Corporate tax in Switzerland applies to anyone running a Swiss company, whether they’re setting up businesses as limited companies, sole traders, or work as part of a partnership.
All businesses registered in Switzerland pay Swiss corporate tax, while limited tax liability is applied to businesses with a permanent presence.
What you’ll pay depends on your business structure, so it’s essential to make sure you know the rules.
Here is an overview of the Swiss corporate tax system
Swiss Taxation Levels
Resident companies are subject to cantonal/communal corporate income taxes, federal corporate income taxes, and cantonal/communal capital taxes.
Company Residence / Non-Residence
If either a company’s seat or its place of effective management is located in Switzerland, then it is considered a resident taxpayer under Swiss domestic tax laws. In general, resident companies are subject to worldwide taxation, excluding income from permanent foreign establishments or income from foreign real estate.
Swiss corporate tax may apply to non-residents if they:
• hold partnership interests in a Swiss partnership; or
• hold real estate in Switzerland; or
• have mortgage claims secured by Swiss real estate; or
• deal with Swiss real estate or act as its broker.
Taxes are imposed on non-resident companies only based on their income and assets in Switzerland. In the case of a Swiss permanent establishment of a foreign corporation, profits are calculated using the direct method, that is, from the books of the permanent establishment.
Taxes on corporate income
The federal and cantonal/community governments both collect corporate income tax. Federal corporate income tax amounts to 8.5%. However, since taxes are deductible from a company’s taxable income, the effective rate of federal corporate income taxes amounts to 7.83%. Tax rates in cantons are quite different; they average around 13%.
Taxes on capital
Capital taxes are levied on a company’s fully paid-in share capital and its reserves (net equity) at the end of each fiscal year. It varies from canton to canton; on average, it is around 0.4%. Tax privileged companies pay reduced taxes.
Dividends received by Swiss corporations and Swiss branches are deductible both at the federal and cantonal/communal levels. In that case, the corporate income tax is reduced in proportion to the net dividend income from these participations. Therefore, such dividend income is virtually tax-free.
Gains on capital
Qualified participation disposed of after one year also qualifies for the dividend received deduction on a federal, cantonal, or local level.
Privilege of holding
Moreover, all cantons grant holding companies’ privileges, which entails exemption from federal and state income tax on income from participation other than dividends. The holding company privilege generally requires:
• a statement in the company’s articles of incorporation stating that participations are the company’s sole or primary purpose; and
• at least 2/3 of assets are qualified investments; or
• Two-thirds of the income derives from eligible participation.
Due to this, pure holding companies pay federal corporate tax on only the income that is not eligible for the federal dividend received deduction.
Domiciliary companies are afforded tax privileges in all cantons. Domiciliary companies predominantly perform their activities abroad, while their administrative activities are exclusively performed in Switzerland. Tax privileges for domestic companies are available only at the cantonal/communal level, however, not the federal level.
Participation-related income is tax-free. Taxable income from foreign sources is only a small portion, depending on the importance of the administrative activities in Switzerland. The tax base determined in this manner is subject to ordinary corporate income tax rates in the canton/community. Meanwhile, Swiss source income is fully taxable. Expenditures incurred by a business are deductible from the income in which they are incurred.
Swiss auxiliary companies may perform limited business activities. The foreign income of a business should comprise at least 80% of its total income. Thus, Swiss revenue should not exceed 20% of total revenue. In addition, 80% of the expenses must be related to overseas business activities. Tax treatment of auxiliary companies is similar to that of domestically incorporated companies, with the exception that foreign source income is included in the tax base according to the importance of the business activities conducted in Switzerland.
Losses from taxes
Losses can be carried forward for seven years for federal and cantonal/communal tax purposes but cannot be carried back.
Rules of thin capitalization
An asset base test determines whether a company is sufficiently financed under federal thin capitalization guidelines. There is a limit to the amount of debt from related parties that may be used to finance each type of asset. Federal corporate taxes do not deduct interest on related-party debt over the maximum equity-to-debt ratio.
Few cantons expressly provide for minimum equity requirements. Most cantons follow the federal guidelines for thin capitalization. Other cantons use a debt-to-equity ratio of 6:1.
There are no transfer pricing laws in Switzerland. OECD transfer pricing methods are accepted and applied by Swiss tax authorities. A company must maintain arm’s length relationships when transacting with affiliated companies.
Stamp tax issuance
An issuance stamp tax of 1% is imposed at the federal level on both the issuance and the increase of participation rights, whether free of charge or for consideration. Amounts exceeding CHF 1,000,000.00 remain exempt from taxation. Swiss branches, however, are exempt from the issuance stamp tax.
Tax on transfer stamps
A transfer stamp tax is imposed on the transfer of title to taxable securities for consideration when at least one of the parties to the transaction or an intermediary involved qualifies as a domestic securities dealer.
The Federal withholding tax
Federal withholding tax is imposed at the rate of 35% on profits and liquidation proceeds distributed by Swiss joint-stock companies. Company distributions are payments made to shareholders other than the repayment of capital. The Swiss branch of a foreign company does not have to withhold tax on earnings distributed to its foreign headquarters.
In Switzerland, the Savings Tax Agreement entered into force on July 1st, 2005, replacing the Parent-Subsidiary Directive and the Interest & Royalty Directive and abolishing withholding taxes on cross-border dividends and interest and royalty payments.
Value Added Tax
Vat at 7.7% is the standard rate. In general, the tax base is the consideration received by the contracting party.
The federal, cantonal, and communal taxes must all be reported under one tax return for each fiscal period.