Swiss withholding tax aspects of financing · loans, including intercompany loans, are not subject to tax. The concept of The concept of debenture is thus central in withholding tax

Swiss withholding tax aspects of financing

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Jean-Blaise EckertPartner, Lenz & Staehelin, GenevaAttorney-at-law, Certified Tax Expert, lic. iur., MBA Berkeley University

and

Floran PonceSenior Associate, Lenz & Staehelin, GenevaAttorney-at-law, Certified Tax Expert, lic. iur., LL.M. Harvard Law School

Under Swiss tax law, withholding tax is only levied on interests from deben-tures or customer deposits held with Swiss banks. By contrast, individual loans, including intercompany loans, are not subject to tax. The concept of debenture is thus central in withholding tax matters; it is, however, conceived largely so that it impacts a large number of financing transactions, including syndicated loans. It is today accepted that these rules increase the cost of fi-nancing for Swiss companies and reduce their competitiveness at the interna-tional level. A legislative reform is thus anticipated in order to switch to the paying agent system, in which the withholding tax on interests would only apply to interests paid by banks to their Swiss resident individual clients.

En droit fiscal suisse, l’impôt anticipé n’est prélevé que sur les intérêts prove-nant d’obligations ou d’avoirs de clients bancaires. Les prêts individuels, y com-pris les prêts intragroupes, ne sont en revanche pas soumis à l’impôt. La notion d’obligations est donc décisive pour la perception de l’impôt anticipé ; elle est toutefois conçue de manière large si bien qu’elle a des conséquences sur un grand nombre de financements, notamment en matière de prêts consortiaux. Il est aujourd’hui admis que ces règles augmentent le coût du financement des sociétés suisses et réduisent leur compétitivité sur le plan international. Une réforme législative est ainsi prévue afin de passer au système dit de l’agent payeur, dans lequel l’impôt anticipé en matière d’intérêts ne s’appliquerait qu’aux intérêts versés par des banques à leurs clients personnes physiques rési-dant en Suisse.

Content

I. Introduction 970

II. Withholding Taxation of interests payments 971 1. General principles of withholding tax on interests 971 2. Withholding tax on interests from bonds and similar debt instruments 973

ASA-83-H.11-12.indb 969ASA-83-H.11-12.indb 969 26.06.15 07:0126.06.15 07:01

Jean-Blaise Eckert and Floran Ponce

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2.1 Characteristics of bonds and similar debt instruments 973 2.2 Loan debentures 974 2.3 Cash debentures 974 2.4 Defi nition of interests 976 2.5 Issues in case of sub-participation 977 3. Withholding tax on interests from bank deposits 978 3.1 Defi nition of bank deposits for withholding tax purposes 978 3.2 Defi nition of interests 979 3.3 Special rules for intercompany loans 979 4. Distinction between the various categories of loans and debt instruments 980III. Tax residence for withholding tax purposes and anti-avoidance rules 981 1. Issuance by a Swiss resident issuer 981 2. Issuance by a non-Swiss resident subsidiary of a Swiss company or by a non-Swiss branch 982 3. Issuance by a non-Swiss resident company with a guarantee by a Swiss company 982IV. Practical issues with loan agreements and syndicated loan agreements involving a Swiss borrower 985 1. Risk of requalifi cation of syndicated loan agreements as debentures 985 2. Transfer restrictions 986 3. Gross-up clauses 987V. Proposed legislative reform to strengthen the Swiss capital market 988

I. Introduction

Under the current legislation, interests on bonds are subject to withholding tax at a rate of 35%. In addition, bonds used to be subject to issuance stamp duty until 1st March 2012 at a rate comprised between 0.06% and 0.12% of the par value for each year of the maximum term of the bond. Stamp duty rendered the issuance of debt securities fiscally unattractive for Swiss resident companies. As a consequence, they tend to issue relatively few bonds in comparison with companies located in other European countries or in the United States. Al-though issuance stamp duty has recently been abolished, the Swiss debt capital market has not really evolved largely because the withholding tax on interests is still viewed as a factor reducing the international competitiveness of Switzer-land.

Swiss companies are thus mainly financed by means of loans or credit fa-cilities, whose interests are not subject to withholding tax. Syndicated loans are in particular common for loans to Swiss companies exceeding certain amounts. These are in general arranged by the major Swiss banks or by international banks when the amounts lent to the Swiss borrower are substantial. However, because the definition of bond for Swiss withholding tax purposes is very broad, tax rules must also be taken into account in the context of loan agree-ments. Specific clauses must be inserted in these agreements in order to limit the risks of Swiss withholding tax liability.

