Today we are talking about the jurisdiction of Switzerland for international business, the establishment of Swiss companies, the tax regime.
We have Ludmila Podsekina with us, managing partner of the Swiss company MP Part AG, an expert in tax and legal advice.
There is a strong perception that products and services in Switzerland are arguably the highest quality in the world, but also the most expensive. When it comes to corporate services, setting up companies in Switzerland – does this rule apply as well?
It is probably not the right question to start looking at jurisdictions for setting up a business company. The primary question in choosing a jurisdiction to do business in is whether the legal system, infrastructure facilities and corporate rules of the foreign country meet the objectives of the founder. The choice of a foreign country to conduct a business almost always means that the objective pursued by the business and/or its shareholders is not feasible, or not easily feasible, in the State of their residence. Hence, it is necessary to find a state that will solve the business challenges or increase its efficiency. Such a state may well be Switzerland, which is open for international business and offers quite interesting conditions for doing business.
As for the cost of corporate services – setting up companies in Switzerland is not a costly service and the annual business costs depend a great deal on the organization of the business. Switzerland is a pro-business territory, so if the result meets the objectives and expectations of the shareholder, it justifies the costs associated with the relatively high prices in the labor market and commercial real estate.
And what is appropriate to do, what actions to take and what to organise with the jurisdiction of Switzerland?
As already stated, it is important to be guided by the objectives and goals of the shareholder. Swiss companies are often used to access international trading markets and to develop a trading or brokerage business. Switzerland’s neutrality, as well as the strength and flexibility of its legal system, have made it popular for setting up international holding and corporate office structures. Lately, Switzerland has also been gaining popularity as a jurisdiction for crypto business.
What are Switzerland’s most frequent competitor countries – considered in the latest narrow sample of jurisdictions?
Switzerland is often compared to Cyprus or Malta, but this comparison is most likely based on tax attractiveness. Indeed, Switzerland offers very competitive (including in comparison with the aforementioned jurisdictions) corporate income tax rates. At the same time, Switzerland compares favorably with these jurisdictions in terms of the stability and predictability of the legislative space, the ease of tax administration, the efficiency of the banking system, and the protection of the confidentiality of businesses, their assets, and their owners.
What are the peculiarities of taxation of Swiss companies?
The main peculiarity of profit taxation is the lack of unified corporate tax rates. The tax rates mainly depend on the canton in which the company is incorporated and operates. This is due to the fact that the tax is charged at federal, cantonal and communal level. Each canton sets its own corporate tax rate, so the choice of canton where the company is incorporated has a direct impact on the subsequent taxation of the company. In taxable cantons, the effective income tax rate may be in the range of 12 % to 13 %.
Another special feature of the tax system is the tax on the company’s equity (analog of the wealth tax for individuals). This tax is levied on the book value of the net assets (there are exceptions) and is a fraction of a percent. The amount of the capital tax also depends on the canton of incorporation.
As an example, if the company is incorporated and operates in the canton of Zug/city of Zug – the effective corporate tax rate is 11.9 %, and the capital tax rate is 0.07 % (both rates are given for 2020).
Which cantons are known for their profiles for holding companies, for crypto, trading companies?
International companies are most commonly established in the canton of Zug. This is not only due to the advantageous taxation (as in the example above), but also to the willingness and openness of the canton and its authorities to international business. Also, the canton of Zug actively promotes and encourages crypto-asset activity (up to the possibility to pay in some cryptocurrencies!)
Companies are also often established in the cantons of Lucerne, Schwyz and of course Zurich!
There is a perception that the withdrawal of profits from a Swiss company is subject to high taxation. Is this true? And is there any way to reduce the tax burden associated with the payment of dividends to the shareholder?
This is true, but only if the shareholder resides in a state with which Switzerland does not have a double taxation treaty. In this case, the withholding tax rate is 35%. In all other cases, most of them, the withholding tax rate is determined by the applicable tax treaty.
For example, in the case of a Russian tax resident shareholder – when dividends are paid from a Swiss company to an individual resident in Switzerland, tax will be withheld at the rate of 15%. The tax withheld will be accounted for by the recipient of income against the tax on the dividend received in Russia, so there is no additional taxation in Russia on the income received in the form of a dividend from a Swiss company.
What is tax ruling and when it is necessary to check the necessity of its application and the consequences of not using it or, on the contrary, the benefits it brings.
Tax ruling is an agreement with the tax authority about the tax consequences of certain transactions, the applicable prices in transactions with related parties or generally the taxation of certain new business activities. Tax ruling is a very convenient tax planning tool and a sign of the flexibility of the tax administration in Switzerland. It is recommended in every case where there is uncertainty about the tax consequences of certain activities or transactions and it is an excellent way to eliminate this uncertainty.
How is the exchange between Russia, Ukraine and Switzerland going so far. How smoothly or if there are known bottlenecks – where to anticipate them and what to do in advance to pass successfully?
The confidentiality of doing business that Switzerland maintains does not mean data secrecy or the usual “bank secrecy” regarding tax information. On the contrary, Switzerland is a full-fledged participant in international tax cooperation which means that Switzerland is not on tax havens’ blacklists, lists of non-cooperative jurisdictions and is not subject to any restrictions on doing business with any country in the world.
The exchange of tax information takes place on request, spontaneously or through the automatic exchange of information. With Russia, Switzerland has been implementing the automatic exchange of information since 2018. No agreement has yet been reached with Ukraine on an automatic exchange of information, but it is expected as soon as Ukraine finally joins the international exchange system. Under this exchange, information on any financial accounts owned or controlled by a foreign beneficiary is to be transferred and becomes available for analysis by the tax authorities of the receiving party.
Thus, beneficiaries of financial accounts in Switzerland need to be aware that information on such an account as well as the income on the account will be available to the tax authorities in their country of tax residence. It is important to ensure that the data obtained in the exchange corresponds to the data provided by the taxpayer himself during the declaration campaign. Swiss law provides for the possibility for the client to verify the accuracy of the information to be exchanged and to correct the data if it is not correct. This is a very practical feature and I recommend always using it.
In conclusion, I would like to say that Switzerland is a great jurisdiction to do business in. But, as in any other jurisdiction, it is important to be thoughtful about the planning of the company and its incorporation and to get expert advice on all aspects of Swiss corporate and tax law of interest to future shareholders before the actual incorporation of the legal entity takes place.