Switzerland

Andreas Staubli
PwC
Switzerland

Andreas Staubli of PwC discusses new tax developments in Switzerland, including withholding tax and stamp duty changes, and tax transparency.

Trends in Swiss taxation

Continuous efforts are being made in Switzerland to secure and even further improve the attractive Swiss tax regime as well as to protect the Swiss privacy rules on banking. This is part of a business-friendly system that helps to increase and maintain general prosperity in Switzerland. The Swiss people rely on broad entrepreneurial freedom, innovation, privacy and democratic decisions on government spending and tax levies.

In order to remain an attractive location and conserve the competitive advantages Switzerland has, but also to align certain tax regimes to EU requirements, various reforms within the different tax laws in Switzerland have already been implemented (for example, tax exemption of paid-in capital as of January 1 2011, various cantonal tax reforms to reduce tax burden) or are under discussion to be implemented in the upcoming years. Some examples of the latter are the potential abolishment of the 1% issuance stamp duty on capital contribution or the adjustments to the existing privileged tax regimes on cantonal level for holding companies as well as for companies having no or very little domestic but mostly foreign related business. These tax regimes shall be reviewed and potentially amended to cease the ongoing discussions with the EU relating to these privileges. However, it is clear that the overall tax attractiveness shall never be reduced but rather be further enhanced over the next few years. This is a very clear commitment by the political and governmental bodies in Switzerland.

Below some key Swiss tax developments are discussed in detail. First, some improvements on the taxation of financing activities in Switzerland. Second, the quite unknown Swiss stamp duty taxation rules on insurance premium payments related to international insurance programmes and periodical premium payments related to life insurance products. And last, most important, the two recent agreements on final withholding tax with Germany and the UK. Various other countries have already requested to enter into similar agreements and we expect more over the next few years. This will secure the Swiss privacy rules in banking and avoid an automatic information exchange.

Financing activities: Improvements to the "20 non-bank lender rule" for withholding tax purposes

On July 26 2011, the Swiss federal tax administration issued circular letter no. 34 on customer account balances, which replaces the respective leaflet of April 1999 and introduced a new "100 non-bank lender" rule for customer credit balances. According to the old leaflet, all Swiss enterprises with interest bearing debt (excluding bonds and medium-term bonds issued) with a total amount of SFr500,000 ($635,000) or more towards more than 20 creditors, which do not qualify as a bank according to the banking law, qualify as a bank for Swiss withholding tax purposes. As a consequence, the enterprise was obliged to levy a 35% Swiss withholding tax on all interest payments.

Circular letter no 34 now states that a qualification as a bank for the purposes of the Swiss withholding tax law requires that the enterprise has interest bearing debt exceeding CHF 5'000'000 ($6,350,000) towards more than 100 non-bank creditors. These changes are effective immediately.

Note that the "10 non-bank lender rule" for bonds and the "20 non-bank lender rule" for medium-term bonds remain unchanged. Furthermore, consider that according to art. 14a of the Swiss Withholding Tax Ordinance, enacted as per August 1 2010, debt between group companies does not count towards the thresholds mentioned above, provided that the group of companies does not have a bond issued abroad, which is guaranteed by a Swiss group company.

The transformation of the "20 non-bank lender rule" for deposits in a "100 non-bank lender rule" is a positive development and reflects the changes in market situations and the general internationalisation of businesses. The development also increases Switzerland's attractiveness for further services e.g. for cash pooling solutions or invoicing services.

Stamp duty on insurance premiums

The Swiss Federal Tax Administration (FTA) published circular No 33 dated February 4 2011 regarding stamp duty on insurance premiums. Though most of its content has already been published in the "guidance for stamp duty on insurance rates" in 2001, the circular offers certain clarifications in two areas.

These areas are international insurance programs and the definition of periodical premium payments related to life insurance products. The circular does not lead to a specific change of the FTA's practice, but clarifies certain aspects that also affect policyholders in Switzerland, especially in case of Swiss holding companies that conclude master contracts for the whole group of companies or individuals with e.g. a whole life insurance or an endowment life insurance contract.

Concerning the international insurance programs it needs to be considered that certain setups might trigger Swiss insurance premium tax consequences. It is therefore essential to differentiate between international insurance agreements based on centralised programmes and agreements based on local programmes as they lead to different tax consequences. For individuals, the issues that need to be considered in terms of life insurance contracts are whether the policy needs to be seen as a surrenderable life insurance contract and the payment frequency.