Another consequence of these fiscally unattractive rules is that Swiss mul-tinational enterprises prefer issuing bonds through foreign subsidiaries, very



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often with guarantees of the Swiss parent company. In this context, the Swiss tax authorities have developed various anti-avoidance rules that need to be tak-en into consideration when these types of financing transaction are structured.

The Swiss government has become aware that these rules create a fiscally unattractive environment to raise debt financing in Switzerland. It has pro-posed a major legislative change in order to switch to the paying agent system, which would in effect exempt portfolio interests paid to foreign and institution-al investors from Swiss withholding tax and only maintain it on interests paid by paying agents to Swiss resident individuals, for which the withholding tax serves a guarantee function, as well as small Swiss resident corporations.

This article discusses the withholding tax regime currently applicable to bonds and loans, as well as the practical consequences these rules have on the financing practice and in particular on syndicated loan agreements or credit facilities. The proposed legislative reform is also presented at the end of the article. Other tax issues related to the financing of companies, such as the lim-itations to the deduction of financial expenses based on thin-capitalization rules, or transfer pricing principles, which can be relevant with respect to issues like the remuneration of intercompany loans or intercompany guarantees are not covered in this article.1) Some specific types of financing such as mortgage secured loans, securitization or asset backed securitization are also not cov-ered.

II. Withholding Taxation of interests payments

1. General principles of withholding tax on interests

According to the Federal Code on Withholding Tax2), a 35% withholding tax applies on interests paid to Swiss or foreign creditors on bonds or similar debt instruments issued by Swiss resident issuers3) and on interests paid on Swiss bank deposits.4) The 35% withholding tax rate, which applies on interests from bonds and bank deposits, is a standard rate that applies to all forms of income from securities such as dividends from shares including constructive dividends, and income from collective investment schemes.

Unlike many countries, Switzerland does not levy any withholding tax on private and commercial loans (including inter-company loans). There is, how-ever, an exception when a loan is secured by real property located in Switzer-

1) For publications in English on these topics, see Schafer Daniel, Branch report: Switzer-land, in: The debt-equity conundrum, IFA Cahiers (97b), 2012, 715 et seq.; Untersander Oliver, Branch report: Switzerland, in: New tendencies in tax treatment of cross-border interest of corporations, IFA Cahiers (93b), 2008, 713.

2) Federal Code on Withholding Tax of 13 October 1965, «Withholding Tax Code» or «WHTC».

3) Article 4 par. 1 lit. a lit. d WHTC.4) Article 4 par. 1 lit. a lit. d WHTC.



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land.5) In this case, the canton where the real property is located is competent to levy a special withholding tax. The rate can vary between 13% and 33%.

Withholding tax on interests applies to companies that qualify as tax resi-dent for withholding tax purposes, that is to companies that have their statutory seat in Switzerland or that are effectively managed in Switzerland and carry out a business in Switzerland6), and to Swiss branches of foreign companies.

Withholding tax has to be paid irrespective of the residence of the creditor. Creditors must then apply for a withholding tax refund. In domestic situations, the withholding tax serves a mere guarantee function and the creditor is enti-tled to a full refund if he declares the income in his annual tax returns or in-cludes it in his financial statements and files a refund request.7) In international situations, the withholding tax aims at levying a tax at source on Swiss source income and the tax is only refunded if the creditor can rely on a double tax treaty. Most tax treaties concluded by Switzerland follow the OECD Model Convention and provide for the taxation of interests in the residence State of the recipient with a limited taxation right to the source State. While a few of them provide for a full tax relief on interests, including those with France, Germany, the UK and the US, most of them provide for a residual tax ranging from 5% to 15% in favor of Switzerland. Unlike most countries which provide for a source taxation of interests, Switzerland does not allow Swiss debtors to grant a relief at source on the sole basis of the residence of the beneficiary in a treaty country. From a procedural point of view, the creditor must file a refund request with the Swiss Federal Tax Administration («SFTA»), which first has to be endorsed by the tax authorities of his State of residence.

For a long time, bonds and similar debt instruments were also subject to issuance stamp duty at the time of their issuance at varying rates depending on their classification and maturity period. Issuance stamp duty on bonds was, however, abolished with effect as of 1st March 2012 by a Finance Bill, which was introduced to create a more favorable tax regime for the planned issuance of contingent convertible bonds by the two major banks of the countries, which needed to refinance after the 2007-2009 financial crisis. Because classification rules for stamp duty were similar to those for withholding tax, most of the prac-tice of the SFTA developed in relation to issuance stamp duty, as well as court precedents, generally remain relevant for withholding tax purposes.

