Withholding tax on bonds and other collective debt financing
Unlike many countries, Switzerland does not withhold any withholding tax on interest paid on private and business loans (including arm’s length intercompany loans). However, a federal withholding tax of 35% is levied on interest paid to Swiss or foreign lenders on bonds and other similar collective debt securities issued by or on behalf of Swiss resident issuers, as well as on interest paid. by Swiss banks.
International financial markets generally do not respond too well to bonds subject to withholding tax. Therefore, it is common for Swiss multinational groups to issue bonds through a foreign subsidiary. However, the Federal Tax Administration (SFTA) will reclassify these foreign bonds as national bonds if the amount of the product used in Switzerland exceeds certain thresholds (i.e. (i) the combined book equity of all non-affiliated subsidiaries. of the Swiss parent company and (ii) the total amount of loans granted by the Swiss parent company and its Swiss subsidiaries to non-Swiss subsidiaries).
In order to avoid federal withholding tax being imposed on normal loans (unlike obligations triggering such a tax anyway), credit agreements entered into by a Swiss borrower or by a non-Swiss borrower under guarantee of a Swiss parent company must contractually restrict free transferability and syndication by invoking the so-called 10/20 non-bank rules and by declaring that:
I. lenders must ensure that as long as the loan in question is ongoing, no assignment, transfer or sub-participation of loan tranches is made, which would result in the number of 10 non-bank lenders being exceeded; and
ii. the borrower must ensure that he will at no time have more than 20 non-bank lenders under one of his loans (in both cases generally without taking into account affiliated lenders).
Fundamental changes envisaged by the Swiss Federal Council
The Federal Council, in response to its consultation document, will submit to Parliament a request for the abolition of withholding tax on bonds. The corresponding message to the Swiss Federal Assembly will probably be published in the second quarter of 2021.
On April 3, 2020, the Federal Council opened the consultation process for the reform of withholding tax. The aim of this proposal is twofold. On the one hand, the Swiss debt capital market should be strengthened. Companies domiciled in Switzerland should be able to raise borrowed capital from Switzerland on competitive terms and conditions. To this end, Swiss entities and all foreign investors should be exempt from withholding tax on interest.
However, the objective of safeguarding the Swiss withholding tax should be extended to the national level. For natural persons residing in Switzerland, withholding tax on interest should continue to be levied (as a safeguard tax) and should also apply to foreign bonds and other securities. Technically, this would have required a modification of the “paying agent principle”, according to which the paying agent (usually a bank) withholds the withholding tax due, in accordance with the status of the investor. During the consultation process, the economic policy objectives of the reform were supported. Many participants in the consultation process support the desired strengthening of the Swiss debt capital market and the necessary exemption of domestic legal entities and foreign investors from withholding tax. However, there has been some controversy surrounding withholding tax as a means of securing taxes owed by individuals residing in Switzerland. The Federal Council’s proposal was considered administratively inconvenient by various parties, in particular in the area of foreign collective investment schemes. These parties advocated a solution that was easier to administer.
On September 11, 2020, the Federal Council changed course and defined its policy. He decided to continue the reform and to further strengthen the Swiss debt capital market. In light of the consultation process, however, the Federal Council has decided to end its withholding tax system for interest on bonds and other collective debt financing paid to individuals residing in Switzerland. Rather, he called on Parliament to abolish the full withholding tax on interest on bonds and the like (excluding bank deposits from individuals residing in Switzerland).
The Federal Council is expected to present its dispatch to Parliament in the second quarter of 2021. Once adopted, it will also vote on the remaining key issues of the reform. This is the abolition of the tax on transfers of securities on national bonds, which was also proposed during the consultation.
The abolition of the Swiss withholding tax on bonds and other collective debt financing is a welcome step which allows Switzerland to considerably strengthen its position as an international financial and treasury center. All types of financing and refinancing activities in Switzerland, such as raising capital through bond issues, crowdfunding platforms, asset backed securities (ABS) structures and others transactions in the capital markets will be facilitated because the adverse consequences of withholding tax can be avoided. This fundamental change in the Swiss withholding tax regime should enter into force on January 1, 2022 at the earliest.