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Swiss withholding tax law reform: WHT on bond interest abolished as from 2023?

Luca Poggioli
Director Tax & Legal Services, PwC Switzerland

On 17 December 2021, the Swiss Parliament has approved an amendment of the Swiss Withholding Tax Act. Within the context of strengthening the Swiss debt capital market and to increase Switzerland‘s  attractiveness for group financing activities, the Parliament has abolished Swiss withholding tax on domestic interest on bonds. Only interest paid or credited to Swiss resident individuals on bank or insurance accounts shall remain subject to Swiss withholding tax. The Parliament has also introduced a new basis for the levy of Swiss withholding tax on manufactured or compensation payments made on Swiss underlyings. This new rule shall apply to both domestic and foreign parties paying out such payments. Furthermore, the current reform shall also further strengthen and stimulate the securities and asset management business by abolishing Swiss Transfer Stamp Tax on domestic bonds and on the issuance of specific foreign money market funds. The amended law is subject to facultative referendum, which is likely to be called by the socialist party.

Withholding Tax Reform

Currently, a withholding tax of 35 % is levied on interest payments on domestic bonds. Switzerland is therefore less attractive as an issuing location by international standards. Swiss groups very often mitigate this withholding tax by issuing their bonds through a foreign group company, subject to certain anti avoidance rules. Intra-group financing activities are also frequently not carried out in Switzerland because of the withholding tax. The Parliament has therefore introduced the following amendments to Swiss withholding tax and transfer stamp tax:

Abolition of withholding tax on interest income

The withholding tax on domestic interest is to be abolished to a great extent. Regarding the application of the reform to domestic bonds, the reform foresees a full application of the exemption only for bonds issued as for the coming into force of the new rules (expected as of 1 January 2023 due to the potential call for a facultative referendum). Domestic bonds issued before this date will remain subject to Swiss withholding tax until redemption. This will lead for a certain period of time to a parallelism of systems (bonds with and without Swiss withholding tax deduction on coupons).

However, this abolition does not apply to withholding tax on interest on customer deposits held with banks and insurance companies by natural persons domiciled in Switzerland.

Abolition of the transfer stamp tax on domestic bonds

In order to make trading in domestic bonds more attractive, the domestic bonds shall no longer be treated as taxable securities for Swiss transfer stamp tax purposes. Technically speaking this means that domestic bonds including domestic money market papers will no longer be in scope of stamp tax and hence also no longer count towards the CHF 10 million threshold for the qualification as “other” Swiss securities dealer. Foreign bonds will remain taxable securities subject to Swiss transfer stamp tax for secondary market transactions whilst foreign money market papers can benefit from the currently implemented product exception (whilst still counting towards the CHF 10 million threshold).

Introduction of withholding tax on compensatory payments

Swiss Parliament has introduced a new legal basis for the levy of Swiss withholding tax on compensatory payments made on payments subject to Swiss withholding tax, with the main application clearly related to Swiss dividend payments. The introduction of the new rule provides for a legal basis for such a levy of Swiss withholding tax, which is currently based on the practice established by the Swiss Federal Tax Administration (e.g. with regard to securities lending with Swiss underlyings according to circular letter no. 13 on securities lending), only. This new rule may also impact domestic and foreign issuers of structured products with Swiss underlyings subject to Swiss withholding tax. It has to be noted that the legal basis is worded to have extraterritorial application, i.e. also foreign payors of compensatory payments over Swiss securities subject to Swiss withholding tax would be seized by the new rule. Exact implementation will be subject to further discussion and implementation.

Other impact on Swiss transfer stamp tax

Within the context of the current reform, Swiss Parliament has also introduced a new transactional exemption for Swiss transfer stamp tax for investments into specific foreign money market funds. The issuance of foreign money market funds is currently not exempt (other than the issuance of Swiss money market funds) and does lead to additional transactional costs for (corporate) investors wanting to place excess liquidity into foreign currency denominated money market funds as short-term investment. Lastly, a new general transactional exemption rule shall be introduced for the transfer of qualifying participations of 10%.

Timing

The above described reforms are scheduled to become applicable as of 1 January 2023. However, further to the quotes made by members of the Parliament during the drafting process, there is a high likelihood that the facultative referendum will be called against the reform. In this case, a public vote would be necessary prior to having the reform coming into force.

Overall assessment of the reform

With the withholding tax reform now presented, the Parliament is making a new, promising attempt to strengthen Switzerland's attractiveness as an issuing location of bonds and for the establishment of group financing activities. Compared to previous reform efforts, this proposal is characterized by a complete exemption of domestic bonds from withholding tax, which is appropriate in our view. Compared to the originally planned paying agent principle on interest payments, the reform should be implementable for banks and insurance companies with a manageable effort. The so-called 10/20 non bank lender rule is therefore no longer needed for Swiss withholding tax purposes, however, the rule is still relevant for Swiss securities transfer tax purposes to determine whether a foreign issued instrument qualifies as foreign bond subject to Swiss transfer stamp tax on secondary market transactions.

The exemption of domestic bonds from transfer stamp tax is also to be welcomed and should also increase the attractiveness of Swiss bonds. The exemption of specific foreign money market funds from transfer stamp tax upon issuance will also add to Switzerland’s attractivity as a finance hub.

The new rule on the levy of Swiss withholding tax on compensatory payments provides for a clear legal basis for such levy, which was missing so far. As the current wording of the provision seems to imply an extraterritorial application, the exact mechanics of application should in our view be further detailed in an ordinance or at least in a circular letter to be issued by the Federal Tax Administration. This may however still take time, notably in view of the potential public vote on the reform.

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Contact us

Martin Büeler

Martin Büeler

Partner, Leiter FS Tax, PwC Switzerland

Tel: +41 58 792 43 92

Luca Poggioli

Luca Poggioli

Director Tax & Legal Services, PwC Switzerland

Tel: +41 58 792 44 51

Martin Burri

Martin Burri

Director Tax & Legal Services, PwC Switzerland

Tel: +41 58 792 45 00