5) Article 94 Direct Federal Tax Code ; article 35 par. 1 lit. e Tax Harmonization Code. 6) Article 9 par. 1 WHTC. 7) Article 21 par. 1 WHTC. The creditor must also demonstrate that he has the right to use

(«Nutzungsrecht»; «droit de jouissance») the income and that there is no tax avoidance («Steuerumgehung»; «évasion fiscale»).



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2. Withholding tax on interests from bonds and similar debt instruments

2.1 Characteristics of bonds and similar debt instrumentsWithholding tax applies on interests paid to Swiss or foreign creditors on bonds or similar debt instruments issued by a Swiss resident issuer.8) The definition of a bond according to Swiss tax law is rather extensive and goes further than the notion of bond used in Swiss civil law or commonly understood and used in financial markets. Indeed, the Swiss Federal Supreme Court considers that bonds or debentures are written debt acknowledgments for fixed amounts, which are issued in multiple tranches at comparable conditions for purposes of collective financing and allow the creditor to evidence, reclaim or transfer its receivable.9)

This definition has been codified in article 4 par. 3 of the Federal Stamp Tax Code10) in almost identical terms. Under this provision, debentures («Obli-gationen»; «obligations») are written debt acknowledgments for fixed amounts, which are issued in multiple tranches for purposes of collective financing. There is no equivalent definition in the Withholding Tax Code or the Withhold-ing Tax Regulation11), but the SFTA considers that the definition of debenture is the same for withholding tax and stamp duty purposes.12) Article 15 par. 1 WHTR distinguishes two categories of bonds: loan debentures and cash deben-tures.

Withholding tax may also apply to other similar debt instruments. These are serial mortgage notes, serial promissory notes, deposit certificates, com-mercial papers, money market papers. Because these are less frequently en-countered in practice, they will not be discussed at length in this article.

Under the current law, mandatory convertible bonds (including CoCo bonds and write-off bonds) and bonds coupled with a waiver of debts in accord-ance with the Banking Act13) are not subject to withholding tax.14) This rule was introduced in order to allow major banks of the countries, one of which had needed financial assistance from the Swiss government following the 2007 fi-nancial crisis, to issue contingent convertible bonds in a fiscally favorable framework. The rule is time-limited and only applies to bonds issued until the end of 2016. It is, however, proposed to extend its application until the entry into force of the legislative reform of withholding tax.

18) Article 4 par. 1 lit. a WHTC. 19) See for instance Swiss Federal Supreme Court decision («SFSC») of 19.06.1947, ASA 16

(1947/1948), p. 123; SFSC of 26.11.1993, ASA 63 (1994/1995), p. 65.10) Federal Code on Stamp Tax of 27 June 1973, «Stamp Tax Code» or «STC».11) Federal Regulation on Withholding Tax of 19 December 1966, «Withholding Tax Regula-

tion» or «WHTR».12) Guideline S-02.122.1 in relation to bonds of April 1999, point 1.13) Federal Act on Banks and Saving Banks of 8 November 1930.14) Article 5 par. 1 lit. g WHTC.



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2.2 Loan debenturesLoans qualify as loan debentures («Anleihensobligationen»; «obligations d’em-prunt») if the following conditions are met: • There are written debt acknowledgments for fixed amounts; • these written debt acknowledgments have similar conditions referring to

one agreement only; • there are more than 10 creditors, not including Swiss or foreign banks

recognized as such under the Swiss Federal Banking Act or the banking legislation in effect at their place of establishment;

• the total amount of the financing exceeds CHF 500,000.15)

In practice and in particular in loan agreements with Swiss borrowers, this rule is often referred to as the «Swiss 10 non-banking creditors rule».

Loans are deemed issued with similar conditions if they are based on the same interest rate, maturity and reimbursement conditions so that they appear as tranches of the same financing transaction.16) Differences in nominal value of the tranches do not affect the characterization as loan debentures.17) It is also irrelevant whether they are marketed through a public offering or private place-ment. Loan debentures thus include what is commonly understood as bonds or debentures in the financial markets terminology. However, the definition can also cover other types of collective financing such as syndicated loan agree-ments if non-banking creditors take part in the financing.

