Company Formation Switzerland

Switzerland company formation

Company formation Switzerland: Switzerland ranked second in table of most competitive countries

This year’s report from the World Economic Forum WEF on international competitiveness puts Switzerland in second place behind the USA and followed by Denmark, Sweden and Singapore. The WEF explained our country’s lofty position by pointing out the Swiss economy’s ability to innovate and its highly developed business culture. ‹The Global Competitiveness Report 2008 – 2009

Introduction/summary Company formation Switzerland

Switzerland has double taxation agreements = DTA with most other countries. Freedom of establishment in the European Union is not applicable. For approval of the permanent establishment according to tax laws, a commercially equipped business operation must be installed in Switzerland, and active business must be transacted in Switzerland. In addition, it is possible to install a branch of a European company. Such a branch will be treated like a Swiss GmbH without the obligation to pay CHF 20,000 capital stock. This legal form is taxed with only 8.5% in the tax law domicile privilege.

Company formation Switzerland: Services

Forming of the company, entry in the commercial register of the country, apostille, notarially certified translations of certificates into English, unless official language

  • Nominee director: An attorney in the formation country will act as nominee director of the company (to the outside) and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust). The director does not have any account authority.
  • Nominee shareholder: a tax office in the formation country will act as nominee shareholder (to the outside) of the company and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust).
  • Domicile of the company in the formation country: deliverable postal address, availability by telephone, telephone and fax, mail forwarding service
  • Account opening: bank account for the company at a renowned major bank in the formation country, internet banking, VisaCard and cheques. Only the founder of the company is authorized to have access to the account.
  • General power of attorney to the founder: Only the founder receives a notarially certified general power of attorney for the company.
  • Recommendation of a renowned tax office in the formation country, for book-keeping and accounting
  • Internet-homepage of the company hosted on a server in the formation country: 5 pages for presentation of services/products, feedback form, imprint, e-mail address. May be extended at any time.

Investment climate and business environment in Switzerland

Switzerland has one of the most liberal and competitive economies in the world. The most notable factors that position Switzerland as an advantageous European business location for high quality products and services are: legal security, long-term stable fundamentals for investors, low regulatory hurdles, guaranteed protection of property ownership, free competition, as well as the avowed protection of banking secrecy. The Swiss economy’s high degree of development is largely due to its strong intertwining with the economies of other countries.

Prosperity level and pillars of the Swiss economy

Switzerland has a per capita gross domestic product which is the sixth highest worldwide or, when adjusted at purchase power parity, the seventh highest. The highly motivated workforce,the strong linkage of its industry and trade with foreign countries, and the achievements of the services industry are the keys to these economic results. The nominal gross domestic product of USD 50,500 per capita is significantly higher than the EU average and 44% and 30% higher than in Germany and Austria, respectively. In this “mature” economy, almost 70% of the gross domestic product is generated by the service sector. The manufacturing industry, with nearly 30% of the gross domestic product, also remains an important pillar of the national economy. Within the key sectors of chemicals and investments, and in the banking sector, Switzerland has maintained its strong position over the course of many years. In the high-growth services sector, information technology and telecommunications, the Swiss economy benefits from continuing market liberalization.

Basic chemicals, pharmaceuticals, machine tools and certain electronics sectors represent outstanding growth areas. The chemicals and pharmaceuticals sectors contribute 25% of the total value added of the manufacturing industry. The growing trend towards a services-based economy is accompanied by the development of smaller companies. The preponderance of small and medium-sized enterprises (SME) has traditionally been a feature of the Swiss economy. Over 99% of all companies have fewer than 250 full-time employees. A strong commitment and a keen sense of responsibility of the employees toward their employers are among the most outstanding characteristics of the Swiss workforce. They place great importance on quality and customer service in the Swiss industry sector as well as in the services sector.

Human capital

The classic example of a successful export-oriented branch of the manufacturing sector is what is known as the “secret automobile and aircraft industry”: a little known network of highly specialized manufacturing companies and problemsolvers providing components for a range of areas from precision and micro-mechanics to materials technology, plastics  and textiles. As leading innovation partners, they were able to position themselves as suppliers of quality and precision products coupled with their ability to reliably meet delivery deadlines. For a mature economy such as Switzerland’s, it is typical that its growth potential remains modest. However, Swiss industry has massively increased its productivity. Measured by the value added per employee, Switzerland is still an international leader. With the progressive deregulation of protected market segments, higher overall productivity gains are likely. Overall, Switzerland has a solid base for building on its already strong international competitiveness.

Legal forms of business

Forms of domicile

An overseas individual or foreign company may choose the business form which best meets their needs. The time horizon,legal and fiscal framework and additional strategic issues of management require careful evaluation (headquarters, manufacturing or operating companies, sales office, financing or service companies).

