15%. Royalties owned by a resident of any of the contracting states are generally taxable only in the respective state.
Interest payments are taxable with a 5% tax rate by the source country. However, interest is exempt from taxation by the country in which the interest arises. Restrictions on the taxation of royalty and income don’t apply if the beneficial is a resident of one of the contracting states who carries business in the other contracting state in which the income arises and is attributable to a permanent establishment in the respective state. In this situation, the income is considered business profit or income that is derived from independent personal services.
Withholding tax – the maximum rates of withholding tax are a subject to the anti – abuse rules designed for certain types of investment income found in the USA tax treaties and agreements with other countries.
Capital gains – taxation of capital gains follows the same rules established by the OECD model. Gains on real property are taxable in the country in which the property is located, while gains from the sale of personal property are taxed in state of residence of the seller. If these gains are attributed to a permanent establishment in the other state, they are subjected to taxes in the respective state.
Switzerland has signed more than 80 double taxation treaties with countries from all around the world. Therefore, it’s important to consult double taxation agreements in order, before investing in any type of business in Switzerland or opening a company in Switzerland.