2.3 Cash debenturesLoans qualify as cash debentures («Kassenobligationen»; «obligations de caisse») if the following conditions are met: • There are written debt acknowledgments for fixed amounts issued by a

non-banking debtor and interest rates are fixed at the issuance; • these written debt acknowledgments have variable conditions; • there are more than 20 creditors, not including Swiss or foreign banks

recognized as such under the Swiss Federal Banking Code or the banking legislation in effect at their place of establishment;

• the total amount of the financing exceeds CHF 500,000.18)

15) Guideline S-02.122.1 in relation to bonds of April 1999, points 1.a. and 3.a. 16) Decision of the Federal Appeal Commission in tax matters of 11.11.2003, in VPB 68.75.17) Duss Marco/ Helbing Andreas/ Duss Fabian, in: Zweifel Martin/ Beusch Michael/ Bauer-

Balmelli Maja (ed.), Kommentar zum Bundesgesetz über die Verrechnungssteuer (cit.: Komm. VstG), Basel, 2012, N. 26 ad. art. 4; Pfund Walter Robert, Verrechnungssteuer,I. Teil, Basel, 1971, N. 2.3 ad. art. 4 par. 1 lit. a WHTC.

18) Guideline S-02.122.1 in relation to bonds of April 1999, points 1.b. and 3.b.



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In practice and in particular in loan agreements with Swiss borrowers, this rule is often referred to as the «Swiss 20 non-banking creditors rule».Cash debentures differ from loan debentures in that they are not issued as part of the same financing transaction and thus do not have identical conditions. The re-characterization of a loan as a bond applies here because the debtor is con-sidered to be continuously issuing debts. The requirement to have 20 creditors and the CHF 500,000 threshold concretize the condition of collective financing set in the case law of the Swiss Federal Supreme Court. These rules are some-what arbitrary and criticized in the specialized literature with the argument that they cannot be derived from the WHTC or the WHTR.19) However, they reflect the constant practice of the SFTA and because the SFTA has authority to issue regulations when this aims at clarifying an undetermined concept in the law, they are accepted as binding by the market practice.

According to the published guidelines of the SFTA, individual loans are not treated as cash debentures.20) Indeed, when it issues cash debentures, the com-pany offers to the public or to certain investors debt acknowledgements and these debt instruments are issued based on a planned process, which is why they are considered as being part of a collective financing transaction. By con-trast, individual loans are issued based on specifically negotiated terms and are not part of a collective financing transaction. This distinction between individ-ual loans and cash debentures is vague and impractical, which is probably why it is not really considered in practice.21) Indeed, it seems that the SFTA has practically replaced this distinction with the 20 non-banking creditors thresh-old, so that it is generally prudent to assume that all loans based on fixed amounts can count with regards the Swiss 20 non-banking creditors rule.

A different rule applies when loans based on written debt acknowledg-ments and fixed amounts are issued by banks within the meaning of the Swiss banking legislation. These are treated as cash debentures even if the number of creditors is less than 20.22) As a matter of consequence, all loans issued by banks are subject to withholding tax, either as cash debentures or as bank de-posits.23)

19) Duss/ Helbing/Duss, Komm. VstG (Fn. 17), N. 29 ad. art. 4; Storck Alfred/Spori Peter, Konzernfianzierung in der Schweiz: Fakten und Steuern (cit.: Konzernfianzierung I), FStR 2008, 249, p. 255; Glauser Pierre-Marie, La notion fiscale d’obligation – En parti-culier dans le cadre des f inancements internationaux (cit. : Obligation), FStR 2008, 77,p. 83.

20) Guideline S-02.122.1 in relation to bonds of April 1999, point 1.c.; SFSC of 19.03.1982, ASA 51 (1982/1983), p. 652.

21) Duss/Helbing/Duss, Komm. VstG (Fn. 17), N. 31 ad. art. 4; Storck/Spori, Konzernfianzie-rung I (Fn. 19)., p. 255; Glauser, Obligation (Fn. 19), p. 83.

22) Duss/Helbing/Duss, Komm. VstG (Fn. 17), N. 28a ad. art. 4; Glauser, Obligation(Fn. 19), p. 83.

23) See infra II.3.



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Another distinction made by the SFTA is between short-term debts and long-term debts. Monetary papers, i.e. debt securities that have a duration of less than 12 months, as well as book claims, which are debts of less than 12 months registered in an official registry of a clearing house, are treated as a separate category.24) Consequently, the limits on the number of creditors apply only within each category (10/20 for short-term debts, 10/20 for long-term debts). If a limit is exceeded within one category and this results in a requalification of certain debts as a debenture, this has no consequence on the debts from the other category.

2.4 Definition of interestsInterests include any income received by the creditor based on the loan agree-ment if the income may be quantified and does not represent a repayment of capital.25)

This includes of course interests paid periodically, irrespective of whether these are based on a fixed or variable rate.