Swiss law recognizes the following types of business forms:

  • Founding a partnership or a joint-stock company
  • Establishing a subsidiary or branch
  • Acquiring an existing company in Switzerland (partnership or joint-stock company)
  • Forming a joint venture (partnership or joint-stock company)
  • Creating a strategic alliance with or without an equity investment

The most common forms of domicile for a foreign company in Switzerland are the subsidiary (in the form of a corporation or limited liability company) and the branch. The right choice of domicile and legal form can have a decisive impact on the success of a business relocation. It is therefore worth seeking the advice of someone familiar with the Swiss system at an early stage in the process.

Joint-stock company

The joint-stock company or corporation (AG) is the most widely used type of legal entity in Switzerland. Foreign companies often choose this legal form for their Swiss subsidiaries. A corporation is a distinct legal entity, and its liability is limited to its assets. The authorized capital is determined in advance and is subdivided into shares. The AG is the legal form chosen not only for large companies, but also for medium and smaller ones. It is the usual legal form for holding companies and commercial finance companies. The reasons for the popularity of the AG as a legal form are:

  • Limitation of liability to the company‘s assets
  • Anonymity of the capital providers
  • Limitation of the shareholder‘s obligation to contribute additional capital
  • Simple inheritance arrangements
  • Publication of annual financial statements required only if the AG has outstanding bonds or if it is listed on the stock exchange.

Establishing a corporation or joint-stock company (AG):

  • At least three shareholders are required. It is possible for shares to be held in trust by third parties. The single shareholder corporation is not uncommon.
  • The minimum capital is CHF 100,000 of which at least CHF 50,000 must be paid in (at least 20% per share).
  • The legally prescribed articles of incorporation and governing bodies are to be created.
  • There is a formal incorporation procedure ending with entry in the commercial register. The entry is published in the Swiss Commercial Gazette.

The law prescribes three governing bodies:

  • The General Meeting of Shareholders is the highest governing body. It has the most important powers, such as the definition and modification of the articles of incorporation, electing the board of directors, choosing the statutory auditors, approving the annual report, balance sheet and income statement, deciding on the distribution of profits and approving or ratifying the actions of the board of directors.
  • The board of directors is the managing body of the corporation(AG). It consists of one or more members who must also be shareholders. The majority of board members must be resident in Switzerland and either be Swiss citizens or citizens of an EU or EFTA member state. Exceptions are possible in the case of holding companies. But in every case, at least one authorized representative of the company must be resident in Switzerland.
  • The statutory auditors examine the accuracy of the annual financial statements and report to the board of directors or to the shareholders at the annual general meeting. They must be certified and independent.

Limited liability company

After the new limited liability company legislation comes into force (on 1/1/2008), a limited liability company (German abbreviation GmbH) will be considered to be a company established as a legal entity in which one or more persons or companies come together in a new firm with predetermined nominal capital (equity). Each member contributes to the firm’s capital by taking one or several equity shares at a nominal price of at least CHF 100. Equity amounts to at least CHF 20,000 and must be paid in full. Equity shares can be easily transferred in written form. Due to the revision of the corporation law, the GmbH is enjoying increasing popularity as an alternative to the corporation. The GmbH is an attractive legal form for a company and is increasingly preferred over the AG by small and medium-sized companies. The GmbH does not have a Board of Directors, thereby somewhat reducing structural costs; responsibility is concentrated in the managing director/s (at least one of which must be domiciled in Switzerland). Depending on its size, the GmbH only has limited auditing requirements. Compared to the AG, it has the advantage of having a smaller amount of registered capital, and the disadvantage of no anonymity; all members, even those who join later on, are disclosed. The formation of a limited liability company and the costs involved are similar to setting up a joint stock company. Only one founder is required. Existing GmbHs must adapt their rules and regulations within the two years following the enactment of the new GmbH legislation.


Foreign companies often choose the legal form of a branch for entering the Swiss market. Branches are not distinguished as separate legal entities under Swiss civil law. There are only references to branches under other legal forms (e.g. corporation or limited liability company). The branch is subject to the provisions of Swiss law (civil law, contract law, international private law). As far as authorization, registration, taxation, and accounts are concerned, a branch is treated like a Swiss company.

Advantages and disadvantages

of legal forms

All possible legal forms have their advantages and disadvantages. These can best be identified through a comparison of the different forms.

The Holding Company

The ‘Holding’ Company is a Stock Corporation with a particular tax status (see Offshore Legal and Tax Regimes). Holding companies benefit from reductions in corporate income tax and capital gains at federal and cantonal levels, and from a reduction in net worth tax at cantonal level.

