Doing Business in Switzerland – Guide to Privileges

There are different opinions about Switzerland as a place for starting a company.

On the one hand, many people believe that businesses in Switzerland have to pay too high taxes, the regulations are too strict, and being the owner of a Swiss company is a luxury. 

This perception can be attributed to the awareness of the Swiss Confederation’s status as an important global financial center, assurance that it sustains the European tradition of taxation, and the assumptions of the regulator’s strict control over business. 

On the other hand, some people are convinced that doing business in Switzerland can be very profitable, the rules are quite reasonable, even with consideration of the established taxation scheme, and there are different substantial incentives. 

Let us look at the facts and draw our own conclusions. 

To begin with, Switzerland is an onshore de facto, though it is a classic midshore de jure. This means that the Swiss taxes are significantly lower than in the rest of Europe, and the control of the regulator over companies is rather mild, conducive to businesses. 

Consequently, this is a convenient, profitable, promising, and reputable jurisdiction for starting a company. Our experts on onshores, midshores, offshores explain that Switzerland is a sound alternative to pure offshores, especially because the prospects and future benefits of the tax-free territories are rather uncertain in the light of the current trends promoted by AML, KYC, FATCA, BEPS.

Moreover, there is another aspect of doing business in Switzerland that deserves your attention. It involves the legal (!) tax allowances offered by the federal tax authorities and in some cantons. 

Please note that the Swiss holding, domiciliary, auxiliary, service, or mixed companies can enjoy considerable perks in terms of reduced taxation, tax exemption, and some other matters.

Together with an experienced professional expert you can compare in detail the different legal types of Swiss entities and select the most beneficial one for your purposes. 

The Swiss Holding Companies 

Switzerland offers a wide choice of company types and allows registration of subsidiaries and branch offices of foreign businesses.

A holding is the most popular type of business entity in Switzerland. Its alternatives (domiciliary, auxiliary, mixed companies) are usually rather narrowly specialized and are much less widespread. 

The most important facts about holding companies:

• The main purpose of registration of a Swiss holding company is to hold and directly manage participation in affiliated (dependent) companies.
• The recommended business forms are AG / GmbH.
• The basic condition is the ban on any commercial activity in Switzerland.
• The reduced rate of capital tax and the zero income tax were formally abolished on January 1, 2020. However, the real situation is rather ambiguous, and changes need to be followed, as many cantons are introducing their own tax abatements and credits.
• Investments/income resulting from the holding company’s participation in other companies must represent at least 2/3 of the entire assets and/or the entire income of the holding company.
• At least one participation needs to exceed 10%, OR the entire value must exceed CHF 1 Million
• The holding period of investment needs to be more than 1 year.

Some activities that are not forbidden to holding companies in Switzerland:

• Asset management (of surplus cash/capital, intellectual property).
• Group management (mostly cost-plus method for transfer pricing purposes).
• Business activities in other jurisdictions including transactions with intellectual property.

The main advantages of Swiss holding companies:

• Deductible tax payments. The maximum federal income tax rate can be reduced from 8.5% to 7,8%.
• Reduction of the corporate income tax rate. This allowance is available if the holding company owns at least 20% of the share capital of another legal entity.
• Tax exemptions/reduction for the dividends (special conditions apply).
• Reduced annual capital tax rate. It varies between 0.01% and 0.2% for holding companies, while standard rates are substantially higher.
• Minimum capital requirements.

