Withholding tax: Federal Council launches reform to strengthen capital market
Bern, 17.12.2014 - The Federal Council wishes to refine the withholding tax system to facilitate the raising of capital within Switzerland. Systemic stability can be increased at the same time, as the issuance of certain financial instruments by big banks will be covered by the reform. The tax will also be better able to play its safeguard role as a result of the reform. Today, the Federal Council submitted for consultation a corresponding bill on the debtor and paying agent principle for withholding tax. The consultation will last until 31 March 2015.
Withholding tax makes a considerable contribution to federal receipts and plays a safeguard role for income and wealth taxes (see box). However, the current design of the tax has some disadvantages. Swiss groups can frequently avoid the tax by processing their financing through foreign companies. Consequently, the creation of value added takes place abroad, companies incur expenses for maintaining foreign structures and the safeguard purpose of withholding tax is only partly fulfilled.
Introduction of the paying agent principle
Switching from the debtor principle to the so-called paying agent principle would allow these problems to be counteracted. Given that a system using this principle enables tax collection to be based on the interests of the capital market and tax authorities, the tax could be collected in a more targeted manner than at present. It is currently levied on all investors, including pension funds, for example, which have no safeguard needs.
The change of system will occur particularly in the area of interest, where tax collection is to be focused on natural persons resident in Switzerland. Withholding tax will cease to apply for all other investors. In this way, the Swiss capital market will be strengthened as desired and the issuance of contingent convertible bonds will be facilitated.
No change is planned for Swiss companies' dividends, as there is no need for action in that respect from a capital market view or in terms of safeguarding tax receipts. Withholding tax receipts are currently derived primarily from dividends and should not be reduced by the system change.
The change of system carries the risk of persons resident in Switzerland avoiding the tax by transferring their assets to a foreign bank, which would cause disadvantages for the Swiss financial centre and reduce receipts. Two measures are envisaged to lower this risk. Firstly, natural persons resident in Switzerland should have the option of voluntary disclosure instead of the tax deduction. Secondly, the withholding tax reform should not come into effect until the automatic exchange of information has been established with major financial centres.
Furthermore, the reform will make it possible to overcome two other challenges. Firstly, the new system will create favourable framework conditions also for big banks' financial instruments that are eligible as capital. The temporary derogations that currently apply for these products can be removed after a transitional period. Moreover, the reform can prevent the accumulation of disclosures and safeguard taxes for foreign investors following the introduction of the automatic exchange of information internationally; such an accumulation would be damaging for the Swiss financial centre.
The reform will have a direct impact on withholding tax receipts and an indirect effect on income tax, wealth tax and profit tax receipts. Withholding tax receipts will fall by approximately CHF 200 million p.a. However, the removal of the obstacles in the capital market and treasury areas will help create jobs and added value in the medium term. This will lead to higher income tax and profit tax receipts for the Confederation, the cantons and the communes. Additional receipts will also arise from the taxation of previously untaxed assets of Swiss residents.
Withholding tax and the paying agent principle
Withholding tax is levied on interest, participation income, lottery winnings and certain insurance benefits. Because it is refunded only if the corresponding income is declared, withholding tax constitutes a safeguard for the taxation of Swiss residents' domestic income. Based on the tax return, the withholding tax levied is either set against cantonal and communal taxes or refunded in cash. Withholding tax receipts amounted to some CHF 5.9 billion in 2013. Much of that related to foreign beneficiaries, who cannot claim a refund of withholding tax in many cases or can claim only a partial refund. More of the receipts arise from the fact that withholding tax refunds are not claimed. There can be many reason for this, ranging from negligence and the avoidance of the administrative burden, to tax evasion.
Withholding tax is currently collected from the debtor of the taxable item in accordance with the debtor principle. A debtor can be a Swiss company that issues bonds, for example. If the bonds are interest-bearing, the company pays 65% of the gross coupon to the beneficiary and transfers the 35% tax deduction to the Federal Tax Administration. When the paying agent principle is applied, in contrast, the debtor transfers the full gross amount to the paying agent (typically a bank). Depending on who the investor is, the paying agent then decides whether withholding tax is to be collected in the case at hand.
Address for enquiries
Fabian Baumer, Vice-Director, Federal Tax Administration, 058 465 31 67
Last modification 03.10.2018