The Swiss holding company was a particular target of the OECD’s ‘unfair tax competition’ initiative, and in 2004 an agreement was reached between Switzerland and the OECD whereby information about holding companies would be shared by Switzerland in circumstances where there was prima facie evidence of fraud.

For federal tax purposes a company is defined as a holding company if it holds either a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least 2m Swiss Francs (known as a “participating shareholding”). The reduction in the level of corporate income payable tax depends on the ratio of earnings from “participating shareholding” to total profit generated.

Although the definition of a holding company varies among cantons, broadly speaking a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either:

  • derives 51%-66% of its income from dividends remitted by the subsidiary; or
  • holds 51%-66% of the subsidiary’s shares.

The Domiciliary Company

Domiciliary Companies are Stock Corporations that are both foreign-controlled and managed from abroad, have a registered office in Switzerland (i.e. at a lawyer’s premises) but have neither a physical presence nor staff in Switzerland. They must carry out most if not all of their business abroad and receive only foreign source income . The use of domiciliary companies can result in savings in corporate income tax levied on income and capital gains and net worth tax. See Offshore Legal and Tax Regimes.

The Auxiliary Company

An Auxiliary Company is essentially a Domiciliary Company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary Companies are possible in only seven cantons, and do not benefit at federal level. Treatment varies according to canton, but in most cases an auxiliary company may have Swiss offices and staff and be in receipt of Swiss income (which is taxed at normal rates). Most income though must be from a foreign source. See Offshore Legal and Tax Regimes.

The Service Company

Service Companies are Stock Corporations whose sole activity is the provision of technical, management, marketing, publicity, financial and administrative assistance to foreign companies which are part of a group of which the service company is a member. Service companies may not in general derive income from third parties (i.e. companies outside their corporate group). Service company status is obtained by way of an advance cantonal tax ruling (there is no benefit at federal level). See Offshore Legal and Tax Regimes.

The Mixed Company

Mixed Companies are Stock Corporations which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. There is no benefit at federal level, but at cantonal and municipal level there are corporate income tax benefits if the mixed company meets the following conditions:

  • the company is foreign controlled;
  • a minimum of 80% of its total income comes from foreign sources;
  • the company has close relationships to foreign entities.


Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas other taxes are concurrently levied at cantonal, communal and federal levels. Although the rate of tax levied at a federal level is consistent, that levied at a cantonal level varies from canton to canton. (There is currently legislation in the pipeline that aims to terminate this variation, and to reorganise the division of responsibilities and of revenues between the federal and cantonal administrations, but the timescale of change is not yet settled). Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in all tax planning.

In 2005 the EU put a warning shot across the bows of the cantons by threatening the tax regime in Zug, one of the more attractive cantons to foreign companies.

In a letter sent to the Swiss Mission in Brussels in October, the EU congratulated Switzerland on its decision to extend the free labour accord with the European Union. However, the letter also went on to point out that certain parts of the Swiss corporate tax regime “may be incompatible” with Switzerland’s obligations under the agreement.

“The legislation in question, that is enforced in Zug and [canton] Schwyz, is said to grant fiscal advantage to undertakings for… economic activities taking place outside Switzerland,” the letter stated.

Zug denied that its corporate tax regime breaches a 1972 Free Trade Agreement between Switzerland and the European Union. Guido Jud, head of corporate tax in canton Zug, said that he was “surprised” by the EU’s viewpoint.

“The rules on taxation in Switzerland have not changed recently so we do not see why, in 2005, there should be suddenly be a problem,” he stated.

Currently, the tax rate for companies in Zug ranges from 14% to 17%.

The federal government has played down the affair, saying the letter was merely a request for information rather than a formal complaint against the tax regime.

By international and OECD standards Swiss tax rates are relatively low.

Scope of Corporate Income Tax

For corporate income tax purposes a company is deemed resident in Switzerland if it is either incorporated in Switzerland or effectively managed from there. Thus a UK-registered company whose effective seat of management is in Switzerland is a Swiss resident company for corporate income tax purposes.

The General Assessment Rule is that resident companies are assessed on their worldwide income except for profits generated by enterprises, permanent establishments and real estate situated abroad, whereas non-resident companies are only assessed on profit generated by enterprises, real estate and permanent establishments situated in Switzerland as well as interest on loans secured on Swiss real estate.

Corporate income tax is levied at a federal, cantonal and communal level. The level of corporate income tax payable varies amongst the cantons but at present Zug and Fribourg are considered the best cantons in which to locate trading and holding companies respectively.

Corporate income tax payable to the federal authorities may be tax deductible for the purposes of an assessment to cantonal corporate income tax and vice versa.