This also includes interests paid on zero-coupon bonds, which are issued at nominal value and repaid with a premium at maturity, and original issue dis-count bonds, which are issued below their nominal value and redeemed at their nominal value at maturity. For income tax purposes, bonds are subject to a different tax treatment if the interests are predominantly paid through periodi-cal interests or not and it is generally required to use principles from financial mathematics to determine at the issuance of the bond whether the periodical interests represent more or less than 50% of the income over the total period up to maturity. Because withholding tax is conceived as a tax at source, this dis-tinction does not apply for withholding tax purposes: periodical interests are subject to withholding tax when the coupon is paid and interests paid at matu-rity, through the repayment price, are subject to withholding tax at the time of the repayment.26) Consequently, accrued interests are not subject to withholding tax and capital gains realized on the sale of bonds are never partially re-charac-terized as interests for withholding tax purposes. This can theoretically lead to tax arbitrage opportunities in particular in relation to zero-coupon bonds, but these are limited in practice, since many market participants benefit from a full withholding tax relief on interests (unlike dividends) based on Swiss domestic tax law or double tax treaties.

24) Guideline S-02.130.1 in relation to money market instruments and book claims of April 1999, point 3.

25) Article 14 par. 1 WHTR. 26) Circular letter No. 4 of 12 April 1999, abolished by Circular letter No. 15 of 7 February

2007 (1-015-DVS-2007) in relation to bonds and derivative financial instruments as sub-ject matter of taxation of Swiss federal income tax, Swiss withholding tax and Swiss stamp taxes.



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Interest income may also be included in derivative financial instruments or structured products. Indeed, in most circumstances, Swiss tax practice consid-ers these products as transparent and requires distinguishing between the bond component and the derivative component using principles of financial mathe-matics.27) As a matter of consequence, the interest component may be subject to withholding tax if the other conditions for the classification as a bond for with-holding tax purposes are met. A detailed analysis of these rules would go be-yond the scope of this article and taxation of derivative financial instruments will hence not be further discussed.

2.5 Issues in case of sub-participationUnder the published practice of the SFTA, a sub-participation is an arrange-ment where the lender assigns tranches of the loan to investors, irrespective of whether this is done at the beginning of the agreement or later. According to the guidelines, if a loan is refinanced by assignments of loan tranches, the assignor creates bonds or similar debt instruments as soon as the number of receivables exceeds the thresholds, which would create a withholding tax liability for the original borrower.28) The interpretation of this ambiguous language by the SFTA is that sub-participations can create a withholding tax liability at the level of the original borrower even in absence of notification to the original debtor by the lender if the loan agreement authorizes to assign the loan to more than 10 non-banking creditors.29) In practice, the SFTA may, however, have difficulties to access to evidence demonstrating that a loan is assigned.

Although the language used in the regulations is unclear and states that the withholding tax liability can arise even in absence of notification, situations where the original lender assigns tranches of its loan must be distinguished from situations where he only refinances its loan.30) In case of assignment, the investors become lenders of the original borrower in lieu of the original lender. By contrast, when the sub-participation only aims at refinancing the loan, the original lender remains the lender to the borrower and the sub-participants only have a claim against the original lender. It is accepted that the issuance of sub-participations can only impact the debtor of the sub-participants. As a con-sequence, in case of assignment of the loan, the original borrower can face withholding tax liabilities if the conditions of a cash debenture or a loan deben-

27) Circular letter No. 15 of 7 February 2007 (1-015-DVS-2007) in relation to bonds and de-rivative financial instruments as subject matter of taxation of Swiss federal income tax, Swiss withholding tax and Swiss stamp taxes.

28) Guideline S-02.122.1 in relation to bonds of April 1999, point 4.29) This practice is described in the official summary of unpublished decisions of the SFTA.

See Bauer-Balmelli Maja/Küpfer Markus, Die Praxis der Bundessteuern, II. Teil: Stem-pelabgaben und Verrechnungssteuer (cit.: Praxis), Therwil, 1943 et seq., N. 26 ad. art. 4 par. 1 lit. a WHTC.

30) Duss/Helbing/Duss, Komm. VstG (Fn. 17), N. 36 ad. art. 4; Glauser, Obligation (Fn. 19), pp. 84-85.



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ture are met at his level. However, when the sub-participation is only a refi-nancing by the original lender, only the latter may have a withholding tax lia-bility if he is resident in Switzerland and if the conditions for a debenture are met at his level.

