Switzerland: Under pressure, but strong

Monday 15th March 2010

Almost unscathed by the economic crisis and despite the difficulties experienced by UBS and the Swiss financial market as a whole, the Swiss economy is riding high. At the 2009 World Economic Forum’s “Summer Davos” in China, Switzerland was named the most competitive economy in the world. At the same time, the US won their battle against UBS regarding the disclosure of tax relevant information on American citizens.

This issue has put Switzerland under pressure. The banking secrecy is in the focus of neighbouring countries and the USA. Simultaneously the Swiss government is fighting off attempts by the EU to abolish attractive tax regimes accessible to foreign companies. However, Switzerland is strong and is able to weather the current rough seas. Both efficient handling of the issues by the Swiss government and an ongoing improvement of the Swiss tax system help the country to maintain its position as an attractive place for investors, says Stephan Pfenninger from Tax Partner Taxand in Zurich.

Lower corporate income tax rates and other tax benefits
Over the last few years, many cantons have dramatically reduced their corporate income tax rates to the lowest ever level. In a lot of cantons the income tax rates now range between 12 and 15 percent, and this process will continue. At the same time, important federal corporate tax reforms were implemented. The Swiss tax take is amongst the lowest in the world, says Stephan Pfenninger. This reflects from an analysis made by Taxand (with respect to taxation of property income) in which Switzerland ranks top, along with Cyprus, Luxembourg and India.

The Swiss government has already announced the next Corporate Tax Reform. One of the topics is the abolition of the one percent one-time capital duty on paid-in equity and the introduction of favourable rules for intra-group financing.

Preserving its attractive corporate tax regimes
Historically, the Swiss government has attempted to design tax rules that are also suitable for foreign investors, e.g. holding companies or mixed companies. Indeed so-called ‘foreign-orientated businesses’ enjoy a more favourable tax regime under the rules for mixed companies than domestically-orientated ones. Mixed companies may attract a tax rate as low as six percent to ten percent depending on their specific activities. The EU takes the view that the favourable treatment of Swiss holding companies and mixed companies conflicts with the free trade agreement agreed by the European Community and Switzerland. Even if Switzerland strongly disagrees, the Swiss government may compromise, due to the pressure from the EU. However, if any refinements will be made, Stephan Pfenninger is certain that Switzerland, like other European countries whose tax systems have been challenged by the EU, will end up with a regime that will continue to be highly attractive to foreign investors.

Dividend taxation and other benefits for individuals
One of the cornerstones of the last tax reform concerns the taxation of dividend income incurred by individuals. Under the new rules private investors holding at least 10 percent of the shares in a Swiss or foreign company get a discount of approximately 50 percent on the income tax on the dividend income. This is an enlightened reform that satisfies a long lasting demand of individual investors, says Stephan Pfenninger.

Swiss banking secrecy and tax treaties
In the context of the current discussions on banking secrecy, Switzerland adopted the OECD standard with a view to administrative assistance in tax matters. This will allow the exchange of information with other countries on a case to case basis upon a well-founded request. Switzerland negotiated the revision of various existing double tax treaties and managed to be removed off the “grey list” established by the OECD. In general the Swiss government wishes to give support regarding the avoidance of tax frauds and the misuse of the Swiss banking secrecy, without weakening the latter as such.

Stephan Pfenninger, Tax Partner, Zurich, Tel:+41 44 215 77 77 - www.taxpartner.ch

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