Advance tax rulings on the level of corporate income tax payable are available and are advised as a matter of prudence.

Generally speaking capital gains are taxed as corporate income at federal, cantonal and municipal levels.

The Swiss branch of a foreign company pays the same rates of corporate income tax on profits, income and capital gains as would be paid by a Swiss-resident corporate entity. Profits remitted abroad by the branch are not subject to any tax in Switzerland.

Rates of Corporate Income Tax

Corporate income tax is levied at federal, cantonal and municipal levels.

The basic federal tax rate is 3.63% of taxable profits with an additional percentage based on a formula which relates trading profits to net worth (i.e. capital and reserves). The maximum rate of 9.8% is arrived at if profits exceed 23.15% of net worth.

Cantonal tax rates vary between 17% and 35% and like the federal tax are progressive, using a scale based on the relationship of profits to net worth.

Municipal tax on corporate income is calculated as a small proportion of cantonal tax.

Calculation of Taxable Base

There are substantial differences between the federal government and cantons, and between individual cantons, in the calculation of taxable income. The following list of broadly applicable rules must be checked in any given situation:

  • GAAP principles apply to most aspects of the tax computation;
  • Group or consortium relief does not exist in Switzerland;
  • Losses can be carried forwards for between 4 and 7 years, but not backwards;
  • There is no controlled foreign company tax legislation of the type which exists in both the UK and the USA;
  • Capital gains made by a non-resident parent company on the sale of its shareholding in a Swiss subsidiary are not taxable in Switzerland (unless the Swiss subsidiary owns real estate in Switzerland);
  • The payment of loan interest by a resident or non-resident subsidiary to a Swiss parent company is free of any corporate income tax in Switzerland;
  • Provisions for future employee retirement liabilities are tax deductible;
  • Income or capital gains accruing to a resident or non-resident company on the rental or sale of Swiss real estate (including the sale of shares in a company which owns real estate in Switzerland) are subject to corporate income tax at both federal and cantonal levels;
  • Income and capital gains from foreign immovable property are exempt from corporate income tax;
  • The profits of the foreign branches of a Swiss company are exempt from corporate income tax in Switzerland as are any capital gains made on a sale of a branch;
  • The losses of the foreign branch of a resident company can be set off against the profits of the resident Swiss company.
  • Where there is no double taxation treaty in place withholding taxes deducted in a foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland. See Double Taxation Treaties.

Stamp Duty

The federation has the exclusive right to levy this tax. The rates are as follows:

  • 1% on the issue of shares where the value of the shares is over SFr 250,000 including cases in which shares are issued at a premium. A loan made by a shareholder to the company without any consideration is also subject to this tax. The tax is also payable on the nominal value of shares where a majority shareholding is transferred as a consequence of a liquidation irrespective of the fact that the shares have virtually no market value in the circumstances. The issue tax is not payable by the Swiss branch of a foreign company.
  • A rate of 0.15% on the transfer value of shares in Swiss resident companies and 0.3% on the transfer value of shares in non-resident companies where the transfer is effected by “security dealers” which definition includes banks, stock brokers, investment fund managers and other financial institutions. The definition of security dealers is quite wide and includes any company which owns securities with a value in excess of 10m Swiss francs and all intermediaries. The tax is split between the buyer and the seller and is automatically deducted by the dealer.
  • A rate of 0.12% per annum on the value of bonds issued meaning that a 5-year bond pays 0.6% stamp duty.
  • A rate of 0.06% per annum on bank-issued medium term bonds and on the issue of financial paper meaning that a 5-year bond pays 0.3% stamp duty.
  • A rate of 5% on an insurance premium or 2.5% in the case of a life insurance premium paid in one contribution.

Filing Requirements and Payment of Tax

For federal tax purposes the tax year is the company financial year whereas for cantonal and communal tax purposes the tax year is the calendar year. Although the cantonal basis of assessment differs amongst cantons (i.e. it is occasionally annual) assessment is generally on a bi-annual basis meaning that it is based on the average profits of the previous 2 calendar years so that, for instance, the corporate income tax payable to the canton for the period 1st January 2003 to 31st December 2004 is the average of profits for the like periods in 2001 and 2002.

Net Worth Tax

This tax is levied by both the federal authorities and cantons. The tax is based on the value of a corporate entity’s assets, normally equal to shareholders’ equity (paid-in capital, legal reserves, and other retained earnings, public or otherwise). The rates are:

  • A rate of 0.8% of the company’s net worth is levied by the federal authorities annually;
  • A rate of between 0.3% to 1% of the company’s net worth is levied by the cantons annually, depending on the canton.

