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Switzerland Information · Joined: 21 Oct 2006 Posts: 18 Home Country: switzerland

DOING BUSINESS IN SWITZERLAND

FORMS OF BUSINESS ORGANISATION

Companies

Commercial entities are organised either as corporations with a share capital (AG/SA/Ltd) or as limited liability companies (GmbH/Sarl/LLC). The corporation is characterised by the existence of a minimum capital (CHF 100,000, thereof CHF 50,000 paid in) divided into shares which are freely transferable. Shares may be paid up either in cash or in kind. At least three founders, be they individuals or legal entities, are necessary to form a corporation, which number may be reduced subsequently. Founders and shareholders are not subject to any nationality or residence requirements. However, members of the Board of Directors must be shareholders and the majority of directors must be Swiss, EU or EFTA citizens, resident in Switzerland. The corporation may issue bearer and/or registered shares. Bearer shares must be fully paid up. The corporation must elect one or more independent auditors, who are professionally qualified. At least one auditor must have a domicile, registered office, or registered branch in Switzerland.

The limited liability company must have a minimum foundation capital of CHF 20,000 up to a maximum of CHF 2,000,000, and, in contrast to the corporation, only two founders are necessary. A member of a LLC can only hold one common share, which can be for any amount. Founders and members are not subject to any nationality or residence requirements. Contrary to the AG, there are no limitations with regard to foreign membership of the Management Board of a LLC. Only one board member with signatory powers must be resident in, but not a citizen of, Switzerland. However, it is more difficult to transfer shares in a LLC than in a corporation. Further, there is no requirement to appoint independent auditors. These advantages versus a corporation may be partly abolished by the pending revision of the relevant regulation.

Partnerships

Partnerships can be either unlimited partnerships, where the partners each have unlimited liability for the debts and obligations of the firm as a whole, or limited partnerships, where one or more of the general partners have unlimited liability and the limited partners have liability only up to the amount of their registered contributions. Only individuals may be partners with unlimited liability, i.e. a corporation may only be limited partner in a limited partnership.

Sole Proprietorships

Many smaller businesses in Switzerland come into this category. Foreigners, except EU citizens, resident in Switzerland may only set up sole proprietorships if they have a permanent residence permit (“C- permit”). The owner of a sole proprietorship has unlimited liability.

Branches

A non-Swiss company can set up a place of business in Switzerland without forming a Swiss subsidiary company and in that case it is said to have a branch in Switzerland.

A branch is not a separate legal entity, but an extension of the foreign company and the foreign company is therefore responsible for its liabilities. One member of branch management with signature powers must be resident in, but not a citizen of, Switzerland.

Audit and Accounting Requirements

All businesses need to maintain proper books of accounts and to retain the accounting records and associated documents generally for 10 years. Corporations, but not LLCs, must have their accounts audited by professionally qualified auditors. This requirement will most likely be changed in the future (not before 2007) insofar as small corporations need no audit if all shareholders agree.

Corporations having

• outstanding bond issues,
• having their shares listed on a Swiss stock exchange, or
• exceeding two of the following parameters in two consecutive years:
- Balance sheet total CHF 20 million
- Revenues CHF 40 million
- Average number of employees 200
must retain auditors who have special professional qualifications.

Filing Requirements

There are no filing requirements in Switzerland for annual financial statements except in the case of banks, finance companies, and insurance companies.

TAXATION

Companies

Scope
A company domiciled in Switzerland, is subject to Swiss income and capital taxes. The Confederation, each canton and commune, and, sometimes, even churches have taxing jurisdiction. Certain types of corporations, including holding, mixed, domiciliary and service companies, enjoy special tax treatment. Usually, foreign controlled corporations operating in Switzerland are taxed the same way as Swiss domestic corporations. Non-resident corporations with a branch in Switzerland are subject to tax on their branch income and branch capital, the same as resident corporations; subject, however, to special allocation rules.

