Withholding tax

In Switzerland, withholding tax is a source tax levied on capital income, such as interest, dividends, and capital gains. Financial institutions and companies that pay these incomes to beneficiaries are responsible for withholding this tax. This collection system ensures some fiscal equality among taxpayers, whether they are residents or non-residents in Switzerland. It is a cantonal tax, and each canton can freely set the applicable withholding tax rate. The amount of withholding tax deducted at the source can be offset against the income tax payable by the taxpayer. If the amount of withholding tax is higher than the income tax due, the excess can be refunded to the taxpayer.

Withholding tax as a transitional tax

Withholding tax is often considered a temporary tax in Switzerland. Investors investing in Swiss shares or having bank accounts in Switzerland are subject to withholding tax until they reach a certain investment threshold. Once this threshold is reached, investors can then request a refund of the withholding tax deducted from their investments.
The purpose of withholding tax is to encourage foreign investors to invest in Switzerland, while ensuring that taxes are paid on the income generated by these investments. It also allows Swiss tax authorities to collect taxes on foreign-sourced income without having to request additional information from investors.

However, for foreign investors unfamiliar with Swiss tax rules, this system can be complex to manage. Investors must be aware of the investment threshold and the applicable tax rate, as well as the refund deadlines for withholding tax. It is also important to note that investors must comply with the tax rules of their own country regarding the declaration of foreign-sourced income.

Conditions for implementing withholding tax

In Switzerland, the Federal Act on Withholding Tax (LIA) defines the conditions for applying withholding tax. According to this law, withholding tax applies to capital income, such as interest, dividends, and commissions. For capital income to be subject to withholding tax, it must meet certain conditions. Firstly, the income must be paid to a natural or legal person domiciled in Switzerland or having a permanent establishment there. Secondly, the income must come from a Swiss source, meaning from a person or entity domiciled or having a permanent establishment in Switzerland. Finally, the income must be taxable at the federal level. The law also specifies that certain categories of capital income are exempt from withholding tax. These include interest on mortgage claims, insurance indemnities, and interest on savings accounts up to a certain amount. Regarding dividends, withholding tax applies when the dividend is distributed by a Swiss company, regardless of the nationality of the shareholder beneficiary. The withholding tax rate on dividends is set at 35%, except in specific cases provided for by law where a reduced rate may apply.

Calculation of withholding tax on dividends

The calculation of withholding tax on dividends is done in two steps. First, the withholding tax rate is applied to the gross amount of dividends received. Then, the amount of withholding tax thus calculated is deducted from the gross amount of dividends received. It should be noted that the rate of this tax varies depending on the canton where the capital income is paid (see the page dedicated to tax rates). The amount of withholding tax is therefore calculated by multiplying the withholding tax rate by the gross amount of dividends received. For example, if a company pays dividends with a gross amount of 100,000 CHF to a shareholder residing in a canton where the withholding tax rate is 30%, the amount of withholding tax deducted at source will be 30,000 CHF. The dividend beneficiary will therefore receive a net amount of 70,000 CHF. This net amount must be declared in the income tax return, and the amount of withholding tax already deducted at source can be deducted from the income tax due.

Special tax regimes for withholding tax on dividends

There are special tax regimes for withholding tax on dividends in Switzerland. These regimes allow beneficiaries to reduce the amount of withholding tax deducted at source. The participation tax regime allows dividend beneficiaries to reduce the withholding tax rate. This regime applies to qualified participations, meaning participations held at least 10% of the share capital of a Swiss or foreign company. To benefit from this regime, the beneficiary must meet certain conditions, including being domiciled in Switzerland and holding the participation for at least one year.
The double taxation tax regime allows dividend beneficiaries to reduce the amount of withholding tax deducted at source. This regime applies to beneficiaries residing in a country with which Switzerland has signed a double taxation convention. In this case, the beneficiary can request a partial or total refund of withholding tax.

Advice for Swiss companies on managing withholding tax on dividends

Swiss companies must manage withholding tax on dividends effectively to minimize tax and administrative costs. Firstly, companies must ensure that dividends paid are correctly accounted for in their accounting. They must also ensure that data on dividend beneficiaries are up to date and correct to avoid errors in withholding tax deduction. Next, companies can optimize the management of withholding tax by using the special tax regimes mentioned above. They can thus reduce the amount of withholding tax deducted at source and improve their cash flow. Finally, companies must ensure that tax returns related to withholding tax are correctly completed and filed within the given deadlines. They must also be able to respond to inquiries from tax authorities in case of control.

Operation of double taxation conventions

In Switzerland, withholding tax can impact double taxation conventions signed with other countries. Double taxation conventions are fiscal agreements concluded between two countries to avoid taxpayers being taxed twice on the same income.
Under these conventions, foreign residents can benefit from a refund or exemption from withholding tax deducted on their investments in Switzerland. This is possible thanks to a non-discrimination clause stipulating that foreign residents must not be treated less favorably than Swiss residents in tax matters.

The operation of withholding tax concerning double taxation conventions can vary by country. Some countries may require foreign investors to request a refund of withholding tax from Swiss tax authorities, while others may allow investors to deduct withholding tax from their taxes in their own country.

In summary, withholding tax is a tax deducted at source in Switzerland on capital income such as dividends, interest, and capital gains. It ensures some fiscal equality among taxpayers, whether they are residents or non-residents in Switzerland. Foreign investors investing in Switzerland can benefit from favorable tax treatment thanks to withholding tax, which also allows Swiss tax authorities to collect taxes on foreign-sourced income without having to request additional information from investors.

To benefit from withholding tax on dividends, investors must comply with the tax rules in force in Switzerland and in their country of residence. Swiss companies distributing dividends must manage withholding tax effectively to minimize tax and administrative costs. They can particularly use the special tax regimes provided by law to reduce the amount of withholding tax deducted at source.

Finally, withholding tax can impact double taxation conventions signed with other countries. Foreign residents can benefit from a refund or exemption from withholding tax deducted on their investments in Switzerland thanks to a non-discrimination clause. However, the operation of withholding tax concerning double taxation conventions can vary by country.

In summary, withholding tax is a key element of the Swiss tax system. It ensures some fiscal equality among taxpayers while encouraging foreign investors to invest in Switzerland. Investors and Swiss companies must understand the applicable tax rules and comply with tax obligations in their own country to benefit from withholding tax on dividends. Double taxation conventions can also impact the operation of withholding tax in Switzerland.