3. Withholding tax on interests from bank deposits

3.1 Definition of bank deposits for withholding tax purposesWithholding tax applies on interests paid to Swiss or foreign creditors on cus-tomer deposits («Kundenguthaben»; «avoirs de clients») held by Swiss banks.31)

The Withholding Tax Code defines a «bank» as anyone who publicly offers to hold interest-bearing funds (bank within the definition of the banking legis-lation) or accepts interest-bearing funds on a continuous basis (bank for with-holding tax purposes) .32) The tax definition is thus broader than the commonly understood definition of a bank and is not limited to the criterion of the regula-tory status under the banking legislation. In practice, the tax administration considers that a Swiss resident person or company qualifies as a bank for with-holding tax purposes if it holds interest-bearing customer deposits from more than 100 creditors, not including Swiss or foreign banks recognized as such under the banking legislation, with total funds representing at least CHF 5,000,000.33) In this respect, for persons qualifying as banks under the fiscal definition, the liability only begins when the 100 creditors and CHF 5 million thresholds are exceeded.34) By contrast, banks subject to regulation are liable to withholding tax when they start their activity.

The concept of «customer deposits» refers to any interest-bearing deposit held by a bank. Unlike debentures, customer deposits are not based on a debt acknowledgment that provides for a fixed amount. The regulations of the SFTA mention, as examples, savings accounts, deposit accounts, current accounts, term deposits and shareholder loans.35) For banks and saving institutions recog-nized as such under the banking legislation, this includes any liability of a bank towards its clients that is booked on its balance sheet. There is, however, neither withholding tax on interests paid on accounts held by Swiss or foreign banks recognized as such under the Swiss or foreign banking legislation36), nor on fi-

31) Article 4 par. 1 lit. d WHTC. 32) Article 9 par. 2 WHTC. Circular letter No. 34 of 26 July 2011 (1-034-V-2011) in relation

to deposits, point 2. 33) Circular letter No. 34 of 26 July 2011 (1-034-V-2011) in relation to deposits, point 4.b. 34) Circular letter No. 34 of 26 July 2011 (1-034-V-2011) in relation to deposits, point 4.b. 35) Circular letter No. 34 of 26 July 2011 (1-034-V-2011) in relation to deposits, point 1.36) Guideline S-02-123 in relation to interbank loans of 22 September 1986.



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duciary deposits held by a Swiss bank as fiduciary agent and deposited with a foreign bank.37)

3.2 Definition of interestsLike for bonds, interests on bank deposits include any income received by the creditor based on the loan agreement or the current account agreement if the income may be quantified and does not represent a repayment of capital.38) Be-cause the withholding tax is in practice levied on an annual basis, the practice of the SFTA accepts that the bank offsets the interests paid with the interests charged on the same account. Interests from customer deposits are exempt if they are below CHF 200 per annum.39)

3.3 Special rules for intercompany loansAs the definitions of bonds and bank deposits are rather extensive and consti-tute an obstacle to withholding tax-free intra-group financing and cash pooling, a legislative change was made with effect as from 1st August 2010, in order to facilitate the implementation of treasury functions in Switzerland. This legisla-tive change provides that loans or deposits between companies that are fully consolidated in the consolidated financial statements of a group in accordance with an internationally accepted accounting standard, which in principle re-quires to hold a participation representing more than 50% of the voting rights, do not qualify as bonds, nor as bank deposits, irrespective of their duration, currency or interest rate.40) This entails that not only would there be no with-holding tax on these loans if the Swiss resident debtor is deemed to have issued bonds or customer deposits, but also that these loans do not have to be taken into account when calculating the 10, 20 and 100 creditors limits. Loans to group companies are thus treated as loans to banking creditors for purposes of the Swiss non-banking creditor rules.

This rule does not apply when a Swiss company guarantees a bond issued by a foreign group company.41) This is irrespective of whether the foreign issuer takes part in the cash pool or not.42) Although the Withholding Tax Ordinance does not specify it, it is accepted in practice that this exception only applies if there is a down-stream guarantee by a Swiss parent company and that up-stream by Swiss direct or indirect subsidiaries or cross-stream guarantees by

37) Guideline S-02-101 in relation to f iduciary deposits of 31 May 1965. The fiduciary char-acter of a transaction is subject to certain formal conditions such as the existence of a written agreement and the fiduciary accounts must be booked off balance sheet.

38) Article 14 par. 1 WHTC. 39) Article 5 par. 1 lit. c WHTC. 40) Article 14a par. 1 WHTR. 41) Article 14a par. 3 WHTR. 42) Duss/Helbing/Duss, Komm. VstG (Fn. 17), N. 33b ad. art. 4.



