Switzerland

Andreas Staubli and Robert Desax
PwC
Switzerland

Switzerland will emerge strengthened from the present rather strained fiscal and economic situation, believe Andreas Staubli and Robert Desax of PricewaterhouseCoopers

Attractive location

Continuous efforts are being made in Switzerland to generate a business friendly system that helps to increase and maintain general prosperity. As a country lacking raw materials Switzerland has to rely on broad entrepreneurial freedom and innovation. Its political system is therefore characterised by a high degree of business friendliness. The attractiveness of the country is reflected in the presence of numerous multinational groups, which employ highly qualified staff, which in turn has a positive effect on the regional economy concerned. Especially in the last few months numerous companies listed on stock exchanges in the US and the UK have decided to relocate their head offices to Switzerland.

A tumultuous year

It is already clear that for Switzerland 2009 will go down in the annals as a year of challenge. Since the Liechtenstein affair early in 2008 and the initiation in the summer of 2008 of the proceedings against UBS by the US Internal Revenue Service it has become obvious that a somewhat more bitter wind would sweep the smaller financial centres. The increased financing needs of several states that have become acute with the culmination of the economic crisis accelerated this development enormously in the second half of 2008.

Autumn 2008: the real political storm threatened when at a conference of several OECD member states in Paris specific demands for closer international cooperation on tax matters were formulated.
Beginning of 2009: UBS admitted in a deferred prosecution agreement to the US tax authorities that it had infringed US tax laws.
March 2009: the perfect storm finally burst over Switzerland, which resulted in the country withdrawing its reservation about article 26 of the OECD Model Convention.

That provision foresees an exchange of information on request, if the information requested is foreseeably relevant for carrying out the provisions of the convention or the administration or enforcement of domestic laws. As a result Switzerland was placed on the grey list of the states, which, while having accepted the OECD standard, have not yet implemented it.

In the past Switzerland had always been willing to release information covered by Swiss bank secrecy only in cases of tax fraud, that is, in particular when the taxpayer had falsified documents intentionally. In the future Switzerland will exchange information more freely than previously. On the one hand this represents a very significant change in Swiss fiscal policy. On the other, as a result, in future a major latent pressure will be released from the business location. Switzerland has in the meantime revised numerous double taxation conventions (DTC) with other states. By the end of July a clause about the exchange of information according to the OECD standard had been installed in the DTCs with these 12 states: Denmark, Luxembourg, Norway, France, Mexico, US, Japan, the Netherlands, Poland, UK, Austria and Finland. It is only a question of time before the OECD standard is also included in the DTC with Germany, particularly because that is Switzerland's most important trading relationship. It will soon be possible to sign the conventions in question. It has, however, to be expected that at least in principle a popular referendum will be held to consider the new exchange of information. It is therefore anticipated that Switzerland will also soon fulfil the criteria for being struck off the OECD's grey list.

Nevertheless it is also clear that in future Switzerland will in no case grant an automatic exchange of information. Such an automated process would be diametrically opposed to the Swiss understanding of the role of the state and taxation that permits intervention by the state in private matters only in specific exceptional cases and under clearly defined legal conditions. For this reason Switzerland will be interested in demonstrating its goodwill and, particularly with European countries, quickly finding bilateral solutions that satisfy all involved.

This development must be distinguished from the dispute with the EU about certain cantonal corporate taxation rules. The European Commission believes that Switzerland must observe the single market competition rules and sees in the taxation of certain types of companies in Swiss cantons an unlawful state aid that infringes the free trade agreement between the European Community and Switzerland concluded in 1972. The Swiss government, on the other hand, has always held that the European competition rules cannot apply to the nonmember Switzerland and that in addition the free trade agreement is not applicable to direct taxes. Delegations from both parties have held talks about this question and the outcome is still open. Before the summer break, however, it became apparent that a settlement of the dispute is not far away; at the end of 2008 the Swiss government had announced that it intended to introduce important improvements to the Swiss tax system that would explicitly take into account the concerns of the EU. In particular the pure letterbox companies will be abolished and holding companies will be prohibited from carrying on business, even abroad. Also under discussion is a minimum taxation of these privileged companies. Representatives of the European Commission have hinted that the Swiss proposals may be acceptable to them.

Tax reforms

The previously mentioned reform will also include further important elements. Duties that are especially unfriendly to business, such as stamp duties on equity and debt and tax obstacles to group financing, are to be eliminated. The cantons may abolish the annual tax on equity. It is expected that such a reform is likely in the short term to cost something in the form of tax losses. But it is clear that such reforms can in the long run only be worthwhile, because they attract companies and promote entre-preneurship and the creation of jobs. It is the unanimous opinion of business and politics in Switzerland that low taxes are essential for sound economic growth. Because of the difficult economic situation in which we find ourselves today, it is essential to continue to ensure politically favourable conditions for productivity and performance. Out of these considerations important reforms have also been introduced or discussed for individuals:

Some time ago Canton Obwalden made a move to introduce a proportional rate (flat rate tax) for income tax purposes.
Canton Thurgau: there will be a vote in the autumn on the introduction of a flat rate tax of some 25% to 29% (depending on the location).
Canton Obwalden: the first canton to introduce the flat rate tax for individuals; the income tax burden lies between 23 % and 25 %.
Canton Uri: has already moved to a flat rate tax system of about 25%.
Cantons Schwyz and Zug: the income tax burden lies between 20 % and 25%. For Cantons Obwalden and Appenzell Ausserrhoden: have the lowest ordinary corporate income tax rates – 12.66%.

Value added tax

In the course of the VAT reform a significantly simpler VAT law will be phased in to become effective from January 1 2010. The completely revised new law aims for an optimal VAT: the improvement of legal certainty and introduction of numerous significant simplifications. The government expects the saving in tax collection administrative costs to be more than 10%.

The introduction of the revision of the VAT law is the first of two parts of the Swiss VAT reform package. The second part planned includes the abolition of some 20 to 25 existing tax exemptions and the introduction of a single tax rate of 6.1%.

The most important changes in the Swiss VAT law are:

Input tax deduction: In principle, the input tax deduction is linked to a business activity as opposed to taxable revenues. From January 1 2010, the VAT deduction associated with the cost of acquiring, managing and selling stock held by holding companies will be increased. Furthermore, dividend income will explicitly not lead to a reduction of the input VAT deduction.
Group taxation: VAT group taxation will become more flexible. In addition, joint liability for the VAT debts of the entire VAT group will terminate for group members when they leave the VAT group.
Tax liability: In principle, all companies will be liable to tax, but will not have to prepare a VAT return, if the taxable turnover limit of Sfr100,000 ($94,000) is not exceeded (for example, a company domiciled abroad will no longer have to register for VAT purposes in Switzerland anymore, if its business activity in Switzerland will consist exclusively of maintenance services).
Place of supply of services: Harmonising with the VAT package inserted into EU Directive 2006/112/EC, the place of business of the recipient is to apply as the new catch-all rule for services (for example, the new rule will also apply to cargo services).

It is recommended that companies with business activities in Switzerland react to these VAT law changes by the end of this year to benefit from them and to ensure compliance with Swiss VAT legislation (for example, adjust their enterprise resource planning (ERP) system, review rulings and business models). The introduction of the new Swiss VAT law will in general contribute to strengthening Switzerland as a business location.

Alternative investment fund managers

Switzerland has always been an interesting location for managers of alternative investment funds. As several newspapers have reported over the last few months, managers of alternative investment funds have recently become even more interested in Switzerland. Their interest arises in particular because various jurisdictions have increased their tax rates. The UK for example has increased the income tax rate to 50% for wealthy individuals whose annual salary is more than Sfr250,000 ($236,000). Furthermore, a draft of a new EU directive has been published, the intent of which is to impose much tighter regulations on EU fund managers.

In 2007 Switzerland introduced a new Collective Investment Scheme Act and in spring 2009 the Swiss Federal Tax Administration published circulars to outline their practice. As Switzerland offers various attractive and diverse taxation models for companies and individuals, it is especially suitable for alternative investment fund managers. These corporate taxation models consist of, for example, different tax status or fee and profit -plit models allowing favourable taxation. Furthermore, some cantons also grant business incentives for alternative investment fund managers relocating to Switzerland, provided that the new business has particular economic relevance for the Swiss region. Like for companies, Switzerland is an equally attractive location for individuals. Some advantages of such individual taxation are , for example, lump sum taxation, partial taxation of dividend income or possible realisation of tax exempt capital gains derived from the fund's investment resulting from a participation in the fund.

The confirmed tax practice and in particular the possibility of obtaining legally binding tax rulings ensures legal certainty for investors and investment funds. In view of the new developments in Europe there are even more good reasons for alternative investment funds and their managers to move to Switzerland.

In the last few months the Swiss system has been severely tested. The pressure from abroad was aimed at some of the most sensitive areas of the business location. Swiss decision-makers are trying to find legal and political solutions, which on the one hand satisfy the sceptics abroad and on the other, continue to enhance Switzerland's competiveness as a business location. It is clear to all those involved in Switzerland that the economy needs stable and predictable general conditions if it is to prosper. It is essential, particularly today, that performance and productivity continue to be worthwhile. One can therefore be confident that Switzerland will emerge strengthened from the present rather strained fiscal and economic situation.

Andreas Staubli (andreas.staubli@ch.pwc.com) and Robert Desax (robert.desax@ch.pwc.com) of PricewaterhouseCoopers in Switzerland