After more than ten years of discussions, the reform of the Swiss WHT on interest has taken a decisive hurdle. The Federal Council wants to strengthen Switzerland as a location for the debt capital market and for group financing activities in all sectors and has finally adopted the dispatch on the Federal Withholding Tax Act (strengthening the debt capital market) at its meeting on 14 April 2021.
Unlike the initial proposal more than ten years ago, the reform provides for the abolition of the WHT on domestic interest without replacement. However, this revision does not apply to interest on customer deposits by domestic natural persons (e.g. interest on bank accounts held by Swiss resident natural persons). The proposed abolishment of WHT on domestic interest will make it possible to issue bonds in Switzerland without triggering the prohibit-ingly high WHT of 35% on interest payments. Consequently, Swiss bonds will also become interesting for foreign investors as they must no longer file for a refund of the WHT (in case of treaty protection) or assume the (non-refundable part of the) WHT as a final tax burden. It is expected that the issuance of bonds, which has so far been carried out abroad, will in future increasingly take place out of Switzerland. Furthermore, the abolishment of Swiss WHT on interest will also simplify the structuring of group financing when the financing takes place abroad as guarantees and securities by Swiss group companies may no longer lead to adverse Swiss WHT consequences. The Swiss debt capital market as well as in-tra-group financing activities in Switzerland shall be strengthened.
In addition to the abolishment of WHT on interest, the Federal Council proposes to abolish the securities transfer tax on domestic bonds. This will make it more attractive to acquire domestic bonds (and bond-like securities such as structured products) via a domestic securities dealer.
Whether the long awaited reform of Swiss WHT on interest will finally be implemented has not yet been decided. However, by refraining from implementing replacement measures the reform proposal has certainly gained support from the financial industry sector. On 18 August, the Economic Affairs and Taxation committee of the national council has adhered to the proposal of the Federal Council while proposing some minor amendments to stimulate the Swiss debt capital market.
The Federal Council proposes to extend the applicability of the notification procedure for WHT on dividends to corporate shareholders. The Council proposes that the procedure can be used from a participation of 10% instead of currently 20%. The authorisation procedure required in the international context shall also be simplified administratively. Authorisa-tions obtained shall be valid for five years instead of currently three years. It is expected that this proposal by the Federal Council will be implemented.
In January 2021, the Swiss Federal Tax Administration has published a communication regarding the levy of securities transfer tax upon redemption in kind by collective investment schemes. The communication clarifies under which circumstances non-cash disbursements in the form of taxable securities by a collective investment scheme to the investor are not subject to the securities transfer tax.
The Swiss Stamp Tax Act exempts from the securities transfer tax the contribution in kind of taxable securities against issuance of shares in collective investment schemes. By implica-tion, the redemption in kind can only be exempted from the securities transfer tax if the collective investment scheme is thereby partially or fully liquidated. In the case of a domes-tic collective investment scheme, WHT is then generally due on the corresponding liquida-tion surplus.
In contrast, a redemption in kind within the meaning of the Swiss Stamp Tax Act does not exist if the investor exercises his contractual right of termination and thus asserts the claim to the share of the net assets of the collective investment scheme to which he is entitled. Pursuant to the Federal Act on Collective Investment Schemes investors are in principle entitled to demand the redemption of their units and their payment in cash at any time.
If such claim is settled by delivery of taxable securities from the fund assets instead of a cash payment, this constitutes a transfer of taxable securities for consideration and is conse-quently in principle subject to securities transfer tax. In these cases, there is therefore no redemption in kind which would not be subject to securities transfer tax.
If you wish to discuss this topic, please contact: Wenger Vieli AG, Zurich
