International Tax Seminar Switzerland August 2, 2012
Swiss Idiosyncrasies
Page 2
Agenda
► ► ► ►
Switzerland – a hotspot for doing business Switzerland’s positioning in the international tax environment Key features of the Swiss tax system Special tax solutions for ► ► ►
► ►
Trading Financing Research & Development
Update on recent developments in Swiss tax law & policy … and the future: Stay attractive!
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Switzerland – a hotspot for doing business
Page 4
Facts and Figures - Population
► ►
Switzerland has four official languages, German (63.7%), French (20.4%), Italian (6.4 %) and Romanish (< 0,5%) Due to the structure of the population, a vast number of other languages are also spoken (9 %)
Groups
Amount
Permanent residents
7‘591‘400
Swiss citizens
5‘989‘500 (78.9%)
Foreign nationals
1‘601‘900 (21.1%)
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Switzerland’s Federalist System
►
There are 26 cantons and almost 3‘000 communes in Switzerland ► ►
► ► ►
There is a decentralized federalist structure in Switzerland Under the Federal Constitution, all cantons have equal rights, and in comparison with the situation in other countries, they have a high degree of independence Health care, education and culture are among the policy areas where the cantons enjoy a large degree of latitude Each canton has its own constitution, and its own parliament, government and courts For example, although tax laws are harmonized, the cantons may decide on e.g. the tax rates by themselves
Page 6
Political Environment in Switzerland ► ►
Switzerland has a strong position as a neutral state Politics ► ► ► ► ►
►
Multi-ethnic, multilingual and multi-confessional nation Transparent and stable political environment Four major parties: The Liberal Democrats, Christian Democrats, People‘s Party and Social Democrats However, numerous smaller parties also exist (e.g. Green Party) Almost seven percent of Swiss people are members of a party
Direct Democracy ► ► ►
Swiss citizens are able to influence political decisions to a large extent Especially at the cantonal and communal level many instruments of direct democracy are available Citizens who are eligible to vote can request a referendum on decisions made by Parliament
Page 7
Switzerland as a business location
► ► ► ► ► ► ► ► ► ►
2 federal institutes of technology, 9 universities > 6000 foreign companies 2 of the world‘s top 10 pharmaceutical companies (Novartis, Roche) 2 European R&D centers (Google, IBM) 2 major global banks (UBS, Credit Suisse) International or European HQs of major global firms (ABB, Nestlé, Kraft Foods, Zimmer … and many more) 1/3 of the world‘s wealth managed by Switzerland‘s financial centers 2nd most Fortune 500 companies per inhabitant 2nd largest EU export partner after USA 4th largest EU trading partner after USA, China, Russia
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Examples of multinational groups that moved to Switzerland Company
Industry
Activities in Switzerland
Foster Wheeler
Engineering / Power Plant Equipment
Top-Holding company
Transocean
Oil
Top-Holding and management company
Noble Corporation
Oil
Top-Holding and management company
Ferrexpo PLC
Mining
Top-Holding company, trading
Weatherford
Oil
Top-Holding company
ACE Limited
Insurance
Top-Holding company, insurance business
Petroplus
Oil
Top-Holding company, sales & trading
Nobel Biocare
Medical products
Top-Holding company, sales, management company
K端hne & Nagel International
Logistics
Top-Holding and management company
Tetra Pak
Packaging
Top-Holding and management company
Informa PLC
Business information
Top-Holding company
Liebherr International
Construction machines
Top-Holding company
Philip Morris International
Tobacco
Headoffice for non-US operations
Vale
Mining
Sales and trading
Alibaba.com
Online marketplace
European service centre
eBay
Online marketplace
European headoffice
Ecolab
Cleaning, sanitizing, food safety and infection control products
European headoffice company, sales & trading
Kraft Foods
Food
European headoffice company, sales & trading
Lukoil
Oil
Sales & trading
Smith & Nephew PLC
Medical products
European sales company
Zimmer
Medical products
European headoffice company, production & sales
Procter & Gamble
Consumer products
European headoffice
Nissan
Cars
European headoffice
AMD Advanced Micro Devices
Information technology
European headoffice
Colgate Palmolive
Consumer products
European headoffice
Hewlett Packard
Information technology
European headoffice
Oracle
Information technology
EMEA headoffice
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Switzerlandâ&#x20AC;&#x2DC;s positioning in the international tax environment
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Comparison â&#x20AC;&#x201C; Corporate Income Tax (normal rates)
Cyprus Bulgaria Switzerland Ireland Latvia/ Lithuania Hungary/ Romania Poland/ Slovak Rep. Croatia Russia Estonia/Czech Rep. Ukraine Slovenia Austria/China The Netherlands Italy Luxembourg UK/Spain Germany Belgium France Malta USA
10 % 10 % 15 % 16 % 19 % 20 %
20%-24% 21 % 21 % ***** 22% 25 % 25.5 % 27.5 %* 29.6 %** 30% 30%-33%*** 33% 34.43%**** 35% 35%
* Excl.regional tax on productive activities **Luxembourg City *** incl. surcharges and trade tax **** incl. social security surcharges ***** effective from 1 January 2012
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12 %-24.5 % 12.5 %-25%
Comparison â&#x20AC;&#x201C; Value Added Tax (normal rates)
Switzerland Cyprus Luxembourg Spain China UK Russia Latvia/ Lithuania Malta/Estonia Czech Rep./ Slovak Rep. The Netherlands/Germany Romania France Italy/Austria Bulgaria/Hungary Slovenia/Ukraine Ireland/Belgium Poland Croatia
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8% 0/5/8/15 % 15 % 16 % 17 % 17.5 % 18 % 18 % 18 % 19 % 19 % 19 % 19.6 % 20% 20% 20% 21% 22% 0/10/22%
Switzerland’s international tax treaty network
► ►
Switzerland is OECD member and has approximately 80 international tax treaties plus 33 social security treaties in effect Switzerland has entered into a bilateral agreement with the EU (so-called Swiss EU Savings Tax Agreement) ► ►
WHT applied on all interest payments made by a Swiss paying agent to individual resident in an EU Member State In exchange Swiss companies get access to the advantages of the ► ►
EC Parent Subsidiary Directive EC Interest and Royalty Directive 0% WHT on cross-border payments of dividends, interest and royalties between affiliated companies located in the Switzerland and the EU
►
Choice of applying either tax treaty or the Swiss-EU Bilateral Agreement, whichever is more favorable
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Key features of the Swiss tax system
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Swiss Tax System - Overview ► Income
taxes – Swiss tax jurisdictions: ► Federal level: 7.83% ► Cantonal and communal level: from 4% to 16% ► Ordinary Combined effective tax rate: from 12% to 24.5% ► ETR includes all levels of taxation and is largely dependent on the location; ► ETR reduces significantly by using one of the various special taxation regimes on federal and / or cantonal level ► Withholding tax ► On dividends: 35% (unilateral), reduced with double taxation treaties and Swiss-EU Agreement on Savings ► No withholding tax on royalties and interests on inter company loans ► No CFC rules in Switzerland ► Excellent treaty network (over 80 double taxation treaties) ► Stamp duty ► One-time capital duty of 1% (can be avoided if properly structured) ► Securities Transfer Tax of 0.015 to 0.03%
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Comparison of Swiss Cantons - Standard ordinary tax rates (including federal tax)
SH BS
TG BL
ZH
AG
AR
JU SO
SG
ZG SZ
LU
NE BE FR
NW OW
GR
TI VS
Page 16
GL
UR
VD
GE
AI
AG AI AR BE BL BS FR GE GL GR JU LU NE NW OW SG SH SO SZ TG TI UR VD VS ZG ZH
Aargau Appenzell Innerrh. Appenzell Ausser. Bern Basel-County Basel-City Fribourg Geneva Glarus Grisons Jura Lucerne (2012) Neuchâtel Nidwalden Obwalden St. Gallen Schaffhausen Solothurn Schwyz (Höfe) Thurgau Tessin Uri Vaud Valais Zug Zurich
18.87% 14.16% 12.66% 23.38% 20.32% 23.37% 20.40% 24.24% 16.65% 16.68% 20.86% 12.09% 24.53% 14.89% 12.66% 16.88% 15.97% 22.60% 11.79% 16.60% 20.78% 15.85% 23.53% 21.57% 15.38% 21.17%
Swiss Tax Environment / Specific Tax Rulings ► Relationship between
taxpayers, tax advisors and tax authorities ► Excellent and co-operative ► Individual taxation ► Attractive tax rates in most cantons ► Special tax incentives for expatriates depending on cantonal location ► Corporate taxation ► Switzerland provides a wide range of specific tax rulings to cover all possible activities of foreign investors ► The rulings typically are available for corporations and branches alike on the merits of the particular case ► Holding Ruling ► Mixed Company Ruling ► Principal Ruling ► Tax Holiday Ruling
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Specific Tax Rulings
Tax Ruling
Applicable to Cantonal Tax
Applicable to Federal Tax
Holding Company
Yes
No
Mixed Company
Yes
No
Principal Company
No
Yes
Combined Mixed/Principal Company
Yes
Yes
Additional Tax Holidays
Yes
Yes
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Swiss Holding Company
Steps/Structure ► Holding Company Ruling ► Primary objective of the company is to hold and administer participations ► 2/3 of the company’s assets need to be participations or 2/3 of the company’s income needs to be income from participations Benefits ► Full exemption from CIT on cantonal level ► Dividends are basically tax exempt ► Capital gains are basically tax exempt ► No distinction between Swiss and foreign participation ► Interest, royalties, management fees are subject to tax at flat rate of approx 7.8%
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Ukraine
CH HoldCO
B
I
A
G
Swiss Mixed Company
Steps/ Structure ► Mixed Company Ruling (only on cantonal level) ► Swiss company may qualify as Mixed Company, provided that at least 80% of total income/expenses derive from foreign sources ► Predominantly foreign activity while having a full presence (office, staff) in Switzerland ► Full flexibility as to functions: distribution, purchasing, commissionaire, financing, leasing, licensing etc. Benefits ► Privileged taxation on cantonal level ► ► ►
►
Swiss sourced income: ordinary taxation Participation income: no taxation Foreign sourced income: 75%-100% exempt from cantonal taxation
Combined effective tax rates (federal and cantonal) varying between 7.8% and 11.6% Page 20
Ukraine
Swiss
European
European
European
TradingCO
Manufcaturing CO
Sales CO
Commissionaire CO
Swiss Principal Company Overview Functions, risks and profits are centralized in a Principal company. The full principal model must consider multi-functional factors in determining where to locate functions.
Headquarters Management services
Suppliers
Product development
Shared services
Ownership of materials
Admin services
Product development services
Principal
Sale of finished goods
Processing and warehousing services
Deliver materials
Plant
Functions ► Business strategy and planning ► Marketing strategy and brand management ► Strategic sourcing ► Supply chain management Risks ► Market risk ► Intangibles ► Inventory Returns ► Residual profit
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Sales companies Product sales
Deliver goods
Functions ► Production scheduling ► Quality control ► Recruitment and training ► Local sourcing Risks ► Capital investment ► Operating efficiency Returns ► Cost plus
Services
Customers
Functions ► Local market analysis ► Channel management ► Recruitment and training ► Local sales Risks ► Cost control ► Operating efficiency ► Sales effectiveness Returns ► % of sales
Legal title Physical flow Services
Swiss Principal Company Centralization of Functions and Risks The benefits of a centralized structure can be leveraged further through careful planning of the location of key profit drivers Profit is primarily attributable to three areas:
Foreign Currency Hedging
► The successful management of risks
Bad Debt
► Those functions within the business which actively manage the risks the company is exposed to (financial, environmental, market, etc.)
Total profit before tax
Liability (insurance) Financing (WC or debt & equity)
► Exploitation of value added functions
Market
Risk
Inventory and Logistics risk
Procurement Supply Chain Planning Alliance Management
Value-Added Regional Marketing & Sales Regional Contracts
In-country logistics In-country Manufacturing In-country sales In-country back office operations
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Core Operations
Intellectual Property
► Those functions which drive the company’s competitive advantage – i.e., those activities which enable it to succeed beyond its industry peers and make above industry average profits ► Excellence in core operations ► Those functions which are necessary to operate in the market – i.e., the critical success factors of the industry in which it operates
Swiss Principal Company Steps/ Structure ► Swiss Principal assumes risk and responsibilities such as R&D, sales, marketing, production logistics Ukraine ► Manufacturing performed outside of Switzerland Euro Holding ► Sales activities performed outside of Switzerland preferably by limited risk distributors or Commissionaires Distributors Manufacturer US ► LRDs/Commissionaire need to be US non Swiss non Swiss group entities acting exclusively on behalf of the Swiss Principal Toll /Contract Finished Goods Manufacturing Benefits ► Part of the principal’s income will be allocated Distribution Contract to deemed foreign branch (= 35%-50% reduction of federal tax ► Taxation as a mixed company on the cantonal level ► Overall taxation: 5%-9%, in combination with tax holiday status: 0%-4%
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Principal 50-65% Swiss
35-50% Branch
Swiss
Swiss Tax Holidays Cantonal Level ►
► ► ►
Nearly all cantons encourage establishment of new industries within their territories by granting tax privileges to new active business enterprises ► Newly established businesses ► In the interests of the local economy ► Creation of new jobs ► Technical development ► Opening of new markets ► Production of new goods complementary to existing products Tax relief of up to 100% tax relief on cantonal/municipal level Tax relief for 5 or 10 years (5-year period renewed after verification) with certain restrictions (claw-back provision) The canton will examine the project and its positive impact for the local economy based on the Business Plan and the financial forecast attached to the tax holiday request
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Swiss Tax Holidays Federal Level ►
Tax holidays are also available on the federal level, however only in designated “Economic Developing Areas” as defined by the so-called “New Regional Policy”. As of 2011, federal tax holidays are available only in the red-colored areas on the map.
►
Between 0% and 100% tax relief for up to 0 years
►
Considerations: amount of investment; creation of highly skilled jobs (typically at least 25 FTEs or more required); regional economical importance; innovation; competition; etc.
►
Claw-back provisions apply
Zurich Balsthal / Gre nchen
Toggenburg area
Bilte n (Glarus)
Areas of New Regional Policy Former Additional Lex Bonny Areas Page 25
Comparison of selected Swiss Cantons Effective Tax Rates (federal/cantonal/municipal tax)
Comparison of Selected Swiss Cantons Canton City
Ticino Lugano
Geneva Geneva
Glarus Bilten
Schaffhausen Thayngen
Vaud Lausanne
Zug Zug
Zurich Zurich
Schwyz Freienbach/Pf채ffikon
Lucerne (2012) Lucerne (2012)
19.37%
24.24%
16.46%
15.40%
23.53%
15.38%
21.17%
11.76%
12.09%
A) Ordinarily taxed company Income tax 2)
B) Mixed company 1) Ordinarily taxed on federal level; tax privilege on cantonal/municipal level Income tax 2) min.
9.13%
11.66%
8.31%
8.65%
11.47%
8.65%
10.12%
8.24%
8.28%
max.
10.40%
11.66%
9.70%
9.45%
11.47%
9.84%
10.12%
8.65%
8.72%
C) Principal Company
1)
Taxation as principal company on federal level (assumption: only trade income, i.e. 50% exemption); tax privilege on cantonal/municipal level (mixed company) Income tax 2) min.
5.48%
8.21%
4.59%
4.96%
8.01%
4.96%
6.55%
4.52%
4.56%
max.
6.85%
8.21%
6.09%
5.83%
8.01%
6.25%
6.55%
4.96%
5.03%
yes yes, in some parts
yes no
yes yes, up to 100%
yes no
yes no
in practice no no
in practice no no
yes no
yes yes, in some parts
D) Additional Tax Holidays Cantonal level Federal level
1) Assumption: no Swiss sourced income; however, if there is Swiss sourced income, the income will be taxed at the ordinary income tax rate. 2) Combined effective tax rate
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Special tax solutions for Trading ยง Financing ยง Research & Development
ยง
Page 27
Trading structures
Page 28
Swiss Trading Company
► ►
ForeignCo
►
SwissCo
► ►
purchases
sales
Page 29
Applicable for a variety of trading purposes with goods, especially commodities The same conditions for the application of the mixed company status as described on slide “Mixed Company Ruling” apply (at least 80% of income and expenses from foreign source income) Effective combined tax rate (federal and cantonal) typically in the range 8-12% (depending on canton and the quota for the exemption of foreign source income (to be negotiated with the canton in a ruling) Reduced net equity tax will apply (percentage depending on the canton of residency) Zero withholding tax on arm’s length profit repatriation from SwissCo to and EU parent (e.g. Cyprus) based on the Switzerland – EU Savings Agreement, provided the EU parent qualifies for certain conditions related to “substance” and “beneficial ownership”
Swiss Trading Branch
► ►
ForeignCo ►
Swiss Trading Branch
►
►
purchases
sales
► ►
Page 30
Applicable for a variety of trading purposes with goods, especially commodities The same conditions for the application of the mixed company status as described before apply (at least 80% of income and expenses from foreign sources) Allocation of profits between the Head office and the Swiss trading branch based on separate accounts or adequate allocation factors A certain portion of branch profits can be attributed to the head office based on OECD methodology, which further reduces tax base in Switzerland (so-called head office advance) Like for a Swiss trading entity being taxes as a mixed company, the effective overall tax rate (federal and cantonal) for a Swiss trading branch typically is in the range 8-12% depending on the canton of location of the branch, but might be lowered to 6-9% depending on the head office advance to be exempt from Swiss taxation (subject to ruling) Reduced net equity tax will apply (percentage depending on the location of the branch) The branch is not subject to Swiss withholding on profit repatriation
Financing structures
Page 31
Foreign branch exemption
Swiss considerations SwissCo
Foreign Loans
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►
None or low taxation of foreign income at SwissCo level depending on head office allocation (0-10%) resulting in an ETR of 0-2%
►
No or minimal taxation of foreign branch (e.g. offshore, Lux)
►
Swiss treaty network applicable
►
Anti-abuse regulations
►
Substance requirements for foreign branch to qualify as PE (foreign branch exemption)
SwissCo with US LLC financing
US considerations SwissCo
►
LLC not engaged in US trade or business, but may have one or two US employees
►
LLC should not be subject to US taxation
Swiss considerations US LLC
►
Loans
LLC should qualify as a GmbH for Swiss tax purposes Participation exemption applies No CFC legislation in Switzerland ►
►
►
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No subject to tax requirements
Swiss Finance Branch
Lux/Spain/ Belgium/Austria/ Hungary/Offshore
SFB Loans
Page 34
Swiss considerations ► Average assets at least CHF 100 million ► At least 75% of assets and income must derive from financing activities, e.g., lending, leasing, factoring, asset / cash management, hedging ► Loans and advances to Swiss residents must not exceed 10% ► Taxation of Swiss branch – notional interest deduction ► Swiss effective tax rate: 0.8-1.5% ► Tax clearance required & available ► Head office treaty network applicable ► No WHT, no remittance tax, no capital/stamp duties
Swiss Finance Company with Hybrid loan financing Alternative A Lux/NL/ Norway
Equity
Hybrid loan
SwissCo
Loans
Debt
Alternative B CH or ForeignCo
Loans
SwissCo
NL Equity
Debt Hybrid loan
Page 35
Description ► Lux/NL/Norway grants hybrid loan to SwissCo ► SwissCo grants loan to ROW Lux/NL/Norway considerations ► Proceeds on hybrid loan should qualify for participation exemption if properly structured ► Loan may also be granted by a nonshareholder affiliate (brother/sister company) in case of NL (not Lux/Norway) Swiss considerations ► Qualification as loan; interest deduction for CIT purposes ► ETR in Switzerland approximately between 1%-2% ► Treaty network applicable
Swiss Finance Company with non-interest bearing loan
Description ► IrishCo grants non-interest bearing loan to SwissCo ► SwissCo loans at interest rates in line with market ► Only interest spread that is in line with market conditions should be taxable in Switzerland
ROW
5% loan
SwissCo
IrishCo
0% loan
10 October 2011
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Swiss considerations ► Hidden capital contribution by IrishCo (or parent) to SwissCo in the amount of dispensed interest ► Deviation from principle that accounting records prevail (Massgeblichkeitsprinzip) ► Acceptance of structure by Swiss tax authorities?
Swiss financing solutions
R&D / IP structures
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Swiss IP Holding
►
Migration of IP into CH ►
► ► ► ► ► ► ►
Stamp duty to be managed, exemptions available (e.g. business reorganizations)
No withholding tax on royalty payments to a Swiss company from EU countries plus many others A step-up in basis can be negotiated with Swiss tax authorities when moving in a business R&D costs are generally deductible IP may be depreciated over 5 years Swiss anti-abuse decree has been relaxed for Swiss IP companies as of 1 August 2010 Effective tax rate between 7.8% and 11% depending on the canton Lower tax variations with offshore branch strategies available
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Foreign Co
SWISS IP CO
Royalties
Traditional Swiss IP Co
Steps/ Structure ► IP is contributed to Swiss company ► Profit sharing agreements possible ► Ruling typically required ► Swiss anti abuse rules have to be addressed, but have been relaxed for IP Companies as of 1 August 2010 Benefits ► Domiciliary /mixed company status for cantonal tax purposes ► Effective tax rate of 8-12% ► Additional erosion of tax basis through depreciation ► Tax holidays may be granted if R&D and other activities are established ► Extensive Swiss treaty network
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ForeignCo
SwissCO
OPCOs OPCOs OPCOs
IP / Royalty
(New) Nidwalden license box New tax regime in the canton of Nidwalden as 2011 ►
► ► ► ► ►
► ► ► ► ►
The license box tolerates normal business activities. Any ordinarily taxed company with its statutory seat in the Canton of Nidwalden is entitled to run within its normal business activities such a license box. Qualifying income corresponds to article 12 of the OECD model convention Combined ETR with federal tax is 8.8%. Both foreign and domestic IP income qualify for the license box Income from newly created as well as from existing IP qualifies for the license box Swiss domiciled companies have access to Swiss treaty network. Tax credit for residual withholding tax should be granted in principle as the Swiss company will be considered as ordinarily taxed (no privileged tax regime) To further erode tax basis, IP can be amortized over a period of 5 to 10 years and may be acquired for leverage Applicable to capital gains Not limited to self-developed IP Applicable on IP acquired from related companies Deduction of R&D expenses possible Page 40
ForeignCo
Nidwalden
OPCOs OPCOs OPCOs
IP box
IP / Royalty
(New) Nidwalden License Box Benefits in comparison with other countries Switzerland (Nidwalden)
Netherlands
Patents only
Trademarks, brand names, copyrights, image rights or acquired intangibles
Trademarks, brand names, copyrights, image rights or acquired intangibles
Copyrights of literary or artistic w orks, plans, secret formulae or processes
Trademarks, literary, artistic or scientif ic w orks incl. cinematographic films
yes
yes
no
yes, recapture rule w here losses have been fully deducted due to related expenses and amortization of the IP
no
deductible
deductible
non deductible
non deductible
yes
yes
no, only for patents granted from 1.1.2007 and certificates from 1.1.2008
No, only applicable to patents used from 1.1.2007
No, only IP rights w hich have been developed or acquired af ter 31.12.2007
no, only IP rights w hich have been developed after 31.12.2007
no
yes, but also contract research under a cost contribution arrangement developed IP is accepted. Innovative activities may also take place abroad as long as taxpayer holds title to the IP
yes
no
yes, unless it has been developed externally but under the supervision of the company and at ist ow n risk and expense
yes
yes, but only if IP are further developed by the Dutch company
yes, but only if IP are f urther developed by the Dutch company
no
yes, but only if IP has been created under the supervision of the company and at ist ow n risk and expense
8.8%
5%
6.8%
5.90%
15%
Qualifying income
Excluded income
None
Applicability for capital gains R&D expenses
Applicable on IP acquired from related companies
Effective tax rate
Spain Patents, draw ings, models, plans, formulae, secret procedures and rights on inf ormation relating to industrial, commercial or scientif ic experience
Innovation income, patented knw o-how , non patented technical know -how
Limitation on selfdeveloped IP
Luxembourg Royalties, capital gains, images w ith qualif ying IP: Patents, trademarks/servicemarks, designs/models, internet domain names, softw are copyrights related to standard softw are
According to Art. 12 OECD model tax convention
Applicable to old IP
Belgium
> Source: Lizenzbox in Nidwalden, Sch채uble, G체nter / Giger, Reto, in: Der Schw eizer Treuh채nder 10/2010.
Page 41
Swiss IP Co with offshore branch
Steps/ Structure ► Combination of Swiss head office and offshore licensing branch ► Substance requirements for foreign branch to qualify as PE (foreign branch exemption) Benefits ► None or low taxation of foreign income at SwissCo level depending on head office allocation (0-10%) resulting in an ETR of 0-2% ► Mixed company status available ► No or minimal taxation offshore ► Swiss treaty network applicable ► Anti-abuse regulations applicable, but have been relaxed as of 1 August 2010
Page 42
SwissCo
Offshore Royalties
(New) Swiss Royalty Branch
Benefits ► (Small) arm’s length spread in Switzerland ► Lux SNC disregarded for Lux purposes ► Income attributable to Swiss branch exempt in Luxembourg ► Combined Swiss Lux tax: approx 2.5% 4% ► No Swiss withholding tax on royalties ► No branch remittance tax Considerations ► Substance requirements in Switzerland and Luxembourg ► TP study may be required ► Advance tax rulings need to be obtained ► Luxembourg head office should be adequately remunerated for its head office functions
Page 43
ForeignCo
License
LuxCO
LuxSNC
Swiss Branch
OPCO
Sublicense
Key features of the Liechtenstein tax system
Page 44
Liechtenstein Tax System - Overview ► Income
taxes – Tax rates: ► 12.5% effective tax rate ► Minimum income tax of CHF 1’200 ► Deduction of notional interest on the equity was introduced with tax reform ► Currently 4% of deemed equity may be deducted from profit ► Patent box regime also introduced with tax reform ► Deemed deduction of 80% on qualifying income from IP ► Withholding tax ► No withholding tax on dividends (except on existing “old reserves” as at 31 December 2010) ► No withholding tax on royalties and interests on inter company loans ► No CFC rules ► Growing treaty network (double taxation treaties with Luxembourg, Hong Kong, San Marino, among others. Further double taxation treaties [e.g. with Germany] subject to ratification) ► Stamp duty ► Companies in Liechtenstein are subject to Swiss stamp duty taxes ► One-time capital duty of 1% (can be avoided if properly structured) ► Securities Transfer Tax of 0.015 to 0.03% Page 45
Liechtenstein Holding Company
Steps/Structure ► No specific holding company regime Foreign Co.
Benefits ► Dividends are tax exempt ► Capital gains are tax exempt ► No distinction between local and foreign participation ► Interest, royalties, management fees are subject to tax at flat rate of 12.5%, however this amount may be lower considering a notional interest deduction
Page 46
FL HoldCO
B
I
A
G
Liechtenstein Trading Company
Trading company ► Ordinary taxation of trading income at 12.5% ► Notional interest deduction ► Foreign PE-profits are tax exempt ► Income from foreign real estate is tax exempt
Foreign Co.
FL Co
purchases
Page 47
sales
Liechtenstein Finance Company
Finance company ► Ordinary taxation of interest income, however ► Notional interest deduction of currently 4% ► Special provisions for determining deemed equity of banks and insurances ► Notional interest deduction may generate or increase tax loss
Page 48
FL Finance Co
Loans
OPCOs OPCOs OPCOs
Liechtenstein IP box
Liechtenstein Intellectual Property box as of 2011 ►
► ►
Income from IP (patent rights, trademarks, copyrights) is subject to 12.5% income tax, however 80% of the income from IP is tax exempt if the IP is generated or purchased after 1 January 2011 The effective tax rate on such income amounts to 2.5%
ForeignCo
FL OPCOs OPCOs OPCOs
IP box
IP / Royalty
Page 49
Update on recent developments in Swiss tax law & policy
Page 50
Swiss Corporate Tax Reforms Overview Reform I – 01.01.1998 / 01.04.1998 ►
►
►
► ► ►
Objective: increase the attraction of Switzerland as a holding location and a business headquarters site. Participation exemption extended to capital gains on qualifying participations. The income tax rate is changed from progressive rates (3.63% to 9.8%) to a flat statutory rate of 8.5%. The capital tax of 0.08% is abolished. Reduction of stamp tax to 1% . etc.
Page 51
Reform II – 01.01.2007/ 01.01.2009/ 01.01.2011 ►
► ► ► ► ►
Objective: To improve the tax position of small-and medium size companies. To mitigate the current double taxation. Participation exemption thresholds reduced. Partial taxation of dividends. Principle of capital contribution. Indirect partial liquidation. etc.
Reform III – 01.01.2013(?)
►
► ► ► ► ►
Further enhancement of the participation exemption system. Perpetuity of the loss carryforwards. Abolition of the one-time capital duty. Removal of fiscal barriers to group financing. Cantonal tax statutes / « EU pressure ». etc.
New Capital Contribution Principle Overview Nominal value principle (until 31 December 2010)
Equity
Repayment
Regulation until 31 December 2010 (Nominal value principle): general reserves
taxable
share capital
tax-exempt
►According to the applicable law any repayment of equity which does not qualify as a repayment of paid in share capital or common stock is subject to income tax respectively withholding tax (Nominal value principle).
Capital contribution principle (as of 1 January 2011)
Equity other reserves capital contribution reserves share capital
Repayment taxable tax-exempt
tax-exempt
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Regulation as of 1 January 2011 (Capital contribution principle): ►Within the Swiss tax system the switch from the nominal value principle to the capital contribution principle has been implemented within the Corporate tax reform II on 1 January 2011. ►Based on the introduction of the capital contribution principle any repayments of capital contributions, agios and deposits which were conducted after 31 December 1996 by the shareholder are exempt from income and withholding tax. ►The Swiss Federal Tax Administration (SFTA) published a circular letter with regard to the accounting requirements and general guidance on the execution.
New Capital Contribution Principle Overview
Balance until 31 December 2010 Share capital General reserves Free reserves Net earnings
100 900 600 500
Total equity
2'100
► With regard to the tax treatment of reserves as of 1 January 2011 one must differentiate between tax-exempt repayable capital contribution reserves and other reserves which are taxable when distributed. ► Capital contributions, agios and deposits qualify as reserves according to Art. 20 para. 3 DFTA and Art. 5 para. 1bis WHTA if: ► directly received from the shareholders; ► made after 31 December 1996; ► disclosed in a separate account in the balance sheet of the receiving company (i.e. an open capital contribution); and
Balance as of 1 January 2011 Share capital General reserves - Capital contribution reserves - Other reserves Free reserves Net earnings Total equity
► every change in that separate account is reported to the SFTA. 100 800 100 600 500 2'100
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► Thus other reserves are still subject to income and withholding tax: ► current and retained profits; ► hidden capital contributions; ► capital contributions which are not directly derived from the shareholders; ► contributions which are not shown in a separate balance sheet respectively capital contribution reserves which are not reported to the SFTA.
New Capital Contribution Principle Required actions
Procedure for the initial declaration
►
Disclosure in the annual financial report
Separate disclosure of the capital contribution reserves in the closing balance ending with the calendar year 2011
►
Capital contribution reserves must be shown in a separate account in the closing balance ending with the calendar year 2011.
►
Initial declaration for Direct Federal Tax purposes
►
Companies must list the capital contribution reserves separately in the tax return 2011.
►
Initial declaration for Withholding Tax purposes
►
Initial declaration during the implementation of the capital contribution principle: Capital contribution reserves (from 1 January 1997 to 31 December 2010) must be reported to the SFTA by means of form 170 (incl. Excel-File) and by handing in the annual financial report within 30 days after approval of the annual financial report 2011 resp. 2010/2011.
►
Declaration of repayments between 1 January 2011 and the ordinary initial declaration: In these cases every change in the capital contribution reserves occurring from 1 January 2011 to the payout must be declared within 30 days of the decision however latest 30 days after the payout by means of form 170 (incl. Excel-File).
Declaration to the ESTV by means of form 170 and handing in of the annual report within 30 days of the general meeting (GV)
Excel-File to SFTA with depiction of the capital contribution reserves occured between 01.01.97 and 31.12.2010
Depiction in the tax return 2011 of the company
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New Capital Contribution Principle Required actions â&#x2013;şThis description is based on the assumption that the close of business is as of 31.12.
Capital contribution reserves must be Declaration of the capital contribution shown in a separate account in the reserves latest 30 days after the GV of the balance sheet by 31 December 2011. financial year. Additionally form 170 and Excel-File must be handed in. GV Initial declaration possible at any time after 1 January 2011 by means of form 170 and Excel-File.
31.12.2010
31.12.2011
In case payouts of capital contribution reserves are made between 1 January 2011 and the ordinary initial declaration all changes must be declared within 30 days of the decision, however latest 30 days after the payout by means of form 170 and the Excel-File.
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31.12.2012
Declaration in the tax return 2011.
New Capital Contribution Principle Latest political developments ► ► ► ►
► ►
Tax losses of yearly of 400 to 600 Mio Swiss Francs during 10 to 15 years because retroactivity Many parliamentary motions regarding the cancellation of the retroactivity Appeal at the Supreme Court The federal council has rejected the abolition of the retroactivity, but is willing to take other measures: ►
Capital contributions can only be used to cover losses, for measures for continuing of the business in case or to prevent unemployment
►
Repayment if capital contributions only when no accumulated profit and not enough available reserves are available
►
Tax exemption only be granted if neither free reserves nor accumulated profits are available
Both revisions of law would practically make the tax-free repayment of capital contributions impossible Revision of law would come into effect on 1 January 2013 earliest
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New Capital Contribution Principle Latest political developments ►
Given the political developments, it is advisable to report existing capital contributions as soon as possible to show them in the balance and to distribute them without any delay
►
With introduction of the legal restrictions as currently discussed the conversion of capital contribution reserves into nominal share capital should be considered
►
Such transaction may trigger the one time capital duty of 1%
►
Further spinning-off of the operational business to a subsidiary can be considered, capital contribution reserves and cash stays with the parent company – net earnings will be shown in the balance sheet of the subsidiary 2011
April / May
2012
2013
Tax free repayment
Shareholder meeting
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Taxable repayment
1.1.2013
Swiss Corporate Tax Reform III
►
Objectives ► ► ►
►
Strengthen Switzerland‘s attractiveness as business location Increase welfare through growth and creation of jobs Mitigate Swiss-EU tax dispute
Measures ► ► ► ► ► ► ►
Abolish stamp duty entirely Abolish WHT with regard to intra-group financing entirely Further enhancement of the participation exemption Accept NOLs from group companies Abolish/change certain tax regimes on the cantonal level Abolish (on a volutary basis) annual net worth (capital) tax on cantonal level Change lump-sum taxation regime for foreign high-net worth individuals
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â&#x20AC;Ś and the future Stay attractive!
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Switzerland as a business location 2011 How international managers rate Switzerland ► ► ► ►
Global survey of 700 international companies in August 2011 conducted via telephone interviews with senior management (senior executives, divisional managers, boards of directors). Of these companies, 210 currently operate in Switzerland. Study conducted by an independent market research institute. Data for actual foreign direct investment is based on the Ernst & Young European Investment Monitor, a sample of foreign direct investment projects that have set up production sites and/or created jobs (no mergers or acquisitions, no portfolio investments). Geographic origins of companies surveyed
Industrial sector
Revenue
North America
39%
Industry, Automotive, Energy
31%
Less than CHF 200m
40%
Western Europe
37%
Services
20%
CHF 200m – CHF 2bn
38%
Asia
19%
Consumer Goods
18%
Over CHF 2bn
22%
Central and Eastern Europe
3%
High-Tech/Telecoms
13%
Other
2%
Chemicals/Pharma
10%
Trade
7%
Other
1%
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The most attractive countries in the world – Switzerland drops to 4th place If your company were to relocate key divisions abroad, which country would currently appeal most to you?
Germany
23
US
12
5 10
Switzerland China
8
UK
6
France
6
Russia
2
Netherlands
2
Ireland
17
11
India
26
20
10
2011 2009
10 10
5 5
1 1
►Germany is again the most attractive country. Switzerland drops from 2nd to 4th place. ►Though the US has climbed from 3rd to 2nd place, India has managed to place among the top 5 locations for the first time. Page 61
Future prospects 2020: Switzerland as a global center for high-quality added-value services How do you see Switzerland in 2020?
Global center for high-quality added-value services
38
Worldwide role model for entrepreneurial-minded companies
28
Global role model for direct democracy
25
Worldâ&#x20AC;&#x2122;s best universities and education system
25
Worldwide leader in environmental technology
23
Hot spot for R&D
21
Affected by the migration of skilled labor abroad
17
Business location with few prospects
Paralyzed as a result of an overburdened social system and debt levels
15
11
Figures in %; more than one response permitted
â&#x2013;şOne in three respondents sees Switzerland as the global center for high-quality added-value services in 2020. Only a minority predict a negative development for Switzerland: 17% fear that there will be an exodus of skilled labor, 11% predict social paralysis as a result of an overburdened social system and high levels of debt. Page 62
Contact Ernst & Young Switzerland Viktor Bucher Partner Tax Switzerland Tel. +41 58 286 75 60 Email: viktor.bucher@ch.ey.com Roger Krapf Partner Tax Switzerland Tel. +41 58 286 21 25 Email: roger.krapf@ch.ey.com
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