On 17 December 2021, the Swiss Parliament moved forth to amend its Withholding Tax Act. To further reinforce the country’s debt capital market and boost its reputation as an attractive jurisdiction for group financial activities, authorities have agreed to abolish withholding tax on bond interest payments. The Withholding Tax Reform also includes changes to the Swiss Stamp Tax Act. The critical changes are expected to be enforced on 1 January 2023 but may still be subject to a popular vote prior to its actual enactment.
An Introduction to the Switzerland Withholding Tax Act
Switzerland imposes a 35% withholding tax on bond interest payment among other things. Given the high withholding tax rate, bonds issued by Swiss legal entities are deemed unattractive by foreign investors. It is also the reason why Swiss-based multinational companies prefer accessing debt capital markets through the issuance of bonds of foreign group companies, with their respective Swiss-based groups providing support, when needed.
Swiss policymakers have long wanted to reform the existing Withholding Tax regime on bond interest payments in order to reinforce the country’s debt capital market competency. There were a few proposals made in the past but received mixed reactions from legislative authorities.
It was the Swiss Federal Council that formulated a new legislative initiative. The Act to Strengthen Debt Capital Markets (ASDCM), features the abolishment of the Swiss withholding tax on bond interest payments for all bonds issued from 1 January 2023 onwards.
The Swiss Parliament finally approved ASDCM on 17 December 2021 with the enactment of changes to be applied starting 1 January 2023 and certain changes to be enacted at a later date. The ASDCM not only features the abolishment of Swiss withholding tax, but also delineates other measures such as the collection of withholding tax on manufactured payments and amendments on the Swiss Stamp tax act.
Act to Strengthen Debt Capital Markets Main Features
- Abolishment of Swiss WHT on bond interest payments without replacement.
- Once enacted, the only interest payments that will continue to be assessed with Swiss WHT are interest payments on bank deposits made to Swiss resident banks and insurance companies.
The Impact of Withholding Tax on Bond Interest Payments to Switzerland’s Financial Climate
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Significant positive impact on the country’s debt capital and bank debt markets.
When it comes to the bank debt market, prevailing facility agreements with Swiss borrowers feature the ten non-bank and twenty non-bank rules.
- The ten non-bank rule limits the total amount of non-bank lenders to ten.
- The twenty non-bank rule necessitates a borrower’s total number of non-bank creditors for all outstanding debts critical to qualify for debenture not to exceed twenty.
The ten non-bank and twenty non-bank rules are expected to become obsolete once the abolishment of Swiss WHT on bond interest payments is enacted. There are many benefits to this change and includes:
- Increased possibility to widen facility agreements, which in turn increases the attractiveness of the Swiss debt markets for alternative lending companies, such as those that are involved in private debt funds.
When it comes to debt capital markets, the bonds issued by non-Swiss group of companies but guaranteed by a Swiss group entity that involves the adherence to flowback rules are expected to become obsolete once the abolishment of Swiss WHT finally kicks in.
Transitional Provisions
- It is important to bear in mind that withholding tax will only be abolished for new bond issues. This means that nothing will change for bonds that were already assessed with withholding tax before and at the time of its enactment.
- Swiss WTH will only be applicable to bonds that were released by a Swiss-based issuer and are subject to withholding tax.
- Foreign bonds issued can be migrated to Switzerland from the date on which the amendment is enacted, without this action had any tax implications onwards.
- Limitations on the use of proceeds will be obsolete once the abolishment of Swiss WTH enters into force.
Withholding tax on Manufactured Payments
Manufactured payments in Switzerland occur in two forms:
- Under securities borrowing arrangements, wherein a borrower is required to pay a lender any income, such as in the form of dividends and interest payments received from a security issuer
- Under securities sold before the ex-date but transaction closing happens after the ex-date.
Traditionally, the administrative practice of the Swiss Federal Tax Administration (SFTA) necessitates Swiss custodians deduct withholding tax on manufactured payments. This provision was introduced to prevent situations wherein more Swiss withholding tax is refunded than actual withholding deductions made.
In 2017, the Swiss Federal Supreme Court concluded that the Withholding Tax Act does not have any legal basis to deduct withholding tax on manufactured payments.
With the Act to Strengthen Debt Capital Markets, the country’s legislative body has established a legal basis to assess Swiss WHT on manufactured payments.
- Withholding tax is owed by the person who credits, pays out, offsets, renumerates, or transfers manufactured payments will be subject to withholding tax. In most cases, the person assessed with WHT is the securities custodian.
- Under the new Swiss WHT rule, non-Swiss custodians of Swiss securities will be deducted withholding tax on manufactured payments.
The provisions will be made clear once the administrative guidance from the Swiss Federal Tax Administration (SFTA) are published.
Swiss Withholding Tax on Distributions of Collective Investment Schemes
- Income gained from domestic collective investment schemes will still be subject to withholding tax.
- Exemption on withholding tax payment will be implemented for interest received by collective investment schemes.
- Interest distributed by collective investment schemes will be free from withholding tax assessments.
- Partial exemption for foreign income of collective schemes was rejected during consultation.
Pragmatism Provisions for Withholding Tax
- No withholding tax shall be assessed, and no refund shall be refused for errors even when a taxpayer can provide proof that no tax loss has results from non-compliance with legal requirements.
Amendments to Swiss Transfer Stamp Tax Act
The 0.15% transfer stamp tax duty on secondary market transactions involving domestic bonds will be abolished. However, the 0.3% transfer stamp duty on secondary market transactions involving foreign-issued bonds will continue in case a domestic securities dealer plays the role of intermediary.
- Swiss and non-Swiss debt securities no longer than twelve months will be exempt from Swiss transfer stamp tax.
- Provides transfer stamp tax exemption to issuance and redemption of units in non-Swiss investment funds holding debt instruments with less than 397 days maturity.
Abolishment of Swiss Transfer Stamp Duty on The Sale of Qualified Participations
- Purchase and sale of participations in domestic and foreign participations are 0.15% and 0.30 respectively in case a domestic securities dealer act as intermediary.
- A domestic holding company may also qualify as a securities dealer.
- Brokerage, as well as purchase and sale of participations of 10% or more will no longer be assessed with stamp duty, if the participation is qualified as a fixed asset under Art. 960cd CO.
Entry into Force on 1 January 2023
Unless a referendum is held against the bill, the abolishment of Swiss withholding tax on bond interest payments will be enacted on 1 January 2023. As major political parties have clearly expressed their support for a referendum, it is highly likely that Swiss voters will have a final say on the withholding tax reform. In the case of a failed referendum, bond interest payments issued by Swiss resident issuers will not be subject to Swiss WHT after 1 January 2023. On the other hand, payments on bonds issued by a Swiss issuer before 1 January 2023 will continue to be assessed with withholding tax. The enactment of the other parts of the Swiss withholding tax on bond interest payments will fall under the discretion of the Swiss Federal Council but is not expected to happen any time before 1 January 2023.
If you have any questions related to the abolishment of Swiss withholding tax on bond interest payments, please contact our Damalion experts today.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
