Swiss withholding tax / Stamp duty

Transcription

1 Swiss withholding tax / Stamp duty Tax Technical Course 2017 Module 4 September 26, 2017

2 Speakers Stephanie Gysin Senior Manager, International tax structuring, Swiss certified tax expert Avenue C.-F.-Ramuz 45, CH-1001 Lausanne Direct: Mobile: Gil Walser Director, International tax structuring, Swiss certified tax expert Avenue C.-F.-Ramuz 45, CH-1001 Lausanne Direct: Mobile:

3 Part 1 Swiss withholding tax 3

4 Part 1 Swiss withholding tax Agenda Purpose of the law 5 Definitions 7 Taxable basis and exemptions 11 Recipient of a deemed dividend 28 Procedural aspects 37 Anti-Abuse rules 56 4

5 Part 1 Swiss withholding tax Purpose of the law 5

6 Purpose of the law Principles The Swiss withholding tax is levied at source. The taxpayer has to recharge the withholding tax to the beneficiary respectively has to pay only the net amount (gross amount less Swiss withholding tax) to the beneficiary (debtor s principle). The tax has to be paid and declared without request and spontaneously within the deadline as stated by the Swiss withholding tax act (self declaration). Purposes of the withholding tax: 1. Incentive for Swiss tax residents to declare their taxable income; 2. Final tax burden for tax avoiders and foreign tax residents (if no double tax treaty applicable). 6

7 Part 1 Swiss withholding tax Definitions 7

8 Definitions Swiss resident (art. 9 al. 1 LIA) Based on the withholding tax act, the following are considered as Swiss residents which is relevant in order to roll over the withholding tax: An individual having its residence or permanent stay in Switzerland; A company having its seat in Switzerland or being registered as a company in the Swiss commercial register (eg. SA, Sàrl, registered branches of foreign banks that are organizationally independent of the headoffice); Legal entities or commercial companies without legal personality (such as SNC or SComm), which have their legal seat abroad, but its effective place of management in Switzerland and conduct business in Switzerland. NB: for the refund of the Swiss withholding tax, only companies with registered seats in Switzerland are considered as Swiss residents (effective place of management is not sufficient to create Swiss residency for refund purposes). Nevertheless, a company with foreign seat with full submission to stamp duty is considered as a Swiss resident for refund purposes (practice of the Federal Tax Administration). 8

9 Definitions Bank (art. 9 al. 2 LIA) Under the guidelines issued by the Federal Tax Administration (Circular n 34 «Deposits» of July 26, 2011), a bank is an entity that: Publicly offers to receive funds bearing interests; or constantly accepts funds against interest. An entity is considered as a bank for withholding tax purposes, if it has more than 100 Swiss and foreign non-bank lenders and if the entire sum owed is more than CHF 5 millions (in total). 9

10 Definitions Bonds (art. 4 al. 1 let. a LIA) Interest paid by a Swiss resident borrower are in principle not subject to Swiss withholding tax, unless the instrument under which interest is paid is qualified as a bond (obligation d emprunt) or as a cash bond (obligation de caisse) or does not exceed CHF 200 of interest from a bank for client savings. The definition of «bonds» as per the Swiss withholding tax law is broader that the one usually employed in commercial and bank laws. Under the guidelines issued by the Federal Tax Administration (Notice «Bonds» April 1999 (S )), the following thresholds apply: Bond: A domestic entity raises funds on identical terms from more than 10 non-bank creditors. The total loan amount must exceed CHF 500,000; Cash Bond: A domestic debtor (other than a bank) raises funds on a continuing basis at variable terms from more than 20 non-bank creditors against recognition of debt and the total loan amount exceeds CHF 500,000; However, exemption rules on definition of bonds and cash bonds apply for group internal financing (e.g. in case of Cash Pooling). 10

11 Part 1 Swiss withholding tax Taxable basis and exemptions 11

12 Taxable basis and exemptions Overview Taxable income Tax rate (13 LIA) Investment income (art. 4, 4a and 5 LIA)* 35% Lottery gains (> CHF 1 000) (art. 6 LIA) 35% Insurance benefits (art. 7 and 8 LIA) Life annuity insurance benefits and pensions 15% Other insurance benefits 8% * Particular cases: Buy-back of own shares (art. 4a LIA, 24a OIA) Deemed/hidden dividends (art. 20 al. 1 OIA) Reimbursement of capital contribution (art. 5 al. 1 bis LIA) 12

13 Taxable basis and exemptions Investment income in general Income deriving from bonds and bond-like instruments, typically interest income; Income deriving from shares, profit sharing certificates, participation certificates taking into consideration the capital contribution principle as per art. 5 al. 1 bis LIA (since January 1, 2011); Income deriving from stakes in investment funds or from stakes in similar type of investment; Income deriving from client deposits with domestic banks. 13

14 Taxable basis and exemptions Income on bonds and bond-like instruments Income deriving from stakes in investment funds or from stakes in similar type of investments: Income taxable if paid out by a domestic investment fund or by a foreign fund in relation with a domestic person (art. 4 al. 1 let. c LIA). Income is exempt if (art. 5 al. 1 let. b LIA): Income is generated from investments in real estate; Repayment of capital contributions, provided the repayment is documented with a separate voucher (coupon) and declare as such (Form 170). Withholding tax not levied on payments to non-swiss residents, if income of investment fund is on a recurring basis achieved to at least 80% from non-swiss sources (art. 34 OIA). 14