Taxable Income
Swiss corporation tax is charged on a company’s worldwide income from all sources and capital for each of its accounting periods, with some exceptions. Capital gains are included in the ordinary income of a corporation and are fully taxable, except for gains on sales of qualified investments. There are no separate rates applicable to capital gains. Realised exchange gains are included in ordinary income; unrealised gains, however, are deferred until realised in accordance with Swiss accounting practice. Related party transactions must be recorded at arm’s-length prices. Any deficiency of income or excess of expense incurred on related party transactions represent hidden profit distributions and are to be added back to taxable income. In addition, hidden profit distributions are subject to the 35% Swiss withholding tax, possibly reduced due to the relevant tax treaty, if any. Such withholding tax has to be charged on to the recipient of the profit distribution. If not charged on, the benefit must be grossed up resulting in an effective withholding tax payable of 53.85% (i.e. 35% of 153.85%).

Deductions from Gross Income
Business expenses must be wholly and exclusively incurred for the purpose of the business to qualify as deductible. Generally, interest is a deductible business expense. Rates of interest applied on related party loans must reflect fair market terms and conditions. The Swiss tax administration regularly publishes guidelines as to the interest rates considered appropriate on Swiss Franc loans and borrowings. The deduction of interest expense is further limited by the debt-equity provisions for tax purposes; as a rule of thumb a ratio of 6 to 1 is acceptable.

All income and capital tax expenses incurred by a corporation are fully deductible to arrive at taxable income. Because of the deductibility of the tax expense, the effective tax rate (expressed as a percentage of pretax income) is consistently lower than the statutory rate. Unlike the treatment of exchange gains to be included in gross income, both realised and unrealised exchange losses are tax deductible (principle of imparity). Depreciation and amortisation are deductible using allowable rates. The methods of depreciation currently used are the straight-line and the declining-balance methods. Generally allowable depreciation rates are stated in Federal tax administration circulars, yet some cantons may accept accelerated depreciation.

Inventories must be carried at the lower of cost or market, taking into account necessary provisions for special risks, such as obsolescence, slow moving stock, etc. From this lower value, an additional provision of one third may be made. This represents a hidden reserve (i.e. a provision made for tax purposes but which is not economically necessary). A provision for bad and doubtful debts is allowed within limits. Swiss tax laws allow, after having accounted for specific risks, general provisions of up to 5% against domestic debtors and of up to 10% against foreign debtors. Some cantons may allow, in practice, even higher general provisions of up to 10%, or 20%, respectively. Again, such general provisions are hidden reserves.

Swiss federal and cantonal tax laws allow tax losses to be carried forward for up to seven years. Generally tax losses cannot be carried back to previous years.

Exclusions from Taxable Income
Qualified dividend income and capital gains on the sale of qualified participations are excluded from taxable income for federal and most cantonal tax purposes (except for participations acquired before 1997 and sold before 2007, which are subject to federal and some cantonal taxes) as well as income derived from foreign permanent establishments and branches, from foreign real estate, from foreign partnership, provided that the business of the partnership is carried out abroad and is not considered passive portfolio income. Also excluded are contributions from shareholders, however, forgiveness of debts by shareholders may be taxable.

Administration and Due Dates for Payments
A system of self-assessment operates. A corporation tax return is required from companies in respect of each accounting period. Federal tax is due on 31 March. Cantonal and communal taxes are usually due in several instalments depending on the canton of residence. Interest is payable or receivable on any under/overpayments of tax subsequently agreed.

Tax Privileged Corporations
Special rules, involving either exemption from or significant reduction of cantonal taxes, apply to certain types of corporation. At the federal tax level, however, there are no privileged corporations. Holding companies, i.e. companies which generally do not carry out any business activities within Switzerland, and of which qualified participations or revenues derived there from represent at least 2/3 of total assets or of total revenue, are exempt from cantonal income tax. As a result, any other income, e.g. interest income, royalties, management fees, etc. is only subject to federal income tax at the statutory rate of 8.5%, i.e. at an effective pretax rate of 7.83%, except for income from Swiss real estate which is fully taxable.

Management companies (domiciliary or mixed companies) do not conduct any business activities in Switzerland or their business activities are primarily related to business abroad. Generally, 80% of their revenue must derive from abroad, i.e. must be so-called foreign-source income. They may have local staff and premises in Switzerland. Such management companies are subject to full federal tax at the statutory rate of 8.5%. The foreign source income is subject to cantonal taxes generally only in proportion to the extent of the related Swiss activities. As a result, a management company without any staff and premises in Switzerland may, in certain cantons, not be liable to any cantonal tax, resulting in an effective federal tax liability of 7.83% of pretax income. Even with staff and premises in Switzerland, the effective cantonal tax liability generally amounts to 1% to 3% of pretax income. The overall tax burden on foreign-source income, including federal tax, amounts, thus, to some 9% to 11%. Swiss source income is, however, fully taxable. Finally, service companies providing group coordination or management services are required to show a net taxable margin of 5% of total expenses.

Withholding Tax
Federal withholding tax is levied at source on

• Interest on deposits with Swiss banks and derived from bonds and similar negotiable debt instruments issued by Swiss resident borrowers. The definition of a Swiss bank for withholding tax purposes is broader than under the Banking Law and may include any company having a certain number of qualifying interest bearing deposits.

• Profit distributions, such as ordinary dividends, liquidation proceeds, stock dividends, constructive dividends, or hidden profit distributions. In general, the payer of the income is required to withhold 35% irrespective of whether the recipient is entitled to a full or partial refund.

Relief may be obtained as follows:

• Swiss resident taxpayers receive a refund by way of cash (corporate taxpayers) or credit against income tax payable (individual taxpayers).

• Non-residents receive relief upon application for a refund in accordance with the respective double tax treaty, if any. However, for qualifying dividends to foreign corporate shareholders the Swiss tax administration grants upon application a reduction of the withholding tax at source.

No withholding tax is levied on

• Royalty payments

• Interest on any loans and advances where the borrower is not a Swiss bank.

• Interest on interbank loans between Swiss and/or foreign banks.

• Interest on fiduciary deposits

• Remittances of branch profits by a Swiss branch to its foreign head office.

According to the EU Savings Taxation Agreement, there is no withholding tax on dividends paid by Swiss subsidiaries to their qualifying EU parent company (and vice versa).

Individuals

Overview
Individuals who are resident in Switzerland are generally subject to Swiss federal and cantonal/communal income taxes on the aggregate of their worldwide income. Swiss citizens and foreigners with permanent residence permits (“C-permit”) or married to a Swiss citizen or to a C- permit holder are taxed based on a self-assessment system. The highest aggregate effective tax rates, e.g. on a gross salary of CHF 200,000, amount to between 10% and 26%, depending on the canton/commune of residence. Other foreigners, paid by a Swiss company, are regularly taxed at source. If a certain annual level of income (or net wealth in certain cantons) is reached, generally CHF 120,000, they must file retroactively ordinary tax returns and can, subject to certain guarantees, apply for exemption from being taxed at source. In addition to the income tax, most cantons but not the federation, levy a net wealth tax on the worldwide wealth, generally up to a level of 0.5 %. Geneva: 1% if the net wealth is over 5 million. Finally, there is a church tax in most cantons imposed on individuals belonging to one of the three recognised churches, i.e. the Swiss Protestant, the Roman Catholic, and the Christ Catholic Churches. Church taxes may amount to between 8% and 15% of total income tax.

Sole Proprietorships
Self-employed individuals are liable to income tax on their profits adjusted for tax purposes. However, some adjustments differ quite significantly from those for corporation tax (e.g. no deduction of taxes).

Partnerships
Partnerships are taxed in the same way as the self-employed, so that the individual partners are taxed on their share of the profits and capital as adjusted for tax purposes. A partner is not liable for the unpaid tax of another partner, except at least at the federal level for taxes due by a non-resident partner.

A partnership controlled and managed in Switzerland is liable to income tax on both its Swiss and non-Swiss income. This includes any profits due to partners not resident in Switzerland. A partnership controlled and managed outside Switzerland which carries on part of its business in Switzerland through a branch or agency will be subject to Swiss income tax on the profits of the branch and on the capital allocated to the branch. Profits attributable to a corporate partner are assessed separately on the company, broadly under corporation tax rules.

Taxation of Employees
Employees resident in Switzerland are subject to income tax and social security contributions on all worldwide earnings and most benefits provided by an employer in cash or in kind. By virtue of a respective treaty provision, foreign source earned income may be exempt from Swiss income tax but is taken into consideration for the purposes of determining the progressive tax rate applicable to the non-exempt income.

Deduction at Source
As mentioned above, there is no source tax withheld on compensation paid to Swiss citizens or foreigners with a permanent residence permit (C-permit), or married to a Swiss citizen or a C-permit holder. On the other hand, social security contributions are deducted at source by the employer and remitted together with the employer’s share to the relevant authorities.

Taxation of Savings Income
Savings income from domestic and foreign sources such as dividends and interest are included in taxable income. Swiss source savings income is generally subject to a 35% withholding tax, offset in full against Swiss tax on income and net worth due by a Swiss resident. Foreign withholding tax is, depending on the respective treaty, either exempt or partially reduced at source and the remaining tax is creditable against the Swiss income tax. In the absence of a treaty, the savings income is to be reported net, i.e. after deduction of foreign withholding tax.

Income from Land and Real Property
Swiss source rental income is taxable in Switzerland as ordinary income.
Foreign source rental income is exempt. However, this is taken into account for the determination the tax rate applicable to non-exempt income. According to present law, which may change due to pending proposals, a resident taxpayer owning and living in a house or apartment in Switzerland will generally be taxed on the hypothetical rental value of the property.

Capital Gains
Capital gains realised upon disposal of movable property are generally exempt from federal as well as cantonal/communal taxes. However, if a taxpayer is engaged in a trade or business, such as a securities dealer, any gain on disposal of business assets forms part of taxable income (and, in addition, are subject to social security contributions). Capital gains realised upon disposal of real property are generally subject to a separate real property gains tax in the various cantons, however, exempt from federal tax. If the real property represents business property, e.g. for a real estate dealer, the gain is included in business profits subject to federal and cantonal income tax and social security contributions.

Deductible Expenses
Social security, unemployment and pension fund contributions paid by the employee are fully deductible. Medical expense deductions are only allowed within limits.

Interest expense is deductible within limits.

Inheritance and Gift Tax
Inheritance tax is imposed by the cantons and communes on the estates of deceased residents and on Swiss real property or, in certain cantons, on other Swiss business properties of deceased non-residents. Gift tax is imposed by the cantons and communes on gifts made by Swiss resident donors and on gifts of Swiss real property made by Swiss and non-Swiss resident donors.

In most cantons, transfers to a spouse or descendants are exempt. Otherwise the rates depend on the amount and on the relationship between the deceased and the heirs, or between the donor and the donee, respectively. Gifts to and inheritances received from unrelated persons attract rates ranging from 20% to some 50%.

Expatriates

Scope of Swiss Taxation
An individual’s liability to taxation in Switzerland is based on the concept of residence. Residence under Swiss law is defined as the place where a person stays with the intention of settling there permanently and which, therefore, provides the centre of his personal and business interests. However, for tax purposes, a person will also be considered resident if he remains within Switzerland for a protracted period, i.e. more than 90 days (30 days if working), even if he is not engaged in a gainful activity. Tax treaties also contain rules regarding the definition of residence, which come into play when an individual is considered to be tax resident in both countries based on the laws of these countries.

An individual considered resident in Switzerland is taxed on his worldwide income and net wealth, except for real property, partnerships and permanent establishments outside Switzerland. An individual who moves to Switzerland and takes up employment is considered resident and thus subject to Swiss income taxes on his worldwide income from the date of arrival. However, if a tax treaty or Swiss domestic law provides specifically for taxation by the country of source, the exempt income is taken into consideration only for the purposes of determining the applicable tax rate (exemption with progression).

There are no general tax concessions for expatriates. However, in some cantons some exceptions apply, for example: In some cantons housing allowances are not taxable for the first three years or taxed very moderately; or business cars are not taxable; or schooling fees are not taxable.

Unless the expatriate holds a permanent residence permit (“C-permit”), or he is exclusively paid from abroad, he is generally subject to tax at source on his employment income. This tax can be final if certain conditions are met. An annual salary exceeding certain thresholds, usually CHF 120,000.00 can lead to the obligation to file retroactively an ordinary tax return, or, in addition, if certain bank guarantees by the employer are provided, he may even be exempt from the deduction at source. Tax withheld at source will be credited against the final tax liability.

Social Security Contributions
Switzerland has reciprocal social security agreements with many countries under which employees may continue to pay the home country contributions for a specified period of time. This is in particular interesting for expatriates where the home country applies a ceiling for social security contributions whereas Switzerland levies these on the total remuneration. These agreements can also provide for protection of benefits.

Lump-Sum Taxation of Resident Aliens

Resident aliens who are not engaged in any gainful activity in Switzerland may be eligible for this special taxation. This is a so-called lump-sum tax based on deemed taxable income which, in turn, is a function of the living expenses the taxpayer incurs in Switzerland.

The tax due is, in principle, the higher of:
• the tax calculated on certain specific items of actual income, such as income from Swiss real property, Swiss source investment income, pensions, and annuities

• the tax due on five times the rental expense, or the deemed rental income, of the taxpayer

• a negotiated amount on a deemed income.

The lump-sum taxation must be requested by the taxpayer and a special tax return is to be filed.

Tax Planning

There are significant differences in tax burdens for individuals depending on the canton and commune of residence. Also gift and inheritance taxes vary greatly. Detailed advice is necessary for the maximum benefit to be obtained. In particular companies which plan to send employees to Switzerland are highly recommended to seek advice before their arrival or as soon as they arrive, so that prompt action can be taken where appropriate to minimise the overall tax and social security contribution burden in Switzerland and in the home country.

Value Added Tax

In common with the EU, Switzerland imposes value added tax (VAT) on the consumption of goods and services. Swiss VAT law is similar to that of the EU. In general terms, businesses do not themselves suffer VAT, as it is a tax payable by the ultimate consumer, but businesses are responsible for
the administration and collection of tax. Businesses with an annual sales turnover in excess of the registration limit, currently CHF 75,000, are generally required to register. For most categories of goods and services, VAT must be added at the standard rate, currently 7.6%. Special rates of 3.6% and 2.4% apply to specific categories of goods and services. Some categories are “zero-rated”. This means that a nil rate of tax is charged, but the business supplying the goods or services is nevertheless entitled to a refund of the VAT it has incurred on its purchases. Businesses making only zero-rated supplies will therefore be in a position to obtain periodic refunds from the tax authorities. Some services are “exempt”. Again, there is no VAT to be charged, but in contrast to the position on zero-rated supplies the supplier is not entitled to a refund of the VAT paid on purchases. Businesses that make exempt supplies in addition to either standard-rated or zero rated supplies may be able to recover part of the VAT they incur on their purchases. Exports are generally zero-rated. VAT must be paid on the importation of goods, and of some services, into Switzerland. The VAT compliance regulations are strict; therefore businesses need to avoid potential problems by implementing an efficient accounting system at an early stage.

Other Taxes

A stamp duty of 1% is generally levied on share issues and capital contributions with an exemption of up to CHF 250,000. A stamp duty of 0.15% is payable on the transfer of Swiss securities and 0.30% on foreign securities provided the intermediary is a Swiss bank or securities dealer. However, the law contains numerous exceptions. A stamp duty of 2.5% to 5% is, in principle, levied on insurance premiums, however, with a great number of exceptions.


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