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Swiss related companies are not relevant in this regard.43) This rule is intended to prevent groups from issuing bonds outside of Switzerland and indirectly transferring the bond proceeds in Switzerland. This rule is largely criticized in the specialized literature in that it prevents large Swiss groups, most of which have issued bonds through foreign subsidiaries, to establish treasury functions in Switzerland.44)

As previously explained, both Swiss resident companies and Swiss branch-es of foreign companies can be subject to withholding tax on bonds and cus-tomer deposits. However, there is an exception for Swiss finance branches of foreign companies, whose activities are limited to group financing and some accessory financial activities, such as factoring. The SFTA has long accepted that these finance branches do not qualify as banks for withholding tax purpos-es.45) This practice was also applied in relation to bonds so that the rules of the WHTR aiming at facilitating intra-group financing do not have any impact on finance branches.46)

4. Distinction between the various categories of loans and debt instruments

Because the concept of bonds, in particular of cash debentures, is broad and does not apply only to bonds registered as such on the financial markets, the only characteristic that allows distinguishing bonds from customer deposits is the existence of a written debt acknowledgement for a fixed amount. This dis-tinction was, however, considered vague and created uncertainties for compa-nies involved in particular in cash-pooling activities. In response, the SFTA developed a practice in order to clarify the risk of qualification as bank for en-tities in charge of cash pooling activities.

Based on this practice, which has never been published in official regula-tions of the SFTA47), debts are divided into four categories: • loan debentures, • cash debentures related to short-term debts (fixed-term debt of less than

a year),

43) Oesterhelt Stefan, Verrechnungssteuer und Emissionsabgabe bei Konzernfinanzierung (cit.: Konzernfinanzierung II), ST 9/11, 756, p. 758; Jaussi Thomas/Duss Fabian, Komm. VstG (Fn. 17), N. 48a ad. art. 9.

44) Jaussi/Duss, Komm. VstG (Fn. 17), N. 48a ad. art. 9; Brügger Urs/Pauli Christoph, Neue Entwicklungen im Bereich Cash Pooling – Lockerungen bei der Verrechnungssteuer – Transfer Pricing zunehmend kritischer, ST 10/10, 704, p. 707.

45) This practice is described in the official summary of unpublished decisions of the SFTA. See Bauer-Balmelli/Küpfer, Praxis (Fn. 29), N. 10 ad. art. 9, par. 2 WHTC.

46) Oesterhelt, Konzernfinanzierung II (Fn. 43), p. 758.47) This practice is, however, described in commentaries and in the official summary of

unpublished decisions of the SFTA. See for instance Duss/Helbing/Duss, Komm. VstG (Fn. 17), N. 33a ad. art. 4; Bauer-Balmelli/Küpfer, Praxis (Fn. 29), N. 15 ad. art. 9 par. 2 WHTC and N. 30 and N. 34 ad. art. 4 par. 1 lit. a WHTC.



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• cash debentures related to long-term debts (fixed-term debt of more than a year),

• cash debentures related to guarantee or security deposits such as cash-collaterals in securities lending or repo transactions,

• customer deposits related to current accounts (debts without any fixed time limit).

The SFTA accepts that these categories are treated separately. Consequently, the limits on the number of non-banking creditors apply only within each cate-gory (10 for loan debentures, 20 for short term debts, 20 for long term debts, 20 for security deposits and 100 for current accounts). Moreover, if the conditions for cash debentures, loan debentures or customer deposits are met within one of the categories, the withholding tax is due only on interests paid on debts from this category.

In practice and as already explained, the SFTA includes creditors based on individual loans to assess the existence of cash debentures.48) It also includes loans that would qualify as loan debentures if there were more than 10 non-banking creditors to determine whether a borrower has issued cash deben-tures.49) By contrast, the SFTA applies strictly the distinction between cash de-bentures and customer deposits and accepts that loans can only fall within one of these categories.50)

III. Tax residence for withholding tax purposes and anti-avoidance rules

1. Issuance by a Swiss resident issuer

Withholding tax on interests applies to companies that qualify as tax resident for withholding tax purposes; that is to companies that have their statutory seat in Switzerland or that are effectively managed in Switzerland and carry out a business in Switzerland.51) It also applies to companies that are registered as a business establishment in the Swiss commercial register, such as branches of foreign companies, but it is very rare that these issue bonds since it will normal-ly be fiscally more favorable to issue them from the head office.