15 Taxable basis and exemptions Income on bonds and bond-like instruments Income deriving from client deposits with domestic banks: Income: each type of income related to a debt obligation, which is not a repayment of the principal amount (art. 14 al. 1 OIA). Exempt income: Interest income deriving from client deposits if income does not exceed CHF 200 per calendar year (art. 5 al. 1 let. c LIA and art. 16 OIA); Interest income deriving from deposit in social security institutions (AVS) (art. 5 al. 1 let. d LIA). 15

16 Taxable basis and exemptions Income on bonds and bond-like instruments Special Case : Cash Pooling (art. 14a OIA): Intercompany receivables between related companies are not regarded as taxable bonds, cash bonds or client deposits for withholding tax purposes (art. 14a al. 1 OIA); Exemption rule will not apply if a Swiss company issues any guarantee for the benefit of a bond-like instrument issued by a foreign group company and if the amount of the payments forwarded from the Swiss entity to the foreign group company is higher than he equity of the foreign group company as per the end of the financial year (art. 14a al. 3 let. a and b OIA). 16

17 Taxable basis and exemptions Income on shares, profit sharing certificates, participation certificates Ordinary and extraordinary dividends (including liquidation surplus) Deemed / hidden dividend Special cases Liquidation Proceeds Formal and factual liquidation Sale of cash box (deemed liquidated company) Relocation of the statutory seat to another jurisdiction (migration) Buy-back of own shares Direct partial liquidation Withholding tax levied on the difference between repurchase price and total of nominal value plus capital contribution reserves Profit distributions with reduction of overall capital (conversion of reserves being subject to withholding tax into nominal value) Increase in nominal value without compensation Stock bonus, issuance of bonus shares / free shares 17

18 Taxable basis and exemptions Dividend distributions Distributions of dividends out of the retained earnings are subject to Swiss withholding tax at the rate of 35%. 18

19 Taxable basis and exemptions Deemed dividends Description of the Swiss Federal court: deemed dividends are all gifts made to shareholders or related parties, only because of the shareholding relationship. Characteristics of the hidden dividend distribution: Transaction is not at arm s length; Benefit to the shareholders or related parties; Organs of the company can recognize the non arm s length nature of the transaction. Definition of related party made by the Swiss Federal court: An individual or a company that is economically or personally closely related to the company or its shareholder. 19

20 Taxable basis and exemptions Income deriving from stake in investment funds Income deriving from stakes in investment funds or from stakes in similar type of investments: Income taxable if paid out by a domestic investment fund or by a foreign fund in relation with a domestic person (art. 4 al. 1 let. c LIA). Income from funds is exempt if (art. 5 al. 1 let. b LIA): Income is generated from investments in real estate; Repayment of capital contributions, provided the repayment is documented with a separate voucher (coupon). Withholding tax not levied on payments to non-swiss residents, if income of investment fund is on a recurring basis achieved to at least 80% from non-swiss sources (art. 34 OIA). 20

21 Taxable basis and exemptions Main exemptions Qualified restructuring as per art. 61 al. 1 LIFD (merger, demerger, transfer of participation within the group, etc.) as long as the taxable substance is preserved Interest paid on contingent convertible bonds ( CoCo bonds ) Capital Contribution Principle: Repayment of qualifying contributed reserves is exempt from withholding tax Applicable since January 1, 2011 Qualifying reserves: Reserves were contributed by the direct shareholder (such as APIC); Contribution made after December 31, 1996; Reserves are shown in statutory accounts on a separate line item as part of the legal reserves; Declaration of additional contributions or dividends out of this account with Form

22 Taxable basis Example 1 interest on bond Through the intermediary UBS in Zurich, America Ltd, a US based company issues a bond in Swiss Francs. Swiss withholding tax due on interest paid? 22

23 Taxable basis Example 1 - Solution Given that bond is issued by a non-swiss domiciled person, respective interest payments are not subject to Swiss withholding tax; Art. 4 al. 1 lit. a and art. 9 al. 1 LIA (a contrario). 23

24 Taxable basis Example 2 SA1 (CH) et SA2 (CH) are both fully (100%) held by a US holding company. SA2 is merged into SA1 at income tax values, whereas SA1 increases its share capital by the same amount as the share capital of SA2 was. Withholding tax issues? 24

25 Taxable basis Example 2 - Solution Exception, no withholding tax based on art. 5 al. 1 lit. a LIA (exception of restructuring); Tax neutral restructuring as per art. 61 LIFD (conditions); Taxable substance remains unchanged and all reserves remain taxable in Switzerland; Circular N 5 of the Federal Tax Administration regarding tax neutral restructurings (pt ). 25

26 Taxable basis Example 3 Carl SA, whose shareholder is domiciled outside Switzerland, has as its only asset a participation of CHF (fair market value: CHF ). Liabilities and Equity of Carl SA: Third party debt CHF Share Capital CHF Accumulated Earnings CHF The shareholder and the creditor of Carl SA conclude a agreement according to which the creditor will get the participation held by Carl SA for free. 26

27 Taxable basis Example 3 - Solution Factual liquidation: art. 4 al. 1 lit. b LIA and art. 20 al. 1 LIA; Withholding tax due on: as fair market value of the shares./ as third party debt./ as nominal share capital x 35% Obligation to transfer the tax burden to the beneficiary (otherwise gross-up to 53.84%); Joint liability with the liquidator (i.e. management): art. 15 al. 1 LIA; Security of withholding tax (art. 47 LIA). 27