A very important aspect of the Swiss insurance premium tax law is the fact that if a domestic policyholder concludes an insurance contract with a foreign insurer, the insurance premium tax will be levied. In this case, the Swiss policyholder is bound to register himself unrequested with the FTA and to declare and settle the payment of the premium tax with the FTA. This is probably the most important aspect of the Swiss insurance premium tax that is not widely known.

In respect of international insurance programs, the circular states that the FTA differentiates between different agreement programmes and contracts in order to qualify the premium as taxable or not taxable.

Centralised programmes

A contract is made between the master insurer and a Swiss holding company. The contract includes coverage for the entire group of companies and therefore generally also includes coverage for foreign affiliated companies in case of international groups. However, this solution is only seen rather seldom in practice because of regulatory issues.

For premiums related to a centralised insurance programme, Swiss insurance premium tax is due (under the exception of Art. 22 Stamp Tax Law (STL), if:

The contract is part of a domestic portfolio of a domestic insurer.
The contract is concluded between a Swiss policyholder and a foreign insurer.

Decentralised programmes

In this case, a master contract is concluded between the master insurer and the Swiss holding company. Contrary to the centralised programme, however, the contract does not include the entire insurance coverage for all affiliated companies, but must be seen as a basic contract under which different local contracts are operated. With respect to the specific insurance coverage needs of the various subsidiaries, separate local insurance contracts are concluded.

According to the FTA, decentralised programmes consist of a master agreement and related local insurance contract. Local contracts are made to define the specific coverage on an individual basis for each affiliated company. The master contract, however, which is concluded between the master insurer and the Swiss holding company, covers the worldwide insurance coverage of the entire group of companies and generally provides for some additional insurance coverage compared with the local contracts.

For local agreements the Swiss insurance premium tax is due (under the exception of Article 22 STL), if:

The contract is part of a domestic portfolio of a domestic insurer.
The contract is concluded between a Swiss policyholder and a foreign insurer.

For master agreements:

If a reinsurance contract was made for a local contract: For the DIC/DIL-part (Difference in Condition/Limit) the premium tax is due (under the exception of Article 22 STL).
If no reinsurance contract was made for a local contract: For the entire premium (not only DIC/DIL-part) the premium tax is due (under the exception of Article 22 STL).

Of particular importance generally is that if a domestic policyholder concludes an insurance contract with a foreign insurer (not under the supervision of the Swiss Financial Market Supervisory Authority FINMA), the Swiss premium tax will still be levied. However, in contrast to the situation of a Swiss insurer where the premium tax is declared and paid by the Swiss insurance company, the Swiss policyholder is bound to register himself unrequested with the FTA and has to declare the premiums and to make the payment of insurance premium tax towards the FTA.

The new circular also includes some guidance with respect to individual policyholders concluding a life insurance contract. A life insurance contract is generally only subject to Swiss insurance premium tax if it is a surrenderable life insurance contract, financed through a single-premium payment (except if the policyholder is resident outside of Switzerland). In all other cases, premiums of life insurance contracts are generally not subject to Swiss insurance premium tax.

According to the definition in art. 26a of the Swiss Stamp Duty Ordinance, surrenderable life insurance contracts are described as life insurance contracts covering an insured event that is certain, e.g. assurance on death only, assurance on survival to a stipulated age or an earlier death as well as annuity insurance with return of premiums. In order to be classified as a premium paid on a periodical basis; the insurance contract must be financed through regular premium payments that are paid over the entire contract period. Furthermore, insurance contracts financed through the following premium payment models also qualify as periodically financed contracts:

Contracts with regularly increasing premiums;
Contracts with indexed premiums;
Insurances where during the first five years of the contract period the highest of the annual premiums does not exceed the lowest premium by 20%;
Lifelong death insurance contracts with shortened premium payments.

Not regarded as periodical payments and therefore subject to insurance premium tax are:

Insurance contracts with a duration of less than five years;
If less than five annual premiums are paid within the first five years of the contract period though it was agreed, unless the duty of payment expires through death or disability of the policyholder or if the amount payable on settlement is lower than the paid premiums.

The circular also addresses questions with regard to insurance premium in case the insurance benefit from an expiring life insurance contract is used to finance a new surrenderable life insurance contract financed through a single-premium payment. In this case, Swiss insurance premium tax would also become due. In addition, the circular also describes circumstances where an adjustment of an existing contract with periodic premiums is made so that there will be no longer a periodic premium due, but the contract will be financed through a single premium payment.

Tax transparency: DTT information exchange, FATCA and final withholding tax regime

Over the last few years we have seen a continuous trend towards more tax transparency. Information exchange is one of the most delicate topics for some EU (e.g. Luxembourg and Austria) and Switzerland's banking and asset management industry. Nevertheless, Switzerland has re-negotiated a large number of its DTTs in order to reflect the information exchange clause according to the OECD model convention. However, to secure its bank secrecy, Switzerland will not grant automatic exchange of information.