The tax incentives for holding companies in different jurisdictions in Europe:

Note: 

* – additional conditions may apply 

** – minimum requirements

DDT = Double Tax Treaty

Criteria

Switzerland

Netherlands / Cyprus / Luxemburg / Ireland

Participation Exemption

Dividends	+	+ / + / + / +*
Capital Gains	+	+ / + / + / +
Passive Income	+*	– / –* / – / –

Qualifying Requirements for Dividend Exemption

Min % Holding**	10% or CHF 1 Mio	5% / – / 10% (or EUR 1.2 Mio) / 5%
Min Holding Period**	–	– / – / 1 year / –

Capital Gains Exemption Terms

Min % Holding**	10% or CHF 2 Mio	5% / – / 10% (or EUR 6 Mio) / 5%
Min Holding Period**	1 year	– / – / 1 year / 1 year

Permissible Deductions

Capital Losses	+	–* / + / + / +*
Interest Costs	+	+* / + / + / +

Withholding Taxes Dividends

Standard rate (reduction under DDT)	35%	15% / – / 15%* / 20%
Lowest Non EU Treaty Rate	0%	0% / – / 0% / 0%

Additional Taxes

Taxation of foreign subsidiary	–	–* / –* / +* / +
Corporate taxes	7,8 (federal only)	25%* / 10% / 28.8% / до 25%*
Capital Taxes	1%*	– / – / – / –
Stamp Dutie / Transfer Tax	–*	–* / –* / –* / –
Debt to Equity Ratio	7:3	3:1 / – / 6:1 / –
Legislation –  Controlled Foreign Company (CFC)	–	– / – / – / –
Advance rulings available	+	+ / + / + / +
EU Parent Exemption	+	+ / + / + / +
Min Shareholding Requirement**	25%	5% / – / 10% (or EUR 1.2 Mio) / 5%
Min Holding Period**	2 years	2 years / – / 1 year / –
Liquidation (outside EU or DTT)	35%	15% / – / – / –
Interest (outside DDT)	–	– / – / –* / –
Royalties (outside DDT)	0%	– / – / 10-12% / 20%*
Double Tax Treaties	80	92 / 34 / 64 / 63

The Swiss Mixed Companies

The term ‘a mixed company’ does not refer to any specific business form. You can register a mixed company in Switzerland as AG, GmbH, or a branch office. 

The formal qualification criteria for companies intended to register as this type of legal entities include the following ones: the company’s main economic (commercial) activities need to be carried out outside Switzerland; the commercial activity in this jurisdiction is of secondary importance for the company. Swiss legislation does not provide a more specific interpretation.

The most important facts about mixed companies:

• Mixed companies in Switzerland have the right to keep their own office, they can also hire employees.
• The director must be a resident of Switzerland.
• Fiduciary (some nominee’s) services are allowed.
• Special tax privileges are provided (by some cantons).
• Some taxes are reduced (income, capital gains), but federal rates most often remain unchanged.
• Other tax benefits depend on each particular canton

Some most common reasons for incorporation:

• to sell and purchase goods outside Switzerland;
• to manage bank accounts / intellectual property;
• to render financial services;
• to solve administrative problems;
• to develop sales and marketing.

Taxation of mixed companies in Switzerland:

• The basis is the divisional calculation.
• Some types of income are taxed at standard rates (investment income from domestic sources, fiduciary business, commissions, etc.).
• Costs related to a particular income are allocated/covered by a deduction.
• If at least one of the company’s shareholders with the casting vote is a resident of Switzerland, the tax rate increases by 10% (but the scale cannot be more than 25%).
• Income from a foreign business over CHF 200 million is taxed at 10%.
• Net proceeds (out of specific participations such as dividends and capital gains after losses and deductions) are exempt from taxation.
• Tax reform does not affect the tax exemption on participation (if properly structured).
• The capital tax is equal to 0.1% of the taxable equity (a minimum rate of 250 CHF multiplied by the cantonal and communal multiplier).

The tax rate on income earned outside Switzerland is calculated on the basis of the number of employees of a mixed company:

• up to 6 people: 10%.
• 6-10 people: 15%.
• 10-30 people: 20%.
• more than 30 people: 25%.

Equity components:

• Deposited equity capital.
• Initial shares/equity.
• Hidden / declared reserves (basis – taxable income / equity / retained earnings).

Alternative Swiss business types eligible for reduced taxation

The legislation of Switzerland allows several alternatives that can perform tasks similar to those of holding companies (yet focused mainly on other purposes).