28 Part 1 Swiss withholding tax Recipient of a deemed dividend 28

29 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Principle: application of the direct beneficial owner s theory in case of deemed dividend distribution. Cayman For Swiss withholding tax purposes, the recipient is the UK sister company. Switzerland Deemed dividend UK Therefore, the Swiss withholding tax of 35% levied on the deemed dividend might potentially be reduced using the double tax treaty in force between Switzerland and the UK (should all conditions be fulfilled). 29

30 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Exceptions: application of the triangle theory in case of deemed dividend distribution. Deemed dividend Switzerland Deemed dividend Swizerland Common shareholder Recipient UK As per the published practice of the Federal Tax Administration, the triangle theory applies in the following 4 situations: - Financial restructuring of sister company or related party; - Financial restructuring by way of merger; - Hidden profit distribution to an individual with a close relationship (family, close friend) to the shareholder of the distributing entity; - Hidden profit distribution to a legal entity with a shareholder that has a close relationship (family, close friend) to the shareholder of the distributing entity. 30

31 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Example 1 Alpha AG (parent entity) holds two investments of each 100% in Beta AG and Gamma AG. Beta AG delivers goods to Gamma AG for a price which is significantly lower than the fair market price would be. Any withholding tax issues? 31

32 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Solution 1 General rule: Direct Beneficiary Rule Beta AG liable to pay withholding tax Shift of tax burden to Gamma AG entitlement of Gamma AG for a refund Exceptions: Triangle theory (not applicable for this case) Financial restructuring of sister company or related party; Financial restructuring by way of merger; Hidden profit distribution to an individual with a close relationship (family, close friend) to the shareholder of the distributing entity; Hidden profit distribution to a legal entity with a shareholder that has a close relationship (family, close friend) to the shareholder of the distributing entity. 32

33 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Example 2 Mr. Gentle, living in Monte Carlo, is the sole shareholder of Horus AG, a Swiss tax resident manufacturing entity. Mr. Gentle instructs Horus AG to pay a monthly salary of CHF to his girlfriend living in Switzerland. His girlfriend is neither an employee of Horus AG nor does she have any other relationship with Horus AG. Any withholding tax issues? 33

34 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Solution 2 Hidden profit distribution to related party (girlfriend of the shareholder) Triangle theory applies. Horus AG is misused to be the paying company without any business reason Shift of withholding tax burden to Mr. Gentle (and not his girlfriend who in fact got the benefit). Side Remark: No double tax treaty between CH and Monaco no reclaim of Swiss withholding tax possible!! 35% definitive tax burden (if Mr. Gentle does not bear the cost of the withholding tax, a gross-up need to be calculated; 53.84% of Swiss withholding tax). 34

35 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Example 3 A US Group incorporates a new Swiss subsidiary which renders certain administration services to the German and UK group companies. The costs of the Swiss company are charged back to the German and UK company without any mark-up and based on the time sheets submitted by each of the employees working for the Swiss company. Any Swiss withholding tax aspects? 35

36 Recipient of a deemed dividend Direct beneficiary theory vs. triangle theory? Solution 3 With third parties, the Swiss company would not have charged the costs without a mark-up hidden profit distribution (deemed dividend) as per art. 20 al 1 OIA. Recipient of the hidden profit distribution: General rule: theory of beneficial owner; Exception: triangle theory. Refund of withholding tax: only if Germany and UK would confirm that the beneficiaries received a dividend income as per art. 10 of the respective treaty might create issue as the triangle theory is applicable in Germany and the UK. 36

37 Part 1 Swiss withholding tax Procedural aspects 37

38 Procedural aspects Debtor s principle WHT payment Debtor Federal tax authorities Net income Refund Recipient The Swiss withholding tax is paid to the Federal Tax Administration by the debtor; The recipient receives the net income; The recipient requests the refund of the Swiss withholding tax paid by the debtor to the Federal Tax Administration; The Federal Tax Administration will review whether the conditions to get the refund of the Swiss withholding tax are met in each case. 38

39 Procedural aspects Payment and transfer of tax burden Tax burden has by law to be rolled over to the beneficiary / recipient of the taxable income (art. 14 LIA). Tax roll-over cannot be avoided / mitigated by any kind of agreement between the parties. In case of dividends in kind or discovery of hidden distribution during a tax audit three possibilities: Recipient pays withholding tax on behalf of the debtor of the withholding tax; Gross-up method (53.84%); Notification at the time of the transfer of assets (art. 24 OIA). 39

40 Procedural aspects Payment and transfer of tax burden - Example In the course of a tax audit, the Federal Tax Administration assessed that Sigma AG rendered several hidden profit distributions (payment of private vacation, too high salary, purchase of a yacht for private use) to its sole shareholder Marc Smith. The total amount of the hidden profit distribution was CHF 1.2 million. Any withholding tax liability? 40

41 Procedural aspects Payment and transfer of tax burden - Solution Hidden profit distributions already took place transfer of tax burden no longer possible at the time of the hidden profit distribution. Alternative A Marc Smith settles the withholding tax burden of CHF 420k on behalf of Sigma AG (35% of CHF 1.2 million). Alternative B Gross-up and Sigma AG settles withholding tax of approx. CHF 646k: 35% of CHF 1.2m 65 x 100 = CHF

42 Procedural aspects Due date of the Swiss withholding tax The withholding tax is due within 30 days after: The due date of a dividend (date of shareholders meeting, alternatively another date is mentioned in the Minutes of the shareholders meeting Federal Court Decision 2C_730/2013); The shareholders decision to transfer the seat of the company outside of Switzerland; The shareholders decision to strike-off the company from the Swiss commercial register; The payment of the insurance benefits; The capitalization / payment of interest in the books of the company. 42

