On April 15, 2021, the Federal Council adopted the dispatch on an amendment to the Withholding Tax Act. The withholding tax reform is intended to strengthen the debt capital market in Switzerland and to increase the attractiveness of the location for group financing activities by abolishing withholding tax on domestic interest. However, interest paid to domestic natural persons on customer credit balances is excluded. Furthermore, the securities and asset management business is to be stimulated by abolishing the transfer stamp tax on domestic bonds. At the same time, the Federal Council is opening the consultation process on an extension of the group notification procedure for withholding tax.
Withholding Tax Reform
Currently, a withholding tax of 35 % is levied on interest payments on a domestic bond. Switzerland is therefore less attractive as an issuing location by international standards. Swiss groups very often avoid this withholding tax by issuing their bonds through a foreign group company. Intra-group financing activities are also frequently not carried out in Switzerland because of the withholding tax.
The withholding tax reform is intended to strengthen the Swiss debt capital market. The reform mainly provides for the following measures:
- Abolition of withholding tax on interest income
The withholding tax on domestic interest is to be abolished. 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 transfer stamp tax on domestic bonds is to be abolished.
Compared to the original proposal, which was subject of a consultation process between April and July 2020, the introduction of the paying agent principle for interest payments has been abolished. The reason for this is mainly the technical complexity in implementation that the introduction of the paying agent principle would have entailed.
It is expected that the withholding tax reform will be passed by parliament at the end of 2021 at the earliest. Due to the necessary adjustments at the ordinance level, it is unlikely that it will enter into force before 2024. The withholding tax reform is subject to an optional referendum.
Simplification of withholding tax notification procedures
As with interest payments, withholding tax of 35 % is currently levied on dividend distributions. In intra-Swiss group relationships, the notification procedure can be applied instead of a payment and subsequent reclaim of the withholding tax by the dividend recipient. Currently, a participation of at least 20 % is required for the application of the notification procedure. In the future, the threshold to apply the notification procedure shall be reduced to 10 %.
In the international context, an approval must be obtained for the application of the notification procedure (Form 823/823B/823C), which is currently valid for three years. Going forward, this approval shall be valid for five years.
The Federal Council has opened the consultation procedure for these changes of the withholding tax law.
Assessment of the planned measures
With the withholding tax reform now presented, the Federal Council 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 characterised 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 exemption of domestic bonds from transfer stamp tax is also to be welcomed and should also increase the attractiveness of Swiss bonds.
The measures contained in the consultation to simplify the notification procedure within the group will bring administrative simplification for the taxpayer without an expected reduction in federal revenue and are therefore also to be welcomed.