In December 2014 the Swiss National Bank (SNB) announced the introduction of negative interest rates on sight deposits by financial institutions with the SNB. The main intention was to diminish the pressure on the then pegged rate of EUR/CHF 1.20. In January 2015 the SNB gave up on the peg with the immediate consequence of a substantial soar in the Swiss Franc. In order to allay negative consequences (especially for export oriented enterprises) the SNB tightened its negative interest rates by lowering its threemonths Libor to –0.75%. The SNB followed the European Central Bank (ECB) which had introduced negative interest rates beginning of June 2014 already.

In a study UBS estimates direct costs to the banking sector caused by the negative interest rates to amount to CHF 1 bn. 

Currently the possibility of also introducing negative interest rates on client funds held at bank is under discussion.

Next to economic issues the introduction of negative interest rates and their passing on to investors (institutional or private) raise an array of tax questions. From a tax perspective, one main topic is whether negative interest would still constitute interest or whether they would more appropriately be treated as commissions or fees. 

Does a negative interest rate constitute “interest”?

Switzerland has seen negative interest rates before. In the 1960‘s and 1970’s the SNB imposed negative interest rates, at the time the measure was restricted to funds from abroad. Back then, the Swiss Supreme Court decided that negative interests were commissions. It is unclear whether that view would still be upheld today.

Tax Questions

Income and Profit Tax

To the extent an individual would have to pay negative interest rates the main question would relate to the tax deductibility of the payment. Interest paid on private debts is deductible up to an amount corresponding to taxable income on assets (essentially dividends and positive interest) +CHF 50’000. Although there is no settled case law nor otherwise practical guidance the better view is no doubt that negative interest should qualify as deductible interest. It is hard to see what the consideration would be if it constituted a fee. If, however, negative interest rates were treated as commissions or fees for account-keeping, those costs would not be deductible for income tax purposes.

For corporate income tax purposes the qualification of negative interest is less relevant as it will always qualify as commercially justified and hence tax deductible expense. However, there may be questions related to cash pooling scenarios, for example whether there is an obligation to pass on negative interest rates to other cash pool participants. 

VAT

Interest expenses and revenue are VAT exempt and result in a reduction of the claim for input VAT refund. That would be true also if the negative interest rate were qualified as commission for account-keeping. On the other hand, revenue in relation with safekeeping and administration of securities (custody) is subject to VAT.

Conclusion

If negative interest rates were levied on assets of bank customers it will be necessary to carefully analyse ensuing tax consequences. To a large extent relevant questions appear to be open for debate. The Froriep team is closely monitoring the developments and will gladly be at your disposal for any questions.