Many foreign entrepreneurs and companies are interested in pursuing business activities in Switzerland or incorporating in Switzerland, but their main concern is whether it is worth it regarding taxation. However, Switzerland is considered one of the most advantageous locations to register a company in Europe and one of the main advantages is precisely the favorable tax system and business – friendly environment.
Corporate taxation in Switzerland
Companies that have a registered office or a location used for their effective management are considered resident for tax purposes in Switzerland. They are taxed on their worldwide income, with the exception of profits derived from foreign company branches and foreign immovable property. Non-resident companies are taxed only on the permanent establishment or branch income derived from Switzerland or on immovable property located in Switzerland.
Corporate income tax is levied in Switzerland on the net profits of a company, consisting of income derived from business or trading activities, passive income and capital gains. Income derived from foreign sources is included in the taxable income, however tax relief is granted for dividend income from qualifying participations. Business expenses are also deductible. Gains and losses derived from the conversion of financial statements in a functional currency into CHF are not taken into consideration for tax purposes.
Capital gains are not taxed on federal level. Capital gains from the sale of assets are treated just like any other type of income and losses are deductible. If certain assets are sold to a shareholder or to a relate company at a price below the market value, gains may be reassessed for tax purposes. Capital gains derived from the sale of participation if at least 10% in a company (regardless if resident or non-resident) benefit from participation relief, if the participation was held for more than one year.
Losses may be carried forward for seven years and may be set off against any capital gains or income. The carryback of loses is not allowed.
The corporate tax rate is levied at federal and cantonal level. The federal tax rate of 8.5% is levied on net income, but with deductions for income and capital taxes, the effective corporate tax rate goes down to 7.8%. The combined effective tax rate, on federal and cantonal level varies between 12% and 24%, depending on the types of Swiss companies and their place of residence.
Foreign source income is included in the taxable income, but tax relief is granted for dividend income from qualifying participations. No credit is granted for foreign taxes paid, except for nonrefundable withholding tax on dividends, interests and royalty under an applicable double taxation treaty.
Dividends are usually taxable for the recipient company, but tax relief is granted for dividends received from a qualifying participation in a resident or non-resident company. Participations are considered as qualifying if a company owns at least 10% of the capital of the company that is paying the dividends or the participation has the value of at least 1 million CHF.
Swiss holding companies
Holding companies benefit from a privileged tax regime in Switzerland. Companies that have as main purpose the holding of participations and have no active business or trade activities in Switzerland can benefit from certain tax advantages. They are exempt from cantonal and communal income taxes and the effective tax rate on income that is not derived from dividends is 7.8%.
Companies that have predominantly foreign business activities can benefit from tax privileges of mixed companies. At least 80% from the company’s income must be derived from foreign sources and at least 80% of the company’s expenses must occur abroad. Foreign source income of mixed companies is taxed at a combined effective rate between 9% and 11%, including the federal tax. Income derived from Swiss sources is taxed at ordinary rates. These tax incentives are also available for domiciliary companies, principal companies and finance company branches.
Dividends paid to a non –resident are a subject of a 35% withholding tax. Under the EU parent-subsidiary directive, the withholding tax is reduced to 0% on payments of dividends between related companies that are residents of EU and Switzerland if the capital participation is at least 25% and other criteria are met. Repayment of nominal share capital and capital contribution reserves are exempt from withholding tax.
No withholding tax is applied on interests, with the exception of interests derived from deposits made with Swiss banks, bonds and bond-like loans, which are a subject of a 35% withholding tax. Interest from Swiss real estate paid to a non-resident is taxed at source. These taxes however, can be reduced under the provisions of a tax treaty.
No withholding tax is levied in Switzerland on royalties or technical service fees.
Other corporate taxes
- Payroll tax is levied for the wages of foreign citizens that have no permanent Swiss residence. Swiss workers are taxed for their wages as part of ordinary income.
- Real property tax is levied in certain Swiss cantons.
- Stamp duty of 1% is levied on contributions to the equity of a Swiss company, regardless if made in cash or in kind. Reorganization procedures are exempt from stamp duty.
- Transfer of securities is a subject of 0.15% tax on Swiss securities and 0.3% tax on foreign securities.
- Corporate net wealth tax is levied on varied rates, depending on each Swiss canton. In many cantons, the net wealth tax may be credited against the income tax liability.
For further information on the Swiss corporate tax rate and tax planning, don’t hesitate to contact a specialized firm.Many foreign entrepreneurs and companies are interested in pursuing business activities in Switzerland or incorporating in Switzerland, but their main concern is whether it is worth it regarding taxation. However, Switzerland is considered one of the most advantageous locations to register a company in Europe and one of the main advantages is precisely the favorable tax system and business – friendly environment.