Foreign branches based in Switzerland are only assessed on the value of their Swiss assets for the purposes of this tax. Resident companies are not assessed on the value of any foreign-based real estate assets.

Withholding Tax

The federation has the exclusive right to levy withholding tax. The general rule is that withholding taxes are deducted at source from distributions made by Swiss entities. The rate is 15% on pension fund benefits, 8% on insurance benefits and 35% for “investment income”, which includes corporate dividends and interest from bank accounts, bonds & debt instruments.

As from July, 2005, the EU’s Savings Tax Directive applies in Switzerland, and a withholding tax of 15% is being applied to the returns on savings of citizens of EU member states.

No withholding tax is levied on royalties paid to foreign beneficiaries.

Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

NB: Switzerland has double taxation treaties with about 50 other countries, and these determine the rates of withholding tax in most cases, rather than the general rules above.

Double-Tax Treaties

Switzerland has Double Taxation Treaties with more than 50 other countries. The general effect of the treaties for non-residents from treaty countries is that they can obtain a partial or total refund of tax withheld by the Swiss paying agent. Although the full amount of withholding tax is deducted at source the difference can be re-claimed by the non resident from the Swiss tax authorities. Where there is no double taxation treaty in place withholding taxes deducted in the foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland.

No withholding tax is levied on royalties paid to foreign beneficiaries. Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

Treaty abuse: A repayment of withholding taxes under the terms of a treaty will be denied where there has been “abuse”. Abuse occurs when a foreign-controlled legal entity which is resident in Switzerland fails one of the 4 following tests:

  • The entity must have a reasonable debt/equity ratio (generally the total of all interest-bearing loans should not exceed 6 times the company’s equity);
  • The entity must not pay excessive interest rates on debt (for the purposes of this test the accepted rate varies from time to time);
  • The entity must not pay more than 50% of its income as management fees, interest or royalties to non residents;
  • The entity must distribute at least 25% of the income which could be distributed as dividend.

Where any one of the 4 tests are failed the portion of withholding tax deducted and which is deemed refundable under the terms of the treaty is not refunded.

Additionally, treaty provisions do not apply to dividends, interest or royalties paid by a Swiss entity to a German, Italian, French or Belgian entity if the Swiss entity is wholly or partly exempt from cantonal tax under the tax incentives applicable to specific types of company (i.e. domiciliary, holding, auxiliary, mixed and service companies). See Offshore Legal and Tax Regime.

In October, 2004, Swiss President Joseph Deiss agreed with Japanese Finance Minister, Sadakazu Tanigaki, that informal talks would soon begin on the updating of the thirty-year-old double taxation avoidance agreement between the two nations. 

The following are some of the countries which have double-tax treaties with Switzerland:

BulgariaNew Zealand
CIS (ex-USSR)Poland
Federal Rep. of GermanySingapore
FinlandSouth Africa
FranceSouth Korea
GreeceSri Lanka
IndiaTrinidad & Tobago
ItalyUnited Kingdom
JapanUnited States

In July, 2005, representatives from the governments of Switzerland and Pakistan met in Islamabad to put their names to a new comprehensive agreement for the avoidance of double taxation.

The agreement, signed on behalf of Switzerland by Denis Feldmyer, Ambassador to Pakistan, and on behalf of Pakistan by Abdullah Yusuf, Chairman of the Central Board of Revenue, will encompass income from shipping, immovable property, interest, royalties and fees for capital gains and technical services.

Under the arrangement, business income will be taxable at the place of permanent establishment and Swiss firms will be given a tax credit in Switzerland on income earned in Pakistan.

The new agreement, initially concluded in 2002, updates the much older previous double tax avoidance agreement which dates back to 1959.

Table of Treaty Rates

The rates shown are those of withholding taxes applied to payments made by Swiss entities or persons to non-resident entities or persons; a zero rate applies to royalties. Although Switzerland recognises the member states of the CIS as successor states to the USSR, and therefore applies its USSR Double Tax Treaty to them, they are not included in the table because the USSR treaty does not contain concessionary rates of withholding tax for dividends or interest.