The Domiciliary Companies

A domiciliary company is a standard business type for large international companies. They need to meet a combination of two requirements when applying for incorporation in Switzerland:

• Have a registered office in Switzerland. 
• Have no intentions to conduct any commercial activities within the jurisdiction. Any business of a domiciliary company must be conducted abroad.

They are allowed to have some property outside Switzerland. Most often domiciliary companies are registered to perform administrative/managerial services (as the main core/link in a complex foreign structure).

In order to obtain the domiciliary status, a company needs to submit a request to the taxation authority. The service will thoroughly check the company’s profile and business, after which a decision will be made. 

Principles of taxation (of Swiss domiciliary companies):

• Zero regional income tax and the standard rate at the federal level is charged at 8.5% (on net income only).
• The standard taxes are levied on the following transactions: real estate transactions, income from property, dividends, profits arising from the investment of capital, or ownership of intellectual property rights.
• An exemption is granted from the following taxes: taxes on income from foreign sources, investment income (additionally are taken into account – contributions to the reserve fund/depreciation write-offs).

The Swiss Auxiliary (Management) Companies

Management companies (société auxiliaire in French) are rather indirectly associated with Switzerland. Such structures operate entirely outside the jurisdiction, although they are allowed to receive some revenue from Swiss sources, be administered from Switzerland, and be regulated under Swiss law. The basic requirement is the availability of clients/suppliers/contractors outside this jurisdiction.

The auxiliary companies’ features: 

• The pronounced development of the global presence is the main reason for the selection of Switzerland for registration of a management company.
• The format is well suited for the consolidation of the company’s business internationally by administering it from Switzerland (the Swiss headquarters of the international corporation/structure).
• Every auxiliary company maintains/expands ties with businesses located in the European Union.
• Management companies in Switzerland are entitled to a reduced (up to 12%) tax rate on foreign income.

Minimum basic requirements / conditions for registration:

• Only the most essential economic activity is allowed in Switzerland (the maximum level of income from it needs to be less than 20%).
• At least 80% of the income of the management company must be generated abroad.
• It is allowed to own real estate in Switzerland.
• Commercial activities are prohibited.
• Buyers and sellers must be outside this jurisdiction.
• The presence (even temporarily) of the traded goods in Switzerland is prohibited.
• The company personnel (if located in Switzerland) are only allowed to perform non-business related management functions. Foreign employees are authorized to perform all business operations.

Taxation:

• Dividend/Capital Gains Tax Deduction is allowed but depends on provisions of each particular canton.
• The following income taxes are levied at standard rates: on assets (dividends, interest, capital gains), on licensing (copyrights, trademarks), license fees, administrative expenses, and on real estate.
• Zero tax is levied on income from simple domiciliary companies, on net profits from a decisive share.
• The income tax rate is 4% / 7% (before and after the first 100 thousand CHF).
• There are schemes allowing to reduce the income tax (if the management company can dispose of qualified shares).
• The capital tax rate is 0.075% (minimum CHF 150).
• Equity = deposited share + original / nominal capital + share capital + visible / hidden reserves + profit after (!) taxation + net profit.

Having discussed the above-mentioned facts, we can draw some general conclusions:

Business in Switzerland is an extremely profitable, promising venture. 

There are many incentives, including reduced taxes. 

To take full advantage of all allowances and perks, you need to choose the right legal type of the business entity (company) and carefully plan its structure before registration. We are ready to help you in this difficult matter and take over all the organizational matters of registering a company, as well as the opening of a bank account in Switzerland.

If you decide to rely on our experts’ knowledge and experience, you are welcome to contact us at the e-address given at the top of this page.  

Finally, may we once again remind you that the right choice of a consultant at the planning stage is very important for the future success of your business. The InternationalWealth professional experts will guide you through the legal tax reduction nuances, help you minimize the likelihood of failure of your business registration application, and provide assistance in a diversity of practical arrangements.