In the current withholding tax system, interest payments on Swiss issued bonds are subject to a withholding tax of 35%, with no immediate exemption at source mechanism available. As a consequence, Swiss companies regularly issue bonds through foreign group companies. Current withholding tax rules may even re-qualify a foreign issued bond as Swiss issued in certain cases. The complex withholding tax rules in place have so far prevented that Switzerland develops as a hub for debt financing activities.
Originally, in its discussion draft of April 2020 the Federal Council proposed to only exempt Swiss corporate and foreign investors from withholding tax on interest bearing investments and to change from the current debtor to a paying agent principle for Swiss resident individuals. The dispatch now largely abolishes withholding tax on interest bearing investments (also for Swiss resident individuals) except for Swiss bank deposits. The debtor principle is retained. Other income from capital assets such as dividends continue to be subject to a withholding tax of 35% (with the possibility of a full or partial reduction/refund for foreign investors under any applicable treaty). The key elements of the dispatch of the Federal Council are as follows:
- Abolishment of withholding tax: The reform will largely abolish withholding tax on interest payments with the exception of interests on Swiss bank deposits paid to Swiss resident individuals. With the abolishment, the Federal Council intends to make it easier for domestic companies to issue bonds on the capital market and to enhance group financing activities, as the strict withholding tax rules on interest payments will no longer be relevant. Secondly, taxation of foreign investors is nowadays secured through the automatic exchange of information, which makes the levy of a withholding tax as safeguard against tax evasion obsolete.
- Application of revised rules: Once enacted, the new withholding tax rules will apply to interest payments which become due after the date of the entry into force of the proposed legislation. Interest payments on existing bonds will thus fall under the new regulation if the due date of such payments is after the entry into force of the new rules. Additionally, this also means that certain restrictive provisions in the credit documentation (e.g., assignment restrictions and use of proceeds limitations) no longer have to be adhered to after the revised law has entered into force.
- Abolishment of securities transfer stamp tax on domestic bonds: To further support the withholding tax reform and strengthen the Swiss securities and asset management business, the securities transfer stamp tax of 0.15% on secondary market transactions of domestic bonds shall also be abolished. This will make it more attractive for investors to trade domestic bonds through a domestic securities dealer as no securities transfer stamp tax will be levied. Today, securities transfer stamp tax can be mitigated by carrying out a transaction through a foreign securities dealer. The transfer stamp tax of 0.3% levied on the transfer of foreign issued bonds will however remain applicable in the future (if transaction carried out through domestic securities dealer).
The Swiss parliament is expected to discuss and (potentially) approve the draft legislation still in 2021. A revised Swiss Withholding Tax Act – as approved by the Swiss parliament – may however not enter into force before 1 January 2024, as several ordinances regarding the implementation of the above mentioned changes will have to be drafted by the Federal Council.