Switzerland’s economy is very stable and productive, which enables many Swiss companies to enlarge at global scales and become international brands. In addition to Switzerland’s homegrown companies, Switzerland’s reputation as a tax haven has lured many big foreign companies to becoming residents in Switzerland or doing their financial transactions through Switzerland’s financial institutions.
So as the international economic hub that Switzerland is, corporate tax is a significant concern both for the citizens and the corporations, so let’s take a look at how the tax system for corporates works in Switzerland.
The Corporate Tax System in Switzerland
The Swiss corporate tax system entered a new and important phase after major tax reform in 2019, when Swiss voters decided that the government should apply the same taxation rules to all companies, regardless of the company’s size. Just like other types of taxes, Swiss corporate taxes are subject to different levels of taxation, which are levied by the different levels of government in Switzerland.
Levels of taxation in Switzerland
The three levels of taxation in Switzerland are the taxes levied at the three levels of government that exist in Switzerland; the federal government, the canton, and the municipality. At each of these three government levels, certain tax types and rates may differ from the other taxes levied at a different level.
Federal corporate income tax
The federal government levies a corporate income tax (CIT) at a flat rate of 8.5%; however, the applicable tax base is deducted, which gives the federal government a CIT rate on the profit of 7.83%. At the federal level, no tax on capital is levied.
Cantonal/communal corporate income taxes
In contrast to the federal government, different cantons of the Swiss federation apply different tax laws and rates on corporates and businesses’ income. CIT rates at the cantonal level can be progressive based on the accumulated amount of income. Also, the lowest governmental level, the communal level, can impose different CIT rates on its resident corporations and businesses.
The corporate tax rate in Switzerland
Switzerland’s overall corporate tax rate that is applied on corporate income before the federal, cantonal, and communal taxes is between 11 to 21.6%, depending on the business or corporate location. Following the tax reform of 2019, special cantonal tax regimes which gave corporations vast freedom were abolished. This reform was an effort to maintain Switzerland’s reputation as a business location that offers fair opportunities to all and ensures healthy competitiveness.
Who Pays Corporate Tax in Switzerland?
In Switzerland, only resident companies pay corporate tax. So what is a resident company? According to Swiss law, a resident company is a company whose corporate seat or place of effective management is located in Switzerland.
However, non-resident companies may be subject to taxation in certain conditions, such as being partners in a Swiss partnership company or owning real estate in Switzerland.
Corporate tax for sole traders, partnerships, and limited partnerships
According to Swiss law, there are two categories of companies based on their business structure: capital-based companies and partnership-type companies.
In the partnership-type companies, the businesses included are sole partnerships (traders), general partnerships, and limited partnerships or LLC. These types of companies are not regarded as taxable entities, and their profit is taxed at the personal income tax of the partners involved.
Corporate tax for holding companies
Another type of company that exists is holding companies, entities whose only business activity is holding the controlling stock in other companies.
In Switzerland, these companies are subject to Holding Privilege, which enables them to be exempt from any taxes at the cantonal/communal level for all revenue from qualified participation other than dividends.
The general prerequisites for the holding privilege are the articles of formation that specify that the company’s sole or primary objective is the holding of participations and either qualified participation account for 2/3 of total assets or qualifying participation account for 2/3 of total income. Pure holding companies only pay federal corporate tax on profits that do not go to shareholders.
Corporate tax for mixed companies
Other types of companies with privileged tax regimes are auxiliary companies, also called mixed companies. For a company to qualify as a mixed company, at least 80% of its income must
come from foreign sources, and 80% of expenses must be related to business activities abroad.
In addition to Swiss-sourced income, only a small portion of the foreign-sourced income is taxed. The income tax scale is based on the number of full-time employees the company has. The lowest tax scale is for companies with less than six full-time employees at 10%, while companies with more than 30 are taxed at a 25% scale. If a Swiss resident has a decisive influence on the company, the scale is increased by 10% but can not exceed the 25% rate. If the foreign-sourced income is more than 200 million CHF, it’s always taxed at 10%.
Corporate tax exemptions in Switzerland
There are a number of cases in which corporate income tax is not applied. In addition to foreign-owned businesses and real estate, which are not subject to corporate income tax, income from Swiss corporate participation in other companies (be it Swiss or foreign) is also exempt from taxes. Holding companies and issuances worth less than 1 million CHF are exempt from issuance stamp tax.
Corporate tax credits in Switzerland
Swiss tax resident corporations and branches may face foreign non-recoverable withholding tax rates on dividend, interest, and royalty income derived from foreign sources.
Switzerland’s foreign-source income is often subject to corporate income taxation, resulting in double taxation. If a double tax treaty (DTT) exists, the Swiss government typically uses the credit technique to reduce or eliminate double taxation. Credit technique or tax credits means that the Swiss government will reduce the income tax of a corporate to avoid double taxing.
In order to take advantage of international tax credits, several restrictions and formalities must be completed by the corporation.
Corporate tax deductions in Switzerland
A dividend received deduction is available to Swiss firms and Swiss branches that have qualified participation (at least 20% of the shares of another corporation, whether Swiss, international, or a fair market value of at least CHF 2 million). The corporate income tax is lowered in proportion to the entire net taxable income from such participation. As a result, dividend income is tax-free in almost all cases.
VAT in Switzerland
The Swiss federal government enforces a value-added tax (VAT) at a fixed rate of 7.7% for sales and services 2.5% for basic goods. All types of Swiss companies selling products and services are subject to VAT, while foreign companies become subject to it if their Swiss-sourced or world-sourced income is worth more than CHF 100,000.
Corporate Tax Advice in Switzerland
Because of the complexity of the country’s tax system, many Swiss companies have been created to offer help to corporates with taxes. Many of these companies are available online, and many helpful review sites such as International Tax Review help you find competent tax advisors. These advisers can be very helpful to many categories of people, from amateur business people contemplating opening a business in Switzerland for the first time to big international corporations that want to expand with a Swiss branch.
Bottom Line
Corporate income tax is a great way to ensure big corporations give a fair contribution to society that enables their business activity and economic profit. This type of tax is a significant financial asset of countries that seek to improve their economy by taking advantage of globalization to attract and enable the formation of corporations, which also allows people to lift off poverty.
Corporates usually find the Swiss tax system very attractive, and the citizens see the corporate tax income as a valuable contribution to their country’s economy. And even though Switzerland’s reputation as a tax haven may not be entirely accurate, Switzerland is still a place that offers a lot of financial flexibility, enabling people to achieve their goals and create a financially upbeat country with a vibrant economy.
