Federal Council wishes to avoid double taxation of permanent establishments

Bern, 19.09.2014 - During its meeting today, the Federal Council initiated the consultation on the ordinance regarding the flat-rate tax credit in the case of double taxation agreements (DTAs). As a result of the ordinance, and in response to the Pelli motion (13.3184) transmitted by parliament, foreign companies' permanent establishments in Switzerland should be granted the flat-rate tax credit in the future and thereby system-related over-taxation is to be avoided. The consultation will last until 23 December 2014.

The revision of the ordinance affects permanent establishments in Switzerland that are part of a company domiciled in a country with which Switzerland has signed a DTA. If these permanent establishments receive revenue from dividends, interest or royalty payments from a third state with which Switzerland also has a DTA and a non-recoverable withholding tax (residual tax) is levied on this revenue by the third state, cases of double taxation can arise under current law, i.e. residual tax is levied on the revenue and it is also taxed in Switzerland if it is attributed to the permanent establishment. If the company's country of domicile eliminates the profits of the permanent establishment in Switzerland, i.e. exempts them from taxation (exemption method), it cannot credit the residual taxes from third countries to its own taxes, as it does not levy any tax on the revenue in question.

In such cases, a flat-rate credit of the residual taxes from third countries has not been possible in Switzerland to date, as foreign companies' permanent establishments are considered as non-established persons here under DTAs. Only persons established in Switzerland can claim the flat-rate tax credit at present. In the future, granting of the flat-rate tax credit to foreign companies' permanent establishments in Switzerland will be conditional on a DTA existing between each of the countries involved, i.e. Switzerland, the third country and the country of domicile of the company to which the permanent establishment belongs. Likewise, the permanent establishment must be taxed as normal in Switzerland.

In its commentary to the Model Tax Convention, the OECD recommended that the member states use bilateral or domestic law solutions to solve the problem of no credit possibility for withholding taxes from third states. The motion of National Councillor Fulvio Pelli (13.3184), which was transmitted on 27 November 2013, was based on the assumption of a domestic solution. The solution proposed now adheres closely to the OECD's recommendations.

Flat-rate tax credit - definitions:

Permanent establishments
: a permanent establishment is a fixed place of business through which the business of a company is carried on. The term "permanent establishment" includes especially branches, factories, workshops, sales outlets, permanent representations, mines and other places of extraction of natural resources, as well as construction or installation projects lasting at least twelve months. The definition of permanent establishments is set out in the individual double taxation agreements.

Exemption method/credit method: within the framework of DTAs, double taxation can be avoided in one of two ways. Either the company's residence country grants tax exemption for the income that is also taxed in the other contracting state, or else the taxes of the other contracting state are credited to the taxes in the residence country. In terms of the permanent establishment's profits, the company's country of domicile refrains from taxing the permanent establishment's profits in the other state with the exemption method. In the case of the credit method, the country of domicile taxes the total profit but nevertheless credits the taxes levied by the permanent establishment's country and any third countries to its own taxes, provided this was agreed in a treaty.

Flat-rate tax credit: in Switzerland, the tax credit is for the federal, cantonal and commune levels as a whole, as the non-recoverable withholding taxes in a third country cannot be imputed to an individual tax jurisdiction. A flat-rate distribution key is used to assign the credit amounts to the three levels. On 22 August 1967, the Federal Council issued an ordinance that sets out the details of this credit mechanism.


Address for enquiries

Simone Bischoff, Federal Tax Administration FTA
Tel. 058 462 73 69, simone.bischoff@estv.admin.ch



Publisher

The Federal Council
https://www.admin.ch/gov/en/start.html

Federal Department of Finance
https://www.efd.admin.ch/efd/en/home.html

https://www.admin.ch/content/gov/en/start/documentation/media-releases.msg-id-54533.html