Very Attractive from a Tax Viewpoint

The Confederation, the Cantons and municipalities impose direct taxes on the profits and capital of businesses, and on the income and net worth of individual persons. Only the Confederation can levy indirect taxes and duties on consumption.

Therefore, for a company or an individual the effective tax burden depends from the mix of direct and indirect taxes. It differs by tax type.

Taxpayers are required to submit an income and tax declaration every year (or two years, depending on the Canton of residence) to the local tax office. By European standards, the tax burden in Switzerland is moderate. The country's federal structure leaves ample latitude for healthy competition between the Cantons.

A large number of bilateral conventions prevent double taxation internationally. Switzerland, as a business location, is therefore also attractive from a tax viewpoint.

Low Tax Burden for all Types of Companies

Operating companies principally engaged in manufacturing, trading or the provision of services benefit from traditionally low taxation on net income. In addition, various tax-planning possibilities are available.

Both the Cantons and the Federal authorities give preferential treatment to holding companies relieving them from all income taxes, while extensive tax privileges are granted by the Cantons to domiciliary companies without direct business activities in Switzerland.

Swiss branches of a corporation based abroad are taxed only on earnings attributable to the operation in Switzerland.

Operating Companies

An operating company is a business that is principally engaged in manufacturing, trading or the provision of services. What is relevant for tax purposes is not whether the business is a partnership or a joint stock company according to Swiss civil law, but rather whether the business is an operating company, a holding company, or domiciliary company.

Partnerships are not considered legal entities for tax purposes. The profit or the net worth of a partnership is taxable to the partners as individuals, in proportion to their equity participation. In order to be eligible for this tax treatment, the partnership must have an operating facility or business location in Switzerland.

A Swiss company or operating facility is subject to taxes on profits and capital. The business is taxed at its domicile or at the actual place of its economic activity. Corporations and limited liability companies are taxed as legal entities. The tax law distinguishes between corporations according to their purpose. The company's purpose determines whether it will be taxed normally or preferentially.

On average, total taxes amount to approximately 25% (Federal, Cantonal and municipal taxes combined), even though the nominal tax rates are generally higher, because in Switzerland, taxes can be deducted as an expense.

 

Holding Companies

Both the Cantons and the Federal authorities give preferential treatment to holding companies. Companies holding at least 20% or CHF 2 million of the nominal capital of other companies pay a reduced tax on the earned dividend. The reduction of the tax due is based on the ratio of the (net) dividend income to gross profit. The equity holding deduction is granted at the Federal as well as Cantonal level. The end result is that there is largely no Federal tax on pure holding companies.

The Cantons relieve holding companies from all income taxes (holding privilege). The holding company is, therefore, not dependent on an equity holding deduction. The net result is that all dividends, and any profit from the sale thereof, and even interest income, etc. are tax-free. A holding situation exists if, as a rule, two-thirds of the assets are equity investments or two-thirds of the income is equity investment income.

 

Domiciliary Companies

The cantons grant domiciliary companies extensive tax privileges. Profits (and capital) are taxed at a reduced rate, with the condition that the company must not have (direct) business activities in Switzerland. The Federal Government gives domiciliary companies no relief on the net income tax. At the Cantonal level, a domiciliary company pays a tax of up to 15% of the regular Cantonal net income tax. The domiciliary company may be controlled by either Swiss or foreign nationals.

 

Branches

Under the tax laws, a branch is a business entity belonging to an individual person or a corporation based abroad. Accordingly, tax liability for economic links to Switzerland is limited. A branch of a foreign corporation or a foreign partnership is taxed in Switzerland as a joint stock company.

For a business entity to be subject to the tax laws, there must be a permanent business facility that contributes to the profits of the company on its own account, or is important for the operation of the business. Swiss branches are taxed only on earnings attributable to the operation in Switzerland. The division of profit between the parent company and the operating facility is based on the accounts of the branch.

 

 

Lowest Value Added Tax in Europe

As with other indirect taxes and duties on consumption, the VAT can be levied only by the Confederation. To reduce administrative requirements, very small companies are exempt from VAT, and certain goods and services are exempt as well.

As the emphasis is on direct taxes, the VAT rate is a maximum of only 7.6%, making it the lowest VAT burden in all of Europe.