Withholding tax

In Switzerland, withholding tax is a tax levied at source on capital income such as dividends, interest, and capital gains. It is collected by financial institutions or companies that pay these capital incomes to beneficiaries. Withholding tax is a method of tax collection that ensures a certain fiscal equality among taxpayers, whether they are residents or non-residents in Switzerland. It is a cantonal tax. Each canton can therefore freely set the rate of withholding tax it wishes to apply. The amount of withholding tax deducted at source can be deducted from the taxpayer’s income tax liability. If the amount of withholding tax is higher than the income tax due, the excess can be refunded to the taxpayer.

Withholding tax as a transitional tax

Withholding tax is often considered a transitional tax in Switzerland. This means that investors who invest in Swiss stocks or have bank accounts in Switzerland are subject to withholding tax until they reach a certain investment threshold. Once this threshold is reached, investors can then request a refund of the withholding tax deducted from their investments.
This feature of withholding tax was put in place to encourage foreign investors to invest in Switzerland, while ensuring that taxes are paid on the income generated by these investments. Withholding tax also allows Swiss tax authorities to collect taxes on foreign source income without having to request additional information from investors.

However, this approach can also make the tax collection process more complex for investors, especially for foreign investors who are not familiar with Swiss tax rules. Investors must be aware of the investment threshold and the applicable tax rate, as well as the withholding tax refund deadlines. It is also important to note that investors must comply with the tax rules of their own country in terms of declaring foreign source income.

In summary, withholding tax is a transitional tax in Switzerland that allows investors to benefit from favorable tax treatment, while ensuring that taxes are paid on the income generated by investments. However, it is essential for investors to understand the applicable tax rules and to comply with the tax obligations in their own country.

Conditions for implementing withholding tax

In Switzerland, the conditions for implementing withholding tax are defined in the Federal Act on Withholding Tax (LIA). According to this law, withholding tax applies to capital incomes such as interest, dividends, and commissions. For a capital income to be subject to withholding tax, it must meet certain conditions. First, the income must be paid to a natural or legal person domiciled in Switzerland or having a permanent establishment there. Next, the income must come from a Swiss source, i.e., a person or entity domiciled or having a permanent establishment in Switzerland. Finally, the income must be taxable at the federal level. The law also specifies that certain categories of capital incomes are exempt from withholding tax. These include interest on mortgage claims, insurance indemnities, and interest on savings accounts up to a certain amount. Regarding dividends, withholding tax applies when the dividend is distributed by a Swiss company, regardless of the nationality of the shareholder beneficiary. The rate of withholding tax on dividends is set at 35%, except in certain specific cases provided for by law where a reduced rate may apply.

Calculation of withholding tax on dividends

The calculation of withholding tax on dividends is done in two steps. First, the rate of this tax is applied to the gross amount of dividends received. Then, the amount of withholding tax thus calculated is deducted from the gross amount of dividends received. It should be noted that the rate of this tax varies depending on the canton where the capital income is paid. The amount of withholding tax is therefore calculated by multiplying the rate of withholding tax by the gross amount of dividends received. For example, if a company pays dividends of a gross amount of CHF 10,000 to a shareholder residing in a canton where the rate of withholding tax is 30%, the amount of withholding tax deducted at source will be CHF 3,000. The beneficiary of the dividends will therefore receive a net amount of CHF 7,000. This net amount must be declared in the income tax return, and the amount of withholding tax already deducted at source can be deducted from the income tax due.

Special tax regimes for withholding tax on dividends

There are certain special tax regimes for withholding tax on dividends in Switzerland. These regimes allow beneficiaries to reduce the amount of withholding tax deducted at source. The participation tax regime allows dividend beneficiaries to reduce the rate of withholding tax. This regime applies to qualified participations, i.e., participations held to the extent of at least 10% of the share capital of a Swiss or foreign company. To benefit from this regime, the beneficiary must meet certain conditions, including being domiciled in Switzerland and holding the participation for at least one year. The double taxation tax regime allows dividend beneficiaries to reduce the amount of withholding tax deducted at source. This regime applies to beneficiaries residing in a country with which Switzerland has concluded a double taxation convention. In this case, the beneficiary can request a partial or total refund of the withholding tax.

Advice for Swiss companies on managing withholding tax on dividends

Swiss companies must efficiently manage withholding tax on dividends to minimize tax and administrative costs. First, companies must ensure that dividends paid are correctly recorded in their accounting. They must also ensure that the data of the dividend beneficiaries are up to date and accurate to avoid errors in withholding tax deduction. Next, companies can optimize the management of withholding tax by using the special tax regimes mentioned above. They can thus reduce the amount of withholding tax deducted at source and improve their cash flow. Finally, companies must ensure that tax returns related to withholding tax are correctly filled out and filed within the deadlines. They must also be able to respond to requests for information from tax authorities in case of control.

Functioning of double taxation conventions

Withholding tax is a Swiss tax system that can impact double taxation conventions signed between Switzerland and other countries. Double taxation conventions are tax agreements concluded between two countries to prevent taxpayers from being taxed twice on the same income.
Under these conventions, foreign residents can benefit from a refund or exemption of withholding tax levied on their investments in Switzerland. This is possible thanks to a non-discrimination clause which stipulates that foreign residents must not be treated less favorably than Swiss residents in tax matters.

The functioning of withholding tax in relation to double taxation conventions can vary depending on the countries. Some countries may require foreign investors to request a refund of withholding tax from Swiss tax authorities, while other countries may allow investors to deduct withholding tax from their taxes in their own country.

An initial consultation

from 60 min to CHF 220.00

Asses your situation with a specialized lawyer.

You only want an appointment to ask some questions?
Not sure what to do?
Is your situation unclear?

Opt for an initial consultation with a lawyer.

You will then decide if you wish to proceed and our lawyers will give you the cost of the procedure according to your case. Appointments available in person or by videoconference.

Take an appointment with a lawyer

Need a lawyer in Geneva?

Take an appointment now

by calling our secretariat or by filling out the form below. Appointments available in person or by videoconference.

+41 22 348 32 35

PBM Avocats – Law firm based in Geneva and Lausanne. Lawyers registered at the bars of Geneva and Vaud.

Our Team

PBM Avocats in Geneva

Boulevard Georges-Favon 26

1204 Genève

T. : +41 22 348 32 35

PBM Avocats in Geneva

Boulevard Georges-Favon 26

1204 Genève

T. : +41 22 348 32 35