Federal Council adopts dispatch on amending the Withholding Tax Act

Bern, 11.09.2015 - The Federal Council wants to maintain the withholding tax exemptions for certain financial instruments of Swiss banks and introduce new ones. In so doing, it intends to strengthen the systemic stability of Switzerland's financial centre. During its meeting today, it adopted the dispatch on amending the Withholding Tax Act.

In its dispatch, the Federal Council proposes maintaining the existing withholding tax exemptions for a limited period with the aim of boosting the stability of the Swiss financial centre. This will continue to benefit contingent convertible bonds (CoCos) and write-off bonds.

A temporary withholding tax exemption should also be introduced for bonds that were approved by FINMA at the time of issuance and that can be written down or converted into equity capital as part of restructuring procedures in the event of (threatened) insolvency (bail-in bonds).

These exemptions create the necessary tax environment for Swiss banks to be able to issue these financial instruments from Switzerland at competitive terms, and thus boost the stability of Switzerland's financial centre.

Safeguard role of withholding tax only partly fulfilled

Withholding tax guarantees the direct taxation of Swiss taxable persons. It also partly plays a safeguard role vis-à-vis persons resident abroad. For the latter, the collection of this tax can also serve purely fiscal purposes.

The current system only partly fulfils the safeguard role in Switzerland because although the foreign-sourced income of persons with an unlimited tax liability in Switzerland is subject to profit or income tax, it is not covered by withholding tax. At the same time, withholding tax makes Swiss bonds unappealing to institutional investors, which is why groups resident in Switzerland regularly issue their bonds through foreign companies. In this way, value-added is created abroad and the jobs associated with this are established abroad.

The change in system from the debtor to the paying agent principle, as initially proposed by the Federal Council, would have eliminated these drawbacks. As this proposal did not receive the support of a majority in the consultation, the Federal Council will not introduce the paying agent principle for the time being.

The paying agent principle should be discussed again before the exemptions for CoCos, write-off bonds and bail-in bonds expire. The Federal Department of Finance will submit a new proposal to the Federal Council after the referendum on the initiative "Yes to the protection of privacy".

Glossary

CoCos

Contingent convertible bonds (CoCos) are defined in more detail in Articles 11 to 13 of the Banking Act. CoCos are bonds which are converted into equity capital (mostly shares) if a trigger event occurs (e.g. the issuing bank's common equity falls below a certain defined ratio). CoCos are one of the too big to fail measures.

Write-off bonds

Write-off or write-down bonds are also defined in more detail in Articles 11 to 13 of the Banking Act and are another of the too big to fail measures. Unlike CoCos, these bonds are not converted into equity capital if a trigger event occurs, but are instead written off.

Bail-in bonds

Bail-in bonds are bonds that were approved by FINMA at the time of issuance as debt issued in compliance with regulatory requirements and that can be converted into equity capital or written down as part of restructuring procedures in the event of threatened insolvency in accordance with Article 25 in conjunction with Article 31 paragraph 3 of the Banking Act.

Address for enquiries

Patrick Teuscher, Communications, Federal Tax Administration FTA
Tel. +41 58 464 90 00, kommunikation@estv.admin.ch