Withholding tax

In Switzerland, withholding tax is a tax levied at source on capital income such as dividends, interest and capital gains. It is levied by the financial institutions or companies that pay these capital gains to the beneficiaries. Withholding tax is a method of tax collection that ensures a degree of tax equality between taxpayers, whether resident or non-resident in Switzerland. It is a cantonal tax. Each canton is therefore free to set its own withholding tax rate. The amount of withholding tax deducted at source can be offset against the taxpayer’s income tax liability. If the amount of withholding tax deducted exceeds the amount of income tax due, the excess may be refunded to the taxpayer.

Withholding tax is a transit tax

Withholding tax is often regarded as a transit tax in Switzerland. This means that investors who invest in Swiss shares or have bank accounts in Switzerland are subject to withholding tax until they reach a certain investment threshold. Once this threshold has been reached, investors can apply for a refund of the withholding tax deducted from their investments. This particular feature of withholding tax was introduced to encourage foreign investors to invest in Switzerland, while ensuring that taxes are paid on the income generated by these investments. Withholding tax also enables the Swiss tax authorities to collect taxes on income from foreign sources without having to request additional information from investors. However, this approach can also make the tax collection process more complex for investors, especially foreign investors unfamiliar with Swiss tax rules. Investors need to be aware of the applicable investment threshold and tax rate, as well as withholding tax refund deadlines. It is also important to note that investors must comply with their own country’s tax rules regarding the declaration of income from foreign sources. In short, withholding tax is a transit tax in Switzerland that allows investors to benefit from favorable tax treatment, while ensuring that taxes are paid on income generated by investments. However, it is essential for investors to understand the applicable tax rules and to comply with tax obligations in their own country.

Conditions for the introduction of withholding tax

In Switzerland, the conditions for the introduction of withholding tax are laid down in the Federal Law on Withholding Tax (LIA). Under this law, withholding tax applies to capital income such as interest, dividends and commissions. For capital income to be subject to withholding tax, certain conditions must be met. Firstly, the income must be paid to an individual or legal entity domiciled in Switzerland or with a permanent establishment there. Secondly, the income must derive from a Swiss source, i.e. from a person or entity domiciled or having a permanent establishment in Switzerland. Finally, the income must be taxable at federal level. The law also specifies that certain categories of capital income are exempt from withholding tax. These include interest on mortgages, insurance indemnities and interest on savings accounts up to a certain amount. With regard to dividends, withholding tax applies when the dividend is distributed by a Swiss company, regardless of the nationality of the recipient shareholder. The withholding tax rate on dividends is set at 35%, except in certain specific cases provided for by law, where a reduced rate may apply.

Calculation of dividend withholding tax

Dividend withholding tax is calculated in two stages. First, the withholding tax rate is applied to the gross amount of dividends received. Secondly, the amount of withholding tax calculated in this way is deducted from the gross amount of dividends received. It should be noted that the withholding tax rate varies according to the canton in which the capital income is paid. The amount of withholding tax is therefore calculated by multiplying the withholding tax rate by the gross amount of dividends received. For example, if a company pays dividends of CHF 10,000 gross to a shareholder residing in a canton where the withholding tax rate is 30%, the withholding tax deducted at source will be CHF 3,000. The dividend recipient will therefore receive a net amount of CHF 7,000. This net amount must be declared on his income tax return, and he can deduct the amount of withholding tax already deducted from his income tax liability.

Special tax regimes for dividend withholding tax

There are special withholding tax regimes for dividends in Switzerland. These schemes enable recipients to reduce the amount of withholding tax deducted at source. The participation tax regime enables dividend recipients to reduce the rate of withholding tax. This regime applies to qualifying holdings, i.e. holdings representing at least 10% of the share capital of a Swiss or foreign company. To benefit from this regime, the beneficiary must meet certain conditions, in particular be domiciled in Switzerland and have held the shareholding for at least one year. The double taxation regime enables dividend recipients to reduce the amount of withholding tax deducted at source. This regime applies to beneficiaries resident in a country with which Switzerland has signed a double taxation agreement. In this case, the beneficiary may request a partial or total refund of the withholding tax.

Dividend withholding tax tips for Swiss companies

Swiss companies need to manage dividend withholding tax efficiently to minimize tax and administrative costs. First and foremost, companies must ensure that dividend payments are correctly recorded in their accounts. They must also ensure that the details of dividend recipients are up to date and correct, to avoid withholding tax errors. Secondly, companies can optimize withholding tax management by making use of the special tax regimes mentioned above. In this way, they can reduce the amount of withholding tax deducted at source and improve their cash flow. Finally, companies must ensure that withholding tax returns are correctly completed and filed on time. They must also be in a position to respond to requests for information from the tax authorities in the event of an audit.

How double taxation agreements work

Withholding tax is a Swiss tax system that can have an impact on double taxation agreements signed between Switzerland and other countries. Double taxation treaties are tax agreements signed between two countries to avoid taxpayers being taxed twice on the same income. Under these agreements, foreign residents can benefit from a refund or exemption from withholding tax levied on their investments in Switzerland. This is made possible by a non-discrimination clause, which stipulates that foreign residents must not be treated less favorably than Swiss residents in tax matters. The way in which withholding tax operates in relation to double taxation agreements can vary from country to country. Some countries may require foreign investors to apply to the Swiss tax authorities for a refund of the withholding tax, while other countries may allow investors to deduct the withholding tax from their taxes in their own country.