CountryDividends, %
Paid from Switzerland
Interest, %
Paid from Switzerland
Belgium10/15 (Note 1)10
Bulgaria5/15 (Note 1)10
Egypt5/15 (Note 1)15
Finland5/10 (Note 2)nil
France5 (Note 3)10
Germany10/30 (Note 4)nil
Iceland5/15 (Note 1)nil
Indonesia10/15 (Note 1)10
Irelandnil/10 (Note 1)nil
Japan10/15 (Note 1)10
Luxembourgnil/15 (Note 1)10
Malaysia5/15 (Note 1)10
Netherlandsnil/15 (Note 1)5
New Zealand1510
Norway10/15 (Note1)nil
Pakistan15/35 (Note 5)15/35 (Note 6)
Poland5/15 (Note1)10
Portugal10/15 (Note1)10
Singapore10/15 (Note 1)10
South Africa7.535
South Korea10/15 (Note 1)10
Spain10/15 (Note 1)10
Sri Lanka10/15 (Note 1)10
Swedennil/15 (Note 7)5
Trinidad & Tobago10?20 (Note 8)10
UK5/15 (Note 1)nil
USA5/15 (Note 1)5


  1. The higher rate applies if the payment is received by a company holding directly less than 25% of the capital of the Swiss paying company
  2. 5% if the recipient is a company
  3. Only 20% is refunded (making the effective rate 15%) if non residents of France have substantial interests in the recipient company, if the recipient company controls at least 20% of the Swiss company and if the shares of either company are neither quoted at a stock exchange nor traded over the counter
  4. The 30% rate applies to dividends from jouissance rights, participating loans and silent participations. Withholding tax shall not exceed the tax chargeable on the profits out of which the dividends are paid.
  5. The lower rate applies if the recipient is a company which owns at least one third of the voting stock in the Swiss company
  6. If the recipient is an individual no refund of the Swiss 35% withholding tax is granted
  7. The zero rate applies where the payer is a corporate shareholder which has a participation of at least 25% for a continuous period of at least 2 years immediately preceding the distribution. 5% applies where the participation requirement is satisfied but not for the requisite period and 15% is the rate for smaller holdings.
  8. The lower rate applies if the recipient is a company which controls directly or indirectly at least 10% of the voting power in the Swiss paying corporation

Other International Agreements

Switzerland has passed its own mutual assistance law, and is also a party to a number of international mutual assistance treaties, some multilateral and some bilateral, including the following:

  • The European Convention on Mutual Assistance in Criminal Matters, 1959;
  • Treaty on Mutual Assistance in Criminal Matters with the USA, 1973;
  • The Federal Act on International Mutual Assistance in Criminal Matters, 1983, as amended in 1997;
  • The European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, 1993.

The Federal Act, particularly since the 1997 amendments, enables the transmission of documents and information abroad for the purposes of criminal proceedings. From the point of view of banking secrecy the following can be said about the current situation:

  • According to a recent decision of the Federal Supreme Court the transmission of such information requires the permission of the Swiss police authorities who must inform the customer about the order and give him a right to appeal;
  • It is not permitted to forward information on persons who are not the subject matter of the investigation;
  • Information will not be given if
    • The foreign authorities might use the information for purposes other than those for which it was requested;
    • The offence alleged is not equally punishable in Switzerland;
    • The requesting state does not offer Switzerland reciprocal treatment in these matters;
    • The offence is related to tax, politics or military matters.

The Swiss authorities now grant administrative assistance as well as judicial assistance. Administrative assistance is regulator to regulator contact as opposed to judicial assistance which takes place between judicial authorities within the scope of civil or criminal legal proceedings.

In March, 2003, the Swiss government announced that it had ratified a legal co-operation agreement with Italy. Although the accord had been agreed four years before, legislation introduced by the Berlusconi government giving Italy the right to dismiss the findings of investigations carried out in other countries, meant that the Swiss authorities were reluctant to ratify the agreement. However, according to a government statemen, a series of recent rulings in Italy’s High Court had clarified the situation and allowed the two parties to resolve their differences over legal cooperation.

The Swiss Federal Banking Commission which regulates banks, mutual funds, stock exchanges and security dealers is the regulator charged with rendering administrative assistance. A number of conditions attach to the granting of administrative assistance by the Swiss Federal Banking Commission namely:

  • The foreign authority must be recognized by the Commission as a supervisory authority authorized to request administrative assistance;
  • The foreign authority may only use the information for the purposes of direct supervision of the institution concerned;
  • The foreign authority must be bound by official or professional secrecy;
  • The foreign body can only re-transmit the information under very restrictive circumstances. This is called the principle of specificity and means that information that was given for the purposes of a criminal offence such as drug dealing cannot be used in proceedings for tax evasion. In practice the foreign authority must confirm that it will not so transmit the information unless required to do so by a competent court against whose decision it will appeal. Since the grant of assistance by the commission is discretionary if specificity cannot or was not guaranteed future assistance may be denied though in practice the commission is always eager to be seeing to play its part;
  • If the information requested gives the name of a client he must be notitfied and given time to contest the decision;
  • There is a right of appeal to the Federal Supreme Court.

