Taxes in Switzerland are levied at federal, cantonal and local level. Dividends and interests are a subject of the withholding tax, at a rate of 35%, however the withholding tax can be deducted in full, under certain conditions.
Under the agreements signed between Switzerland and the EU, Switzerland has full access to benefits similar to those in the EU parent – subsidiary directive. This means that the withholding tax is reduced to 0% on cross – border payments of dividends between related companies that reside in EU member states and in Switzerland. The 0% tax rate is available, provided that the parent company holds at least 25% of the capital of the distributing company and other certain criteria is satisfied.
In addition to this advantage, many of Switzerland’s double taxation treaties provide for a 5% or even 0% residual withholding tax for qualifying investments. Furthermore, the repayment of nominal share capital and capital surplus is exempt from withholding tax.
After a company completes a financial year and the profit is calculated, the company’s shareholders are entitled to a share in the annual profit. A portion of the net profit, the dividend, is distributed to the company’s shareholders. The Swiss dividend is allocated at a fix amount for each share.
Assessment of dividends
According to the Swiss legislation, public limited liability companies must distribute 5% of their net reported net profit annually to the general reserves, if the respective reserves have not reached 20% of the paid-up share capital. The net profit is a subject to other provisions which have been established by the company. Considering this aspects, this leads to a reduction of the assessment base for the dividend amount.
The dividend is determined after the proper allocations have been made, according to the Swiss legislation and the provisions included in the company’s articles of association. The general meeting of shareholders determines the exact amount of the dividend by vote.
The federal withholding tax
A company shareholder must declare received dividends as income tax. The gross dividend is considered before the deduction of the withholding tax, while the net dividend represents what is left after the withholding tax has been deducted. The amount of the gross dividend increases the amount of the taxable income.
The company’s board decides what amount of profit should remain within the company. There is no fixed percentage for the net profit that can be distributed as dividends. However, it’s important to note that companies try to impose a constant dividend policy in Switzerland. The goal of this initiative is to keep the value of the dividend the same as in previous years, regardless if there are changes in the current financial status.
Income dividend payments in Switzerland
All legal entities, except for non – profitable organizations are subject to the corporate tax in Switzerland. Companies that make profit from dividends or capital gains are allowed to apply for tax deductions, in order to avoid multiple taxations.
Swiss companies and foreign companies with a registered office in Switzerland are allowed to apply for tax deductions. In order to benefit from tax reductions on dividends, the shareholders must have at least 10% participation of the company’s capital, or the value of the participation must exceed 1,000,000 CHF on the stock market.
At cantonal and local level, the dividend tax deduction is applied the same, except that the income of the participation holding must be at least 2/3 and must come from foreign investments. Holding companies must not conduct any business operations in Switzerland.
Deductions for dividend expenses in Switzerland
Interests and administrative expenses are eligible for tax refunds in Switzerland, as long as they don’t exceed the safe haven limit imposed by Swiss authorities. Considering that dividends affect the profits of a company, as well as the earnings made on the dividends, the participation deduction is made according to the expenses.
Swiss holding companies that have no other source of income can benefit from deductions of dividend expenses of up to 100%. The interest expenses on income made from dividends corresponds to the tax applied on income. The same procedure is applied on cantonal level, with the exception holding companies, as all their incomes are exempt from taxation.