43 Procedural aspects Statute of limitation and late interest Statute of limitation is 5 years starting from the end of the calendar year of the due date of the tax (art. 17 al. 1 LIA). The statute of limitation can be interrupted by the Federal Tax Administration. A new statute of limitation of 5 years starts from the date of each interruption. There is no formal prescription. Late interest of 5% per year is levied on the withholding tax not settled starting from the due date of the withholding tax. In case of tax avoidance (art. 12 DPA), the statute of limitation is 7 years based on court decision (Federal Court decision 134 IV 328) starts at the moment when the crime is done. In case of forgery of documents (art. 251 CP), the statute of limitation is 7 years (light case) or 15 years, at the moment when the crime is done. 43

44 Procedural aspects Statute of limitation and late interest The Federal supreme court has stated in its decision dated March 31, 2017 (case no. 2C_1154/2015) that the point of time when the taxpayer commits the crime is not the moment when the SFTA receives the financial statement, but: the moment when the taxpayer sends the financial statements to the SFTA; in case the financial statements has never filed: 30 days after the shareholder approved the financial statements; the statute of limitation of the seven years is standing still if an objection, appeal or court trial regarding the duty to pay or pay back taxes is pending; the statute of limitation is standing still as from the moment as the SFTA issues the respective order. 44

45 Procedural aspects Conditions for the refund (beneficial owner is a Swiss company) The Federal Tax Administration will review the request for the refund of the Swiss withholding tax on the basis of the Swiss withholding tax law. The refund will be granted should the following conditions be fulfilled by the beneficiary: Seat of the company is located in Switzerland at the due date of the taxable income (art. 24 al. 2 LIA); Qualifies as recipient and economical beneficial owner of the asset that generated the taxable income at the due date of the taxable event (art. 21 al. 1 let. a LIA); There is no tax abuse (art. 21 al. 2 LIA); Income has been booked in the financial statements of the beneficiary (gross) (art. 25 LIA). 45

46 Procedural aspects Conditions for the refund (beneficial owner is a foreign company) The Federal Tax Administration will review the request for the refund of the Swiss withholding tax in application of a double tax treaty between Switzerland and the foreign country. The refund will be granted should the following conditions be fulfilled by the beneficiary: Beneficial owner is tax resident in the foreign country in the sense of the double tax treaty; Qualifies the recipient as the economical beneficial owner of the assets that generated the taxable income at the due date of the taxable event; Gross income has been booked in the financial statements of the beneficiary; There is no treaty abuse. 46

47 Procedural aspects Notification procedure (domestic) art 20 para. 2 LIA and art. 24 and 26a OIA Domestic notification procedure is an administrative simplification and replaces the cash flow triggered by settlement and refund of withholding tax. As a principle, withholding tax on insurance benefits is declared using the notification procedure (art. 19 LIA). In some particular cases, exceptionally and upon request, the notification procedure can be used to declare the withholding tax on investment income, i.e (art. 24 and 26a OIA): Dividend distribution to a Swiss shareholder (company) holding more than 20% of the share capital of the company paying the dividend and should all conditions for the withholding refund be fulfilled; Liquidation proceed in case of transfer of seat of the company outside of Switzerland; Distribution of dividend in kind; Conversion of reserves in share capital; In case of tax audit. 47

48 Procedural aspects Notification procedure (domestic) art 20 para. 2 LIA and art. 24 and 26a OIA Execution of the notification procedure (on dividends): Declaration of dividend using Forms 102, 103 or and 110; Notification of withholding tax due using Form 106. Normal forms and 106 are filed together; All Forms (declaration /notification) must be filed within 30 days after due date of the dividend (Forms available: Incompliance with the 30 days deadline (since February 15, 2017): Notification procedure remains applicable without any late payment interest consequcences given that the material requirements to apply the notification procedure are met (also retroactively applicable on all cases back to January 1, 2011); BUT: The Federal Tax Administration may levy a fine up to CHF

49 Procedural aspects Notification procedure (international) - background Dividends / interest paid to non Swiss tax residents are subject to 35% Swiss withholding tax as per domestic law. No mechanism for a reclaim of Swiss withholding tax in Swiss domestic law 35% as a final tax burden and end of the story? Double tax treaties might foresee full or partial reduction of the Swiss withholding tax. Double tax treaties overrule Swiss domestic law and are the legal basis for non-swiss residents for a reclaim of Swiss withholding tax. Some Ordinances of the Federal Council rule the procedure to reclaim the Swiss withholding tax in application of a double tax treaty (e.g. US Swiss double tax treaty, German Swiss double tax treaty). Swiss EU Automatic Exchange of Information-Agreement ( AEOI ) foresees full reduction of withholding tax if certain criteria are met. This agreement overrule Swiss domestic law and is a legal basis for EU residents for a reclaim of Swiss withholding tax. 49

50 Procedural aspects Notification procedure (international) treaty network Switzerland has an extensive treaty network. It has concluded double tax treaties with almost 90 countries, generally based on the OECD Model Convention: Art. 10 Dividends Often full withholding tax exemption for qualifying shareholdings (exception, e.g. double tax treaty with USA (5%)); Reduction of withholding tax to 15% for portfolio investments. Art. 11 Interest Often full withholding tax exemption. Art. 12 Royalties Not relevant for foreign parties since Switzerland does not levy withholding tax on royalty payments. 50

