Generally, interest paid on loans are not subject to Swiss Withholding Tax ('WHT'). Interest on bonds and bank interest, however, are subject to 35% Swiss WHT.
A Swiss borrower / issuer
- Generally, interest paid on loans is not subject to 35% WHT. Nevertheless interest paid on bonds, 'customer balances' or bank interest are subject to 35% Swiss WHT.
- Due to the practice of the Swiss Federal Tax Authority ('SFTA'), a loan to a borrowing Swiss entity qualifies as bond (under the so-called '10/20 non-bank rules'), if:
i) The total indebtedness under a credit facility amounts to at least CHF 500'000 and the aggregate number of non-bank lenders (including subparticipations) exceeds 10 under a facility agreement with identical terms ('Anleihensobligation'), or
ii) The total indebtedness under a credit facility amounts to at least CHF 500'000 and the aggregate number of non-bank lenders (including subparticipations) exceeds 20 under a facility agreement with variable terms ('Kassenobligation').
- Further and since the term 'bank' is not limited to financial institutions as defined in the Swiss banking legislation, a Swiss entity qualifies as 'bank' from a WHT perspective, if it borrows interest-bearing funds from more than 100 non-bank lenders, whereby the overall credit amount is at least CHF 5'000'000.
- However, group companies receiving an intercompany loan do not qualify as nonbank lenders under the 10/20 rule, unless loan or bond is issued by a foreign company and secured by a Swiss parent company (according to article 14a of the Ordinance to the Federal Act on Withholding Tax ('WTO'), see also below).
B Foreign borrower / issuer
- The 10/20 non-bank rules can also apply in case the borrowers or issuers of a bond are foreign (non Swiss tax resident) companies and the loan/bonds are secured by Swiss group companies. The breach of those restrictions results in severe tax consequences (i.e. 35% WHT on interest paid by the foreign borrower to lenders).
- Loans or bonds issued by a foreign (non-Swiss tax resident) company do not qualify as loans/bonds under the 10/20 non-bank rule for Swiss WHT if (i) they are not guaranteed by any Swiss group company or (ii) if they are guaranteed by Swiss group company, but no funds from such loan/bond are used directly or indirectly in Switzerland.
- A use of funds from such foreign bonds/loans is generally permitted if no downstream, but only cross-stream or up-stream guarantees or securities are granted by Swiss group companies, which are limited to the distributable reserves of such entity (ruling confirmation required). The limitation to the distributable reserves at the time of enforcement of the guarantee/security is also required from a Swiss corporate law perspective.
- Based on the amended article 14a WTO, and the current tax authorities' practice (subject to tax ruling), no interest WHT should apply, in case the Swiss parent company grants a down-stream guarantee, but the use of proceeds of the foreign issued bond/loan in Switzerland is always limited to the amount of the equity of the foreign issuer. The equity limitation is based on the latest annual financial statement of the issuer.
C Contractual provisions
- To avoid interest WHT and ensure compliance with the 10/20 non-bank rules, special language typically needs to be included in the credit facility agreements (e.g. limiting assignments/transfers/ syndications by the lenders; limitation language for up-stream/cross-stream guarantees/securities etc.), depending on the circumstances of the specific case.
- It is market standard, that the financing schemes including the securitization is covered by an advanced Swiss tax ruling request with the SFTA.