Banking secrecy in Switzerland is evidently under threat from the international crusade currently being waged, overtly against money-laundering, but with a sub-agenda of fiscal harmonisation and information exchange. Switzerland is holding fast so far against the tide, but may have to give way in the future to a certain amount of information exchange. Along with Luzembourg, Switzerland refused to sign the OECD’s declaration in late 1999 against ‘unfair tax competition’. It did sign the unanimous OECD declaration in April 2000 on information exchange and banking secrecy, but stated immediately afterwards that in its opinion it already conformed to the necessary standards.

However, the task of enforcing regulation in the non-banking sector initially proved to be an uphill struggle for the new Money Laundering Control Authority. According to the Swiss Money Laundering Reporting Office’s latest annual report, of the 311 reports of suspicious transactions in 2001, only 75 came from the country’s 7,000 non-bank financial intermediaries. Of those 75, very few have resulted in prosecution, according to Swiss officials. Then in 2002 the number of suspected cases of money laundering rose sharply, with 652 cases being referred to the Money Laundering Reporting Office – an increase of 56 per cent over the previous year. The ministry said more rigorous control and reporting practices among Switzerland’s non-banking sector were the main reason for the increase. The total amount of money suspected of having been laundered fell from SFr2.7 billion ($2 billion) in 2001 to SFr667 million in 2002. Since 1998, only one per cent of reported cases have led to a conviction.

In addition to dealing with the passive resistance of the non-banking sector and staffing shortages at the Money Laundering Control Authority, its chief Dina Balleyguier also faced the challenge of deciding if any other sectors should be brought, doubtless unwillingly, under the umbrella of greater supervision and reporting.

‘There are about 10…open-ended questions,’ she explained in November 2001: ‘One is whether commodities traders must have a license with us; another is whether asset traders with one-man offshore companies should be included. Another is whether someone doing asset management for their family should be included. It’s very complicated.’

The Swiss government is also considering extending existing money laundering laws to cover art and jewellery trading companies. Following the introduction of enhanced legislation on traditional financial institutions and banks in Switzerland, laundering funds through non-traditional channels such as art dealers, jewellery traders, and money changers has become an increasing problem for the authorities.

Although Swiss-based asset managers are already overseen by the country’s anti-money laundering unit, the goverment has also announced that is considering whether the sector should be put under the authority of the Swiss Federal Banking Commission, which oversees banks, brokers, and investment funds.

Below is a joint response, from The Swiss Federal Banking Commission and the National Bank, to the members of the Financial Stability Forum who complained about the Switzerland’s inclusion on an OECD list issued in May of countries whose financial systems posed a risk to global stability.

To All Members of the FSF Berne/Zurich,
5 September 2000
Financial Stability Forum –
List of “Offshore Financial Centres” (OFC)

Dear Mr . . . Mrs

In May 2000, the Financial Stability Forum (FSF) published a list of “Offshore Financial Centres” (OFC) defined with respect to their compliance with international standards in the financial area. This list also includes Switzerland.

Switzerland is an international financial centre with a significant amount of business with non-residents. The same applies to other countries like the USA and the UK. However, it is incorrect to intermingle the typical features of international financial centres, such as the importance of financial business with non-residents, with the characteristics of “Offshore Financial Centres” as established by the OFC working group of the FSF itself (page 9, table 2 of the report). In fact, none of these characteristics apply to Switzerland. In our country: -Business and investment income is taxed at rates close to the average of OECD countries. The overall tax burden of 33.8% in Switzerland (total tax revenue as % of GDP) is above the OECD average and higher than in the United States (29.7%), Japan (28.8%) or Australia (29.8%).
  -A withholding tax of 35% applies to all interest and dividend payments of Swiss issuers or debtors, irrespective of the domicile of the recipient. The incorporation regime follows international standards. In particular, there is no regulatory or supervisory distinction between onshore/offshore or resident/non-resident activities. In Switzerland, there are neither offshore-licences nor is there preferential treatment for offshore activities. No shell-branches or brass-plate banks are admitted. -The supervisory regime for financial services is in line with international standards and G10 standards in particular.

-Regulation does not offer the possibility to create trusts.

-Financial institutions without physical presence in Switzerland can not be licensed by the Swiss Federal Banking Commission (SFBC) and, therefore, can not lawfully operate as such from Switzerland.

-Swiss supervisors have full access to all files and privacy protection for bank customer information is no obstacle to international mutual assistance in criminal matters such as money laundering, corruption, insider trading or tax fraud.

-The volume of non-resident business does not “substantially exceed” the volume of domestic business despite the fact that, in general, the share of international transactions tends to be higher in smaller countries than in larger economies. In terms of funds under management, the share of domestic and foreign securities holders is about equal.

-The financial sector accounts for 11% of GDP.

The FSF argues that many supervisory and regulatory authorities of major financial centres referred to Switzerland as an OFC. This is certainly not an acceptable reason for placing Switzerland on the Forum’s list. We urge you to take into due consideration that Switzerland is a G10-member with a regulatory and supervisory regime that is in compliance with international standards. Therefore, it is not understandable why Switzerland should be assessed as an OFC.

Yours faithfully
Swiss Federal Banking Commission
Dr Kurt Hauri Chairman

Swiss National Bank
Dr Hans Meyer Chairman of the Governing Board.

In 2001 the European Union began negotiations with Switzerland to attempt to gain agreement to the information-sharing required as part of the EU’s withholding tax directive and without which it will not be effective.

Switzerland was politely helpful, offering to extend its 35% withholding tax on resident savings income to non-resident account holders, and to distribute much of the tax collected among EU member states, but the government was adamant that it will not shift on the issue of banking secrecy. The Finance Minister, Kaspar Villiger confirmed this, commenting frequently that: ‘Banking secrecy is not negotiable’.

Jean-Baptiste Zufferey, a Swiss tax expert and professor at the University of Fribourg expresses the situation more bluntly: ‘It’s not because we fear banks would lose business, but most Swiss people have an attachment to the idea that a human being is entitled to financial privacy. It is the problem of foreign countries if they cannot tax their citizens. We in Switzerland don’t have to help other countries do their job.’

This posed a serious problem for the EU – not just because the alpine jurisdiction is home an estimated one third of the world’s offshore wealth, but because other countries, in particular Luxembourg and Austria, had said that they would refuse to back information exchange plans if Switzerland does not participate. The EU had set the end of 2002 as the deadline for final adoption of its information exchange plans, but Luxembourg’s refusal to accept the Swiss compromise position as acceptable meant that negotiations continued into 2003. After last-minute haggling by Italy and Belgium, it was agreed by mid-2003 that the Directive would enter into force in 2005.

The Swiss banking fraternity certainly doesn’t admit to any regulatory weaknesses, and is up in arms about what it sees as incorrect foreign attitudes towards Swiss banking. “We cannot have a situation where people claim that in Switzerland, control weaknesses supposedly keep occurring,” Urs Roth, chief executive of the Swiss Bankers Association told an August, 2003 seminar.

“Where Switzerland has excessive regulation compared with the foreign competition, nothing is done about it. In the long run this may produce a widening gap that could be very damaging for our banks and therefore our economy,” warned Roth.

In January, 2004, Switzerland and the Organisation for Economic Co-operation and Development reached a long-awaited compromise deal over certain Swiss tax practices deemed harmful by the OECD. Following two days of discussions with the Paris-based organisation’s fiscal affairs committee, Swiss officials agreed to exchange information with other countries on Swiss holding companies, one of a number of issues that has dogged the relationship between Switzerland and the OECD in recent years.

Wilhelm Jaggi, Switzerland’s ambassador to the OECD, stated that the agreement represents a “good and balanced solution for all sides.” However, he was keen to emphasise that the issue remains entirely separate from the more delicate matter of banking confidentiality.

The two parties also managed to resolve another sticking point involving the issue of administrative notes on how taxable profits are defined by firms. But a third tax issue concerned with the method by which commercial expenses are deducted from tax statements remains unresolved.

Further agreement was reached, however, in the area of transfer-pricing, and the Swiss authorities have agreed to warn domestic firms to abide by OECD guidelines when transferring profits to subsidiary companies.

It has also emerged that the OECD is to undertake further analysis of the tax regimes under which Swiss finance and leasing companies operate.

In May, 2004, agreement was provisionally reached with Switzerland over the implementation of the EU Savings Tax Directive. The Swiss government had agreed the text of the Directive, but refused to sign it until assurances were given by the European authorities that the Schengen agreement on cross-border crime would not force it to compromise its banking secrecy by reporting on tax evasion, which is not a crime in Switzerland.

The agreed compromise is that Switzerland will provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but will be exempted from providing such assistances in cases of direct taxation.

Later in the month, representatives from Switzerland and the European Union signed the nine ‘bilaterals II’ agreements covering various topics including tax and the free movement of people. They had been held up pending agreement on the Savings Tax Directive.

The agreements concern: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.

A protocol to the existing agreement on the free movement of persons was also signed, extending the agreement to the new EU Member States.

Right wing parties such as the Swiss People’s Party, opposed to the plans to cooperate more closely with Brussels on security and other matters, threatened to force a referendum on the issue, but by November it was clear that the government was going to be able to put through the necessary implementing legislation with needing a referendum, and the Savings Tax Directive duly came into force in July, 2005, with Switzerland applying a 15% withholding tax to the returns on savings of EU residents.

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