With the introduction of FATCA by the IRS, also the US will levy an extensive information exchange burden on all financial institutions. Implementation has been slightly postponed and the final rules remain to be published.

Switzerland has been proposing a Final Withholding Tax Regime to Germany and the UK. This scheme secures the Swiss bank secrecy and at the same time allows income tax collection on behalf of any foreign country that enters into such a scheme with Switzerland. Further countries shall follow at a later stage e.g. France and Italy.

On August 10 2011, Switzerland and Germany initialled such an agreement that is designed to resolve several pending taxation issues in the interest of both countries and the persons and institutions affected by the agreement. Key aspects of the agreement are: German clients with Swiss bank accounts will have two options to regularize untaxed assets held in Switzerland. They can either pay a flat rate one-off sum anonymously or voluntarily disclose untaxed assets to the German authorities.

With the anonymous payment of the one-off sum, the client will have fulfilled his tax obligation for the past in Germany. A rate of 19% to 34% of the assets will apply for the one-off payment. However, the effective rate for clients is expected to be between 20% and 25% of total assets.

For the future, the Swiss banks will deduct an amount annually on an anonymous basis from income from assets equivalent to German income tax (present rate is 26.375%). The deduction of this withholding tax will have the effect of satisfying any tax liability in Germany. If a client does not wish tax on the income of the assets to be withheld upon in the future the option also exists to authorise the Swiss bank to report his income from assets to the German Authorities through the Swiss Federal Tax Administration and to disclose this income in the German tax return.

On August 24 2011, Switzerland and the UK initialled a Final Withholding Tax agreement too. The agreement with the UK is largely the same as the agreement with Germany. Differences are mainly triggered through the different tax systems. The agreement will also provide for special rules for "non-UK domiciled individuals", i.e. for individuals living in the UK but without having their permanent home in the UK.

UK clients with Swiss bank accounts will have the option to regularise untaxed assets held in Switzerland through the payment of a flat rate one-off sum anonymously. Clients who do not agree to such payment may provide authorisation to the disclosure of the data required for an individual taxation to the competent UK tax administration. UK clients who are not prepared to either pay the flat rate one-off sum or to be taxed individually in the UK have to close their accounts and deposits in Switzerland. Within two months after the agreement has come into effect, the Swiss banks will provide further information on the content of the agreement and the resulting rights and obligations to their UK clients to allow them to take a decision.

With the anonymous payment of the one-off sum, the client will generally have fulfilled his tax obligation for the past in the UK (there are some exceptional cases where the UK tax liability is not considered as fulfilled and the flat rate one-off payment will just be considered as an on-account payment). A rate of 19% to 34% of the assets will apply for the one-off payment; the individual rate depends on the duration of the client relationship as well as on the initial and final amount of the assets.

For the future the Swiss banks will deduct an amount annually on an anonymous basis from income from assets. The tax rates depend on the kind of income and gains and are slightly lower than the corresponding UK marginal tax rates in order to compensate that a tax at source is levied earlier in time. Interest income will be taxed at 48%, dividend income at 40%, capital gains at 27% and other income at 48%. If a client does not wish tax on the income of the assets to be withheld upon in the future, the option also exists to authorise the Swiss bank to report his income from assets to the UK tax administration.

Both treaties will be signed by the respective governments and subsequently ratified by the respective parliaments, after which they enter into force. Presently expected date for entering into force: January 1 2013.

Other noteworthy aspects of both agreements are:

Decriminalisation of banks, bank employees and bank clients by means of regularising the past.
Swiss banks have committed to making an advance payment of SFr2 billion related to Germany and SFr500 million related to the UK after the agreements come into effect. This payment will be offset against tax payments made under the Final Withholding Tax regime.
Simplification of cross-border business/easier market access for Swiss banks in Germany and the UK.
The Swiss FTA will be solely responsible for the correct application of the final withholding tax. However, the foreign tax authorities are entitled to monitor the correct implementation of the foreign final withholding tax by Switzerland through random queries.

The agreements will allow German and UK resident clients with bank accounts in Switzerland to be fully tax compliant for the past and the future while maintaining their privacy at the same time. German clients will have various options to choose from to regularise the past and for future taxation of assets held in Switzerland and Swiss banks will have to implement the operational capabilities to deal with the regularisation of the past and the final withholding tax going forward.

Andreas Staubli (andreas.staubli@ch.pwc.com) is a partner and the leader of the tax and legal service line of PwC in Switzerland