Switzerland is pushing forward with the withholding tax reform – MNE tax

By Francesca Amaddeo, Lecturer-Researcher, Competence Center for Tax Law (SUPSI), Manno, Switzerland

In order to make Switzerland more attractive for financing activities, the Federal Council proposed on April 15 that Swiss interest income be exempt from federal withholding tax.

Switzerland currently levies a withholding tax of 35% on passive income (i.e. interest and dividends) and lottery winnings. This can be seen as an economic policy obstacle, especially in the case of interest-bearing investments.

The withholding tax system is intended to fight against tax evasion and tax avoidance and to act as fail-safe in the national tax framework. For people resident in Switzerland, both private individuals and companies, the withholding tax is fully refunded. However, for non-residents, it becomes a definitive tax.

In the past year, the Federal Council identified some potential reform elements. One such element was an exemption for domestic legal persons and foreign investors from withholding tax on Swiss interest income.

Another reform element identified was the strengthening of the protective purpose of withholding tax by introducing a withholding tax on foreign interest income from individuals in Switzerland, which closed a significant gap and made an effective contribution to combating tax evasion in Switzerland.

Further reforms include the harmonization of the treatment of direct and indirect investments to strengthen Switzerland as a fund location and the abolition of the transfer stamp tax on domestic bonds.

As a successful end to the procedure, the Federal Council passed a mailing with proposed reforms. The proposed changes would exempt Swiss interest income from withholding tax.

Economic estimates of the impact of the changes are encouraging. The changes are expected to increase corporate bond (and debenture) issuance domestically, not overseas (usually without withholding tax).

Even if the Swiss Confederation were to lose USD 1 billion (CHF 1 billion) in the short term, the change offers an excellent cost-benefit ratio in terms of value creation and employment.

Dr. Francesca Amaddeo, PhD in European Law and National Legal Systems, is an Italian lawyer who works as a lecturer and researcher at the Competence Center for Tax Law, Department of Business, Health and Social Affairs, University of Applied Sciences and Arts of Southern Switzerland (SUPSI).

Francesca Amaddeo