51 Procedural aspects Notification procedure (international) Savings Agreement Automatic Exchange of Information agreement between EU and Switzerland ( AEOI ): In force since January 1, 2017 (replaced Swiss EU Tax savings agreement); Applicable to all countries being member states of the EU (also to Cyprus that has not concluded any double tax treaty with Switzerland); Also applicable to oversea districts (e.g. DOM-TOM, Gibraltar, Madeira). Not to be confused with the EU parent/subsidiary directive: No automatic adoption of modifications in parent/subsidiary directive. For countries with double tax treaty and AEOI: choice by tax resident to apply either of them. 51

52 Procedural aspects Notification procedure (international) request to the FTA The 0% or reduced withholding tax rate in application of the Swiss EU AEOI (art. 9) or in application of a double tax treaty can be requested to the Federal Tax Administration. Forms have to be filed with the Federal Tax Administration to request the application of the notification procedure: 823 (based on the double tax treaty with USA only); 823B (based on all Swiss double tax treaties except USA); 823C (Swiss EU AEOI). The Federal Tax Administration review the application and issue approval of notification procedure in writing. Authorization is valid during 3 years or until relevant circumstances change (new shareholder). Timely filing of Forms 102/1o3/110 and 108 within 30 days after the due date of the dividend is mandatory to use the notification procedure. 52

53 Procedural aspects Notification procedure (international) request to the FTA Conditions to be granted the application of the notification procedure: Minimum shareholding; Potential holding period; Request is made before the due date of the dividend. Tax residency certificate of the foreign tax authorities is required. Economical reasons for the structure (excludes treaty shopping). Proof that ForeignCo is the beneficial owner (excludes conduit arrangements). 53

54 Procedural aspects Notification procedure Swiss EU AEOI A Swiss subsidiary pays a dividend to its foreign parent company (EU resident, including Cyprus and Gibraltar). Application of art. 9 of the AEOI: Cf. circular letter of the Federal Tax Administration n 10 of July 15, 2005 regarding the Swiss EU Tax Savings Agreement Forms to be filed : 102/103/ (within 30 days) Conditions: Holding period > 2 years / participation > 25%; Parent company (EU tax resident) / debtor = Swiss subsidiary; Non of the company is tax resident of another State; Companies (definition of Swiss «company» : see footnote of art. 9 AEOI); None of the company benefits from a tax holiday. 54

55 Procedural aspects Notification procedure Swiss EU AEOI (cont d) Request to be granted the notification procedure has to be filed with the Federal Tax Administration before the due date of the dividend; Tax residency certificate of the foreign tax authorities is required; Holding period < 2 years: application of the residual withholding tax rate as per the double tax treaty, possible refund after 2 years (filing of a Form 70 with the Tax Administration within 3 years after the due date). 55

56 Part 1 Swiss withholding tax Anti-Abuse rules 56

57 Anti-abuse rules Domestic anti-abuse rule art. 21 al. 2 LIA Domestic anti-abuse rule applies for the analysis of the refund of the Swiss withholding tax by the Federal Tax Administration. As per the Swiss Federal Court, tax evasion happens when: Legal structure chosen by the taxpayer appears unusual, not in the order of things or strange, in any case inadequate to economic circumstances; The legal structure is abusive and is only made in view of saving taxes that should have been due would the transaction be structured in an appropriate manner; The structure will effectively lead to noteworthy tax savings should it have been approved by the tax authorities. 57

58 Anti-abuse rules Old reserves theory Seller (foreign based) Dividend subject to WHT > 0% Target SA (CH) Holding Sale of shares XY SA (foreign based) Target SA (CH) Dividend subject to lower WHT Foreign shareholder sells / transfers / contributes shares in a Swiss company to another related or non-related foreign party; Residual Swiss withholding tax rate applicable on distributions by the Swiss company is lower for the new owner than it has been for the former shareholder; The Federal Tax Administration established the old reserves theory which captures such transactions and denies refund of the Swiss WHT that would otherwise be refundable (be it under Swiss WHT law or under an applicable international treaty) in cases deemed to be abusive. 58

59 Anti-abuse rules Old reserves theory (cont d) This theory is based on art. 21 al. 2 LIA, a well as on case law and administrative practice. It is applied in the following cases: an intra-group transfer of a Swiss company; or a third party sale of a Swiss company with substantial distributable reserves (i.e. retained earnings). The amount of tainted reserves that can be captured under the old reserve practice is the lower amount of the (i) legally distributable reserves (excluding qualified capital contribution reserves) and (ii) amount of non-operating assets of the target which are calculated on a case-by-case basis. The existence of old reserves (at the time of the transfer) will be reviewed by the Federal Tax Administration at the time of the first dividend distribution after the transfer. 59

60 Anti-abuse rules International transposition Seller (foreign based) Dividend subject to WHT > 0% Target SA (CH) Holding Sale of shares XY SA (Swiss based) Target SA (CH) Dividend subject to lower WHT Foreign shareholder sells / transfers / contributes shares in a Swiss company to a Swiss based group company at a value that exceeds the nominal value of the share capital and reserves from capital contributions; Residual Swiss withholding tax rate applicable on distributions by the Swiss company is 0% for the new Swiss owner; The Federal Tax Administration established the practice of international transposition which captures such transactions and denies refund of the Swiss WHT that would otherwise have been fully refundable in cases deemed to be abusive. 60