The 35% withholding tax on interests from debentures renders bonds is-sued by Swiss borrowers relatively less attractive than bonds issued by borrow-

48) Bauer-Balmelli/ Küpfer, Praxis (Fn. 29), N. 30 ad. art. 4 par. 1 lit- a WHTC. This is criti-cized in the literature : Lissi Alberto/ Zitter Gernot, Ausgewählte Aspekte der Fremdfinan-zierung von Akquisitionen (cit.: Fremdfinanzierung), ASA 81, 123, p. 151; Glauser, Ob-ligation (Fn. 19), p. 88; Duss/ Helbing/ Duss, Komm. VstG (Fn. 17), N. 30 ad. art. 4.

49) Bauer-Balmelli/ Küpfer, Praxis (Fn. 29), N. 30 ad. art. 4 par. 1 lit. a WHTC. This is criti-cized in the literature (Lissi/ Zitter, Fremdfinanzierung (Fn. 48), ASA 81, 123, p. 151; Glauser, Obligation (Fn. 19), p. 88).

50) Bauer-Balmelli/ Küpfer, Praxis (Fn. 29), N. 34 ad. art. 4 par. 1 lit. a WHTC.51) Article 9 par. 1 WHTC.



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ers from other countries, which often do not tax interest payments made to foreign lenders.52) Hence, this tax tends to increase the price of bonds for Swiss borrowers and prevents them from efficiently competing for loans on the inter-national capital markets. As a result, Swiss based multinational enterprises of-ten need to find alternative structures to finance their activities and develop-ment and prefer to issue bonds through foreign branches, foreign subsidiaries or special purpose vehicles.53)

2. Issuance by a non-Swiss resident subsidiary of a Swiss company or by a non- Swiss branch

Debentures issued by foreign subsidiaries of Swiss companies are not subject to withholding tax. The foreign subsidiary must not qualify as Swiss tax resident for withholding tax purposes, which could be the case if it is deemed to be ef-fectively managed in Switzerland and to carry on a business activity in Switzer-land. In practice, however, when the foreign subsidiary is a special purpose vehicle, which only aims at issuing the bond, the SFTA prefers applying gener-al anti-avoidance rules and the bond is deemed issued by the Swiss parent com-pany only if the bond proceeds flow back to the Swiss parent company or other Swiss subsidiaries54). Under the practice of the SFTA, when the issuer is a spe-cial purpose vehicle, this anti-avoidance rule applies irrespective of whether the Swiss parent company guarantees the bond or not.

Bonds issued by foreign branches of Swiss banks are not subject to Swiss withholding tax provided that the bank is recognized as a bank by the banking regulation in force in the jurisdiction of the branch, effectively conducts bank-ing activities and the net proceeds from the issue of the bond are used at all times while they are outstanding outside Switzerland. Swiss banks often carry out their activities through branches and thus issue bonds through their foreign branches. This exception does not apply to non-banking companies.

3. Issuance by a non-Swiss resident company with a guarantee by a Swiss company

Bonds issued by foreign subsidiaries of Swiss groups are often guaranteed by the Swiss direct or indirect parent company. This allows the issuer to benefit from the better credit rating of the parent company and often reduces the fi-nancing costs related to the bond issuance. The SFTA developed a longstanding practice, according to which a debenture is subject to withholding tax if there is a formal guarantee from a Swiss direct or indirect parent company and if the

52) Many countries, such as the United States, apply rules that are the opposite to the Swiss rules: they tax interests on intercompany loans, but exempt interests paid on bonds.

53) Infra sections III.2 and III.3.54) Infra section III.3.



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proceeds of the debenture directly or indirectly flow back to Switzerland.55) Indeed, in this case, the SFTA considers, in application of the general an-ti-avoidance rule, that the issuance is economically similar to a direct issuance by the Swiss parent company. The criteria are, however, so well established that the practice has in a way codified the general anti-avoidance rule in this con-text.56) At the same time, this practice also represents a safe-haven rule that is accepted by the market and taken into account when Swiss groups structure their financing or draft loan agreements or bond agreements: if there is no guarantee by a Swiss parent company or no flow-back of the proceeds in Swit-zerland, there is no Swiss withholding tax on the interest payments to the lend-ers or to the bondholders.57)

The published practice of the SFTA only mentions formal guarantees where the creditors can demand the payment of the principal and the interests directly from the guarantor and without conditions. However, the SFTA is of the view that other forms of guarantees such as keepwell-agreements or joint and sever-al guarantees of Swiss parent companies can also trigger the application of withholