Swiss Federal Council announces amendments to Swiss Withholding Tax Ordinance to provide withholding tax relief for certain group financing activities.

Current situation

Interest payments are subject to Swiss Withholding Tax (WHT) under certain conditions. This is namely the case when interest is paid on customer deposits with domestic banks and savings banks as well as in the case of Swiss-issued bonds. The latter are not very attractive for foreign investors from a tax perspective, because the applicable WHT is relatively high at a rate of 35%. Swiss WHT may, therefore, constitute a barrier to the raising of funds in Switzerland. As a consequence, Swiss corporations often decide to organize their financing and/or to issue bonds abroad.

The tax issues in connection with debt financing are accentuated, among others, by the fact that the term "bond" is defined broadly for the purpose of Swiss WHT. For example, debt financing is presumed to be a bond for WHT purposes if funds of at least CHF 500,000 are raised either (i) from more than 10 creditors under identical terms or (ii) from more than 20 creditors under varying terms.

Effective 1 August 2010, this issue was, however, mitigated by an amendment to the applicable executive legislation. The amended legal provision now states that intercompany balances do not qualify as bonds (nor as relevant customer deposits) for Swiss WHT purposes. Accordingly, WHT is no longer owed for respective interest paid.

However, companies have not been able to benefit from this exemption if they issued a bond by a foreign group company (Issuer) with a guarantee from a domestic group company (Guarantor) and funds were transferred directly or indirectly from such foreign Issuer to a group company domiciled in Switzerland via intra-group loans. In such an instance, the currently applicable law provides for the treatment of the domestic Guarantor as Issuer; in other words, the foreign bond becomes a Swiss one from a Swiss WHT perspective - with the respective WHT consequences. The purpose of this regulation has been the prevention of funds raised through a bond from being transferred to Switzerland via intra-group financing without their interest being subject to withholding tax.

New regulation (effective 1 April 2017)

In order to reduce the extent of this economic disadvantage for Swiss financing activities, the Swiss Federal Council has now announced an amendment to the Swiss WHT Ordinance effective as of 1 April 2017. The revised Ordinance includes that, in the case of a domestically guaranteed bond of a foreign Issuer, the direct, and consequently also the indirect, transfer of funds from the foreign Issuer to domestic group companies shall be possible without triggering Swiss WHT consequences, provided that the total funds transferred do not exceed the equity of the foreign Issuer. There is no more re-qualification of the foreign bond into a Swiss one in this case. It should be noted that, according to the Swiss Federal Council, in case the equity threshold is exceeded, Swiss WHT shall be due on the full amount transferred and not just on the exceeding portion.

According to the explanatory notes of the Federal Council, the relevant date for determining whether and to what extent domestic group companies use funds from a domestically guaranteed foreign bond is the balance sheet date of the domestic Guarantor. The relevant equity of the foreign Issuer shall generally be determined by means of the recognized accounting standard applicable to it.

Since the permitted cash flow is a so-called tax-exemption fact, in order to benefit from the new regulation, the tax subject for WHT purposes (i.e. the domestic Guarantor), must be in a position to prove that the flow of funds to Switzerland is within the scope of the equity of the foreign Issuer on the relevant balance sheet date.