Lowered requirements for participation relief
Swiss holding companies can fully reclaim VAT
Impact of revised provisions on a Swiss holding company selling shares


Based on its comprehensive income tax treaty network and its stable political environment, Switzerland has traditionally been a favourable holding company jurisdiction. Due to increased international competition, especially from EU countries, Parliament has revised the provisions of the Income Tax Act regarding the participation relief rules in order to ensure that Switzerland remains attractive in this field. Under the revised provisions, which entered into force on January 1 2011, the minimal investment threshold to qualify for the participation relief was lowered from 20% to 10%.

In addition, under the Value Added Tax Act 2010, Swiss holding companies are considered to be payers of value added tax (VAT) and as such can now, in most cases, fully deduct any Swiss input VAT payable by such Swiss holding company. Compared to other jurisdictions, this is a significant advantage.

This update outlines how the updated participation relief mechanism works. It also briefly outlines the new VAT rules for Swiss holding companies and considers the impact of the revised provisions on Swiss holding companies which sell qualifying investments.

Lowered requirements for participation relief

The participation relief (also known as 'participation exemption' or 'participation deduction') is an important feature of Swiss tax law which avoids a distortive multiple taxation of income and capital gain at holding company level and on the level of holding company subsidiaries.

Where a qualifying investment is sold, the resulting capital gain (ie, sale price minus investment value for income tax purposes) is taken into account for the participation relief as income from qualifying investments. The relief is granted on the taxes payable and is calculated by multiplying the ordinary tax with the ratio of the net income from qualifying investments to the company's total net income.

Until the end of 2010, capital gains qualified as income for participation relief if the sold investment of at least 20% of the capital was held for at least one year. From January 1 2011 onwards, qualifying investments in relation to capital gains are defined as disposed investments of at least 10% of the capital or of the profit rights which have been held for at least one year. Similar changes have also been introduced for qualifying dividends.

Under certain circumstances participation relief might be granted if an investment of less than 10% is sold. This can be the case if a Swiss holding at the outset held an investment that exceeded 10% (say 15%), sold at least 10% of this investment and subsequently disposed of a remaining investment which on its own was below 10%, provided that this investment still had a fair market value of at least Sfr1 million.

Swiss holding companies can fully reclaim VAT

According to new provisions implemented with the VAT Act 2010(1), the acquisition, holding and sale of investments is considered a business activity. Swiss resident holding companies are therefore now generally able to register as Swiss VAT payers, as they are considered to have a business activity. Such registration no longer requires taxable turnovers.

As holding companies no longer need to consider dividends or capital gains under the new act for any input VAT reduction, in most cases the right to reclaim Swiss VAT is far greater than it was before the end of 2010 and applies also to VAT payable under the reserve charge mechanism.

In determining the amount of reclaimable input VAT, according to a recently issued VAT practice statement from the federal VAT authorities, Swiss holding companies can elect to take into account the business activities of their subsidiaries or calculate recovery rates on a standalone basis.

Therefore, in most cases, Swiss-based holding companies are now in a position to reclaim input tax incurred in connection with the holding or sale of qualifying investments. VAT amounts which were incurred in 2010 by Swiss holdings but are yet to be reclaimed can still be reclaimed until the end of the second quarter of 2011.

Impact of revised provisions on a Swiss holding company selling shares

The following case study of a Swiss holding company that sells a 100% investment under a share purchase agreement to an independent third party purchaser demonstrates the potential impact of the new rules. In principle, federal income tax, cantonal income tax, federal securities transfer duty and federal VAT need to be considered in such a sale scenario.

Federal income tax
The participation relief outlined above indirectly exempts most of the capital gain derived from the sold qualifying investment. However, depreciations of previous years on the sold investment, which at the time lowered income taxes, are recaptured and subject to 7.83% effective federal income tax.

Cantonal income tax
A Swiss holding company which fulfils the respective legal requirements is exempted from corporate income tax at a cantonal and communal level. Hence, the sale of a qualifying investment does not lead to income tax on a cantonal or communal level.

Federal securities transfer duty
The transfer of shares by a 'Swiss securities dealer' is usually subject to Swiss transfer stamp duty at a rate of 0.15% to 0.30%. In most cases Swiss holding companies are considered to be securities dealers for stamp duty purposes as they hold taxable securities exceeding the Sfr10 million threshold. The Stamp Duty Act provides for a variety of tax-exempt transfers, such as the sale of a 20% investment to another group company. In this case study, however, no exemption applies and stamp duty would be payable but could contractually be split between vendor and buyer.

Federal value added tax
Under the new act the received purchase price is a VAT-exempt turnover. Despite such exempt turnover, in most cases Swiss holding companies can fully reclaim Swiss VAT incurred (eg, on transaction costs in relation to such a sale).


The amended provisions of the Income Tax Act and the VAT Act ensure that Switzerland will remain an attractive location for domestic and international holding companies due to the lowered participation relief requirements and the much improved refund rights relating to paid Swiss input VAT.

For further information on this topic please contact Harun Can or Michael Nordin at Schellenberg Wittmer by telephone (+41 44 215 52 52) or email ([email protected] or [email protected]).


(1) An English-language translation of the act can be accessed at