61 Anti-abuse rules International transposition (cont d) This practice is based on art. 21 al. 2 LIA, a well as on case law and administrative practice. It is applied in the following case: an intra-group transfer of a Swiss company underneath to a new Swiss parent. The difference between the sales price and the withholding tax exempt equity (nominal value plus capital contribution reserves) will remain subject to the same withholding tax rate as applicable to the former foreign shareholder (i.e. the full refund of withholding tax will be denied). Withholding tax due upon distributions made after the transfer. 61

62 Anti-abuse rules New case law about beneficial ownership ( Danish banks, case no. 2C_364/2012, 2C_377/2012 and 2C_895/2012 ) The Federal Supreme Court issued two important decisions on 5 May 2015 regarding the concept of beneficial ownership of income under tax treaties, as it applies to total return swaps and futures contracts. Total return Swaps A Danish bank entered into various total return swap transactions with counterparties in the EU and the US relating to Swiss equities. To hedge the exposure from the total return swaps, the Danish bank bought the necessary Swiss equities from various parties. Upon the maturity of the total return swaps, the shares were sold to different parties than those from whom the bank had previously sourced the shares. Under the swaps the Danish bank had to pay to the counterpart an amount equivalent to the dividend received. 62

63 Anti-abuse rules Danish banks (2C_364/2012, 2C_377/2012 and 2C_895/2012 The Danish bank should not be regarded as being the beneficial owner of the dividends. This ownership was given up at the moment in time where the funds received as dividends were paid out to the counterparty of the swap agreement as there was, an on-payment obligation under the total return swap agreements entered into by the Danish bank. Further to this obligation, the bank was no longer in a position to freely dispose of the dividend proceeds received and, in addition, the total return swap entered into put the bank in a position of being fully relieved of any risk associated to the underlying long position in Swiss equities. Hence, the bank had given up its beneficial ownership of the underlying Swiss equities. 63

64 Part 2 Stamp duty 64

65 Part 2 Stamp duty Agenda Overview 66 Issuance stamp tax 68 Stamp duty on insurance premiums 82 Securities transfer tax 84 65

66 Part 2 Stamp duty Overview 66

67 Overview Subject to stamp duties are legal transactions of legal entities to raise funds and turnover made with securities. Switzerland knows three types of stamp duties as per art. 1 al. 1 of the Stamp Duty Law (LT): Issuance Stamp Duty due upon the issuance of domestic equity instruments (including shares, profit sharing certificates, participation certificates) (lit. a); Transfer Stamp Duty on the turnover with Swiss and non- Swiss securities such as shares, bonds, investments in funds and similar types of securities (lit. b); Stamp Duty on Insurance Premiums, i.e. on payments of insurance premiums against receipt (lit. c). 67

68 Part 2 Stamp duty Issuance stamp tax 68

69 Issuance stamp tax Principles Issuance stamp tax is a Federal tax levied on share issuance and other contributions to the reserves of Swiss companies. The tax is levied on through a self-declaration made by the taxpayer. 69

70 Issuance stamp tax Issuance of equity instruments Increase of equity either by Swiss legal entities or by cooperatives: Issuance of new equity instruments (e.g. shares); Comparable transactions to the issuance of shares, i.e. capital contributions (injections) by the direct shareholder (contributions from parties other than the direct shareholder is not subject to issuance stamp duty). Definitions Swiss resident and Equity instruments : Swiss resident: Statutory, legal seat or permanent residency in Switzerland or companies registered in the Swiss commercial register (legal, not tax definition) (art. 4 al. 1 LT); Equity instruments: E.g., shares in joint-stock companies (AG, SA), shares in limited liability companies (GmbH, Sarl) and shares in cooperatives (Genossenschaft) (art. 5 al. 1 let. a LT). 70

71 Issuance stamp tax Issuance of equity instruments Definition of Issuance : New issuance of equity instruments (foundation of a company, issuance of additional shares by an existing company); Increase of the nominal value of existing shares (conversion of reserves into nominal value). Comparable Transactions: Contribution (Injection) Contribution by the direct shareholder(s) to its Swiss subsidiary without remuneration and without increase in nominal; Example: Contribution into the reserves, hidden contributions. Sale of a de-facto liquidated company (cash box) For issuance stamp tax purposes considered as a new foundation (art. 5 al. 2 let. b LT). 71

72 Issuance stamp tax Issuance of equity instruments - Example Alpha AG holds 100% of the shares in its two subsidiaries Omega AG and Theta AG. Jacob Mueller is the (only) shareholder of Alpha AG. Jacob Mueller sells a real estate with a fair market value of CHF 1 million for a price of CHF to Alpha AG. In order to finance its business expansion, Omega AG gets funds from Alpha GmbH by way of an interest-free loan. In addition, Theta AG sells a real estate to Omega AG for a price of CHF (market value CHF ). Are there any issuance stamp tax consequences? 72

73 Issuance stamp tax Issuance of equity instruments - Solution Sale of real estate by Alpha AG CHF are considered as a hidden contribution Interest-free loan Issuance Stamp tax will be due No taxable capital contribution Best Practice: recurring hidden contributions not subject to issuance stamp duty no issuance stamp tax on missing interest Sale of real estate by Theta AG Theta AG is not the direct shareholder of Omega AG no issuance stamp tax 73

