The Switzerland – United States tax treaty was signed in October 1996, together with a protocol to the convention and entered into force in January 1998. The treaty replaced an already existing convention between the two states that was signed in 1951.
The convention and the protocol establish maximum taxation rates that are applicable for various types of income for individuals who earn income in both states. In addition, it provides protection from double taxation of income and has provisions regarding the exchange of tax information between Switzerland and the United States. Therefore, US citizens that want to open a company in Switzerland or to pursue other types of business activities should look into the specific provisions regarding income taxation that are applicable for each type of situation.
Switzerland – United states tax treaty: general scope
The double taxation treaty is applicable to individuals who are residents of both Switzerland and the United States, as well as for taxes on income that are imposed on behalf of each of the contracting states.
The general definitions of the treaty specify that a taxable person can be an individual, a company, a partnership, a trust, an estate or a body of persons. Companies are considered legal entities that are treated as corporate tax payers under the laws of the state in which it has its headquarters. Under the same general definitions, a national is an individual that has the nationality or the citizenship of one of the contracting states.
Taxes covered by the Switzerland – Unites States tax treaty
The provisions of the convention for the avoidance of double taxation between Switzerland and the United States apply to taxes imposed in both contracting states, including the following:
- In Switzerland, taxes are levied on income in federal, cantonal and communal level. The levied taxes cover the total income, the earned income, business profits, income from property as well as other types of income.
- In the United States, the federal income taxes are imposed by the Internal Revenue Code and certain excise taxes.
The double taxation treaty is also applicable to any similar taxes or taxes that are imposed in place of certain existing taxes after the signature date of the tax treaty. The two states have the obligation to inform one another of any changes that are made in their taxation laws.
Dividends are generally taxable at a tax rate of 15%. Dividends obtained from direct investments are subject to tax in the source country at a rate of 5%. The threshold criterion for direct investment has been reduced in order to facilitate foreign investments. As a result, the said threshold has been reduced from 95% to 10% ownership of the equity of a company. Royalties owned by an individual that is a resident of any of the two contracting states are generally taxable only in the state of residence.
Interest payments are taxed by the source country at a 5% tax rate. It is important to note that interest is exempt from taxation by the country in which the said interest arises. Royalties and income are not exempt from tax if the beneficial is a resident of one of the contracting states, but carries out business in the other contracting state, where the income arises. The income is attributable to a permanent established in the respective state. This type of income is considered business profit or income derived from independent personal services.
The withholding tax is a subject to the anti – abuse rules designed for certain types of income derived from investments in the tax treaties and agreements that USA has concluded with other countries.
Taxation on capital gains follows the rules established by the OECD model. Gains on property are taxable in the state in which the respective property is located, but the gains from the sale of a personal property are taxed in the state of residence of the seller. If capital gains made in one contracting state are attributed to a permanent establishment in the other state, they are subjected to taxes in the state in which the establishment is located.
Switzerland has signed more than 80 double taxation treaties with countries from all around the world, as well as tax information exchange treaties. Therefore, before setting up a Swiss company or pursuing any other type of investments and business activities, it is advisable to consult the specific provisions of the suitable tax treaty in order.