Switzerland is an attractive business hub. What is their secret?
Corporate structures
Switzerland is an attractive business hub. What is their secret?
Wed 21 Jul 2021
Choosing a business location involves many considerations, with tax being only one of them. Nevertheless, tax is a consideration. Below is a note commenting on the attractions of Switzerland as a business location. There may of course be other locations that should be considered.
Switzerland attracts global business, research, and innovation, and maintains the high ground when it comes to attracting talent and capital.
Considered one of the top five most economically free countries (see here), Switzerland ranks topmost in Europe and was one of the first to endorse a liberal market and competitive trade vision over a century ago. A plethora of free trade agreements and an abundant network of international double-taxation treaties promote locations like Geneva or Zurich as centers of international trade and finance.
Their accessible and high-quality education, liberal employment law, and a firm social security policy cultivate a pool of highly specialized professionals and experts originating from all over the world. While locations like Basel are internationally noted for Biotech research, Switzerland has taken the lead in adopting comprehensive regulations on block-chain and Fintech industries and has established the world’s first-ever crypto-valley in Zug.
Although also well known for its strong and stable Swiss franc, the main feature of Switzerland’s success is its incentive-based tax policy that encourages the development of business and innovation.
While many refer to it as a “European tax haven”, the Swiss tax jurisdiction is just so much more than appealing tax rates.
Facilitating accounting is key for corporate taxes. Companies are relieved from the burden of a two-book system, since the statutory financial statements serve as the basis for assessment, with some tax adjustments being done directly in the tax return. The alignment with the consolidated reports of the group is convenient because the financial year and tax period may deviate from the calendar year upon the choice of the company. Furthermore, international trade is facilitated by allowing the bookkeeping in English and in a foreign functional currency, with some cantons like Geneva even permitting the filing of a tax return in foreign money.
Switzerland endorses the concept of administration as a service. Correspondence with authorities is swift, convenient, and frequent in English. Companies file a single tax return even when they are subject to taxation in many Swiss cantons. The tax authorities continue to enhance their digital services for document submission and consultation of the file, with some processes already being fully digital, such as quarterly VAT reporting. Companies may likewise anticipate their potential fiscal consequences with full certainty thanks to the possibility of filing a preliminary ruling request. With administrative procedural rights being guaranteed by the Federal Constitution, a free-of-charge opposition to a tax assessment may be filed directly to the competent tax administration, prior to a judicial appeal, and even in the latter case represented by a certified lawyer is not required.
Compliance is essential for any taxpayer, and its simplicity is the reason why the Swiss system is so effective. Legal documentation, case law and safe harbour rules are accessible in various languages, and most of the forms are available in English. Invoices and other documents may be stored in electronic form and the filing of corporate tax returns is almost paperless. The transfer pricing documentation requirements are limited to country-by-country reporting and there are currently no Swiss CFC rules to keep track of. The Swiss Administrations’ websites are intuitive, clear, and provide exhaustive information on the key aspects of recurrent tax compliance.
While the paradigm is shifting towards attracting more talent and innovation, Switzerland’s appeal to foreign capital is still growing.
Since January 2020, Switzerland has seen a reduction of corporate tax rates at the cantonal level. Currently, the effective income tax rates are amongst the lowest in Europe (i.e. 14% in Geneva and 12% in Zug). Recently, the OECD agreed to a global minimum tax rate of at least 15% for companies operating internationally with more than EUR 750 million in annual turnover. Switzerland conditionally supports key parameters for international corporate taxation but its main concern is to ensure that, in case of minimum taxation, the new tax rules shall apply uniformly in the member countries and a balanced solution between tax rate and tax base shall be found.
Generally, the Swiss Cantons compete on rates and other incentives, particularly tax holidays for up to 10 years for newly incorporated start-ups and companies engaged in R&D, patent-holders and IP licensees. Relocation of fixed assets and intangibles from abroad is facilitated through an immigration step-up measure, allowing tax exemption on the imported unrealised reserves, and relocation within the Confederation may be done without adverse tax effect. Fixed assets or qualified participations (i.e. holding of at least 10%) may also be reemployed without tax burden, and corporate restructurings and refinancing are generally tax-exempt.
The Swiss VAT rate is one of the lowest in Europe (7.7%), which enhances the consumption power on the one hand, and facilitates business transactions on the other, with a plethora of exemptions for various kinds of goods or services.
Although Switzerland applies withholding tax on dividends in most cases, intra-group profit distributions are exempt at the national level, and often in the cross-border context thanks to a wide array of international treaties. On the other hand, there is no taxation at source for outbound payments on licences and services. Withholding tax on loan interest paid to foreign investors will soon be abolished to enhance the Swiss capital market.
Unlike in many states, capital gains from share-purchase agreements are generally exempt from tax at the level of the individual shareholders. Switzerland likewise promotes the use of employee stock option plans and offers a variety of tax incentives for expatriate staff.
The takeaway
The Swiss tax system is swiftly adapting to the new challenges of the global economy and offers significant benefits to attract talent and capital. The Confederation offers easy and convenient access to administrations and tax compliance procedures that work efficiently, allowing clarity and certainty for future projects. It also offers incentives to capital markets, innovation, and sustainable prosperity initiatives, all while remaining faithful to free market principles and global inclusion.
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