Overview
At 35%, the Swiss withholding tax on investment income such as dividends of corporations and interest on bonds is high in comparison to international standards. Swiss income recipients are generally entitled to a full relief from withholding tax if they declare (individuals) or record (legal entities, corporations) the income received correctly, if they are the beneficial owner of the income and if there is no tax avoidance.
If the income recipient is resident abroad, his entitlement to tax relief is determined by international treaties, i.e. usually double taxation agreements (DTAs), which Switzerland has concluded with partner states. Switzerland has a large number of DBAs which provide for a full relief from withholding tax or least a reduction of the tax.
Income recipients domiciled abroad are only entitled to treaty benefits if, inter alia, the income recipient is the beneficial owner of the income and if there is no treaty abuse.
Beneficial ownership
In recent years, there have been several landmark court decisions in Switzerland on beneficial ownership. Beneficial ownership of the income recipient is denied if he cannot freely dispose of the income because he has a legal obligation to pass the income on. However, a “de facto obligation” in the sense of economic indications from which an (indirect) legal obligation to pass on the income can be inferred is also considered to be harmful (see the recent decision of the Federal Administrative Court A-2121/2020 of 4 September 2023, which dealt for the first time with beneficial ownership in the case of bond interest; the unsuccessful interest creditor appealed the decision to the Federal Supreme Court).
Substance and abuse
With regard to abuse, the Federal Tax Administration (“FTA”) first examines whether the foreign income recipient has sufficient substance. The review is based on equity-funding, personnel, infrastructure and function, with one or more criteria having to be met depending on the ownership structure of the income recipient (e.g. group company, personnel holding). There is no official guideline from the administration on the subject. In addition, over the years, the practice of the FTA has developed specific practices (so called old reserves practice, deemed liquidation, international transposition) which may lead to a full or partial denial of withholding tax relief for a (new) income recipient, even if the income recipient has sufficient substance.
The restrictions on withholding tax relief do not become apparent at the time of the transfer of the investment, but only when future distributions are made. It is important to avoid unpleasant surprises. (Future) income recipients – whether resident in Switzerland or abroad – should therefore get a comprehensive picture of their refund position before taking over assets whose income distributions are subject to Swiss withholding tax (e.g. participations in Swiss companies). This must also include a review of the refund position of the previous owners.