74 Issuance stamp tax Exemptions (art. 6 LT) Tax neutral restructuring (art. 6 al. 1 let. a bis LT) Foundation and issuance of shares (art. 6 al. 1 let. h LT) Tax threshold of MCHF 1 (not applicable to contributions to reserves only) Issuance of parts of collective investment schemes (art. 6 al. 1 let. i LT) Tax systematic exemptions (art. 6 al. 1 let. d LT) Increase of nominal value of equity instruments using equity that was already subject to issuance stamp duty in past Financial Reconstruction: tax threshold of MCHF 10 (art. 6 al. 1 let. k LT) Stamp duty on issuance on bonds 74

75 Issuance stamp tax Remittance (art. 12 LT) In case of financial distress in which a company is unable to pay issuance stamp duty, the Federal Tax Administration could waive the issuance stamp tax (art. 12 LT). Circular n 32 of the Federal Tax Administration states the conditions to be granted the remittance of the issuance stamp tax, if: Losses are cleaned after the financial reconstruction measures; All open and hidden reserves have been used; The company is not thin capitalized; Overindebtedness situation is solved; Activities of the companies continue after the reconstruction; Losses are not due to deemed dividend distributions; No additional paid in capital reserves benefitting from the remittance of the stamp duty. 75

76 Issuance stamp tax Taxable basis and tax rate Tax basis in case of issuance of shares / increase in nominal value Tax basis in case of foundation / increase of participation rights: on the amount received by the corporation, company or cooperative in consideration; But not less than their par value (art. 8 al. 1 let. a LT). Total consideration as relevant basis in case of issuance of shares above the nominal value, costs in connection with the issuance of shares (including issuance stamp tax) can be deducted from the tax basis. Formula: 1% of (Total Consideration Costs of issuance without stamp tax) x 100 Stamp Duty rate =

77 Issuance stamp tax Taxable basis and tax rate (cont d) Tax basis in case of contributions: Contributed amount (art. 8 al. 1 let. b LT); Contributions in kind (tangible and intangible assets): fair market value (art. 8 al. 3 LT). Tax basis in case of sale of cash box: Net equity value of the legal entity or cooperative at the time of the transfer to the new shareholder, in any case at least on the nominal value (art. 8 al. 1 let. c LT). 77

78 Issuance stamp tax Taxable basis and tax rate (cont d) Tax Rates: Standard rate: 1% (art. 8 al. 1 LT); Exemption: free issuance of bonus shares: CHF 3 per bonus share issued (art. 9 al. 1 let. d LT). 78

79 Issuance stamp tax Taxpayer Issuance of shares, increase in nominal values, contributions by shareholder: Legal entity or cooperative (art. 10 al. 1 LT); Sales of cash box: Legal entity or cooperative, but joint liability of the seller of the shares in the cash box (art. 10 al. 1 LT). 79

80 Issuance stamp tax Procedural aspects due date Due date of the issuance stamp tax (art. 7 and 11 LT) is: Issuance of shares by cooperative: 3o days after closing of business year; Ordinary issuance of shares by legal entity (SA, Sàrl): 30 days after end of the quarter during which the issuance was published in the commercial register; Conditional issuance of shares by legal entity (SA, Sàrl): 30 days after end of the quarter during which the shares were issued; In all other cases: 30 days after the date of the transaction (e.g. applicable in case of contributions of assets). Late payment interest of 5% per year will be levied (art. 29 LT). 80

81 Issuance stamp tax Procedural aspects compliance requirements Self declaration by the tax payer; Forms can be downloaded on the homepage of the Federal Tax Administration: Filing deadlines are the same as due dates of the issuance stamp tax; Statute of limitation is 5 years starting from the end of the calendar year of the due date of the tax. In case of tax avoidance or forgery of documents, the statute of limitation can be extended to 7 years (art. 12 DPA). 81

82 Part 2 Stamp duty Stamp duty on insurance premiums 82

83 Stamp duty on insurance premiums General comments Stamp duty is levied on insurance premiums that are (art. 21 LT): part of a Swiss portfolio of an insurer subject to Swiss insurance; if a Swiss entity (as policyholder) takes out a policy from a non-swiss insurer not subject to the Swiss insurance supervision. The stamp duty is calculated on the net cash premium at the rate of 5% (2.5% for life insurance) (art. 24 al. 1 LT). The Federal Tax Administration published circular N 33 dated February 4, 2011 regarding stamp duty on insurance premiums. The stamp duty on insurance premiums is currently a hot topic at the level of the Federal Tax Administration. 83

84 Part 2 Stamp duty Securities transfer tax 84

85 Securities transfer tax Principles Securities transfer tax is due on the sale of taxable securities against consideration, provided that at least one of the parties involved or an involved intermediary qualifies as a securities dealer (art. 13 LT). Should the following cumulative conditions be fulfilled, the transaction will be subject to securities transfer tax: Change in ownership of taxable securities; Sale / purchase / transfer against consideration; Taxable securities; Involvement of a securities dealer either as counterpart or as intermediary; Several exemptions apply, e.g. transfer of participation of more than 20% within the group, restructuring, buy-back of own shares, etc. 85

86 Securities transfer tax Taxable basis and tax rate Taxable basis: Consideration paid at arm s length (art. 16 al. 1 LT); If the consideration different than cash, then the taxable basis corresponds to the fair market value of the consideration (art. 16 al. 2 LT). Tax rate: 0.15% for domestic (Swiss) securities (art. 16 al. 1 let. a LT); 0.3% for foreign (non-swiss) securities (art. 16 al. 1 let. b LT). The securities dealer is liable (art. 17 al. 1 LT): as an intermediary (broker): one 1/2 stamp duty for each counterpart that is neither a registered securities dealer nor an exempt counterpart (art. 17 al. 2 let. a LT); as a counterpart: one 1/2 stamp duty for itself and one 1/2 stamp duty for any counterpart that is neither a registered securities dealer nor an exempt counterpart (art. 17 al. 2 let. b LT). 86

87 Securities transfer tax Taxable securities (art. 13 al. 2 LT) Securities issued by a domestic company (art. 13 al. 2 let. a LT): Bonds, cash bonds, certificates of deposits; Shares in legal entities (joint-stock company, limited liability company, co-operative as well as profit sharing certificates and participation certificates); Shares in investment funds. Similar instruments issued by a non-swiss entity (art. 13 al. 2 let. b LT). Derivatives of the above mentioned securities (art. 13 al. 2 let. c LT). 87

88 Securities transfer tax Securities Dealer definition (art. 13 al. 3 LT) Definition of securities dealer (art. 13 al. 3 LT): Banks and bank-like finance companies (lit. a); Entities, partnerships, Swiss branches of foreign enterprises whose activities encompass exclusively or substantially in the trading of securities on third parties accounts or brokering such securities (lit. b); Corporations (SA), limited liability companies (Sàrl), cooperatives (Scoop) whose assets as per the last balance sheet consist of taxable securities in excess of CHF 10 million (lit. d); Domestic institutions for the occupational old age insurance if they own more that CHF 10 million in taxable securities (lit. d). The securities dealer has to spontaneously inform the Federal Tax Administration of its quality of securities dealer subject to Swiss securities transfer tax. 88

89 Securities transfer tax Exempt counterparts The following institutional investors are exempt counterparts (art. 17a LT): Foreign public authorities and foreign central banks (lit. a); Certain Swiss and foreign investments funds (lit. b and c); Foreign social security entities and foreign old age benefit plans (lit. d and e); Foreign life insurance companies (lit. f); Foreign members of a foreign (non-swiss) stock exchange and their consolidated group companies (lit. g). 89

90 Securities transfer tax Tax liability The tax liability starts with the beginning of the commercial activities for banks and bank-like finance companies, as well as for brokers; For companies such as SA or Sàrl, should the balance sheet at yearend shows taxable securities of more than CHF 10'000'000, the company will spontaneously have to request its registration as securities dealer 6 months after the closing and starts being subject to tax at that time. 90

91 Securities transfer tax Taxable basis - Example A bank trades a package of shares in BZ Bank against a package of shares in Zurich Financial with an individual. The value of each package is MCHF 1.5. Assumption: The bank is a securities dealer for securities transfer tax purposes. Any securities transfer tax consequences? 91

92 Securities transfer tax Taxable basis - Solution An exchange of taxable securities is seen as two separate taxable transactions: Transfer of shares in BZ Bank to the individual; Transfer of shares in Zurich Financial to the bank. The bank will have to pay securities transfer tax for both transactions. 92

93 Securities transfer tax Exemptions Tax exempt turnovers (art. 14 al. 1 LT): Issuance of Swiss securities and primary market transactions (lit. a); Contributions in kind against issuance of new shares in joint-stock companies, limited liability companies and cooperatives (lit. b); Transfer of subscription rights and options (lit. d); Return of securities for redemption (lit. e); Issuance of non-swiss bonds and non-swiss shares (lit. f); Transfer of securities in course of a restructuring such as a merger, demerger, transformation, etc. (lit. i); Sale or purchase of taxable securities in case of restructuring and intragroup transfer of a participation of at least 20% in a Swiss or non- Swiss group company (lit. j). Exemption of the trading account for banks and professional brokers (art. 14 al. 3 LT). 93

94 Securities transfer tax Tax liability - Example The Swiss company Eta AG (a Swiss securities dealer) plans to invest excess cash in the amount of MCHF 5 in a portfolio of non-swiss shares. The BZ Banks acts as a broker to facilitate the purchase of suitable foreign shares with a promising return. The portfolio of shares was finally bought from a Swiss investment fund. Any securities transfer tax implications? 94

95 Securities transfer tax Tax liability - Solution Involved securities dealers: BZ Bank as broker; Eta AG as a counterparty. BZ Bank as a broker: Buyer Eta AG is a securities dealer ½ not due; Seller Swiss Investment Fund is exempt ½ not due. Eta AG as a counterpart: For himself as a securities dealer ½ due; Seller Swiss Investment Fund is exempt ½ not due. Securities transfer tax due by Eta AG: ½ * 0.3% * MCHF 5 = CHF

96 Securities transfer tax Procedural aspects Due date of the securities transfer tax is the day of the transaction (art. 15 al. 1 LT); Late interest of 5% per year is levied on late payment (art. 29 LT); Statute of limitation is 5 years starting from the end of the calendar year of the due date of the tax. In case of tax avoidance or forgery of documents, the statute of limitation can be extended to 7 years (art. 12 DPA). 96

97 Securities transfer tax Trade register (art. 21 OT) / compliance requirements The securities dealer must maintain a trade register, where all transactions (unless exempted) are recorded. It should include information on the transactions such as their date, their nature, name and address of the counterparts, etc. The trade register serves as the basis for the remittance of the transfer stamp duty every calendar quarter (every calendar year if the stamp duty amounts to less than CHF per year). The Form 9 (self declaration) has to be filed along with the trade register, within 30 days after the end of the calendar quarter (or calendar year). It can be can be downloaded on the homepage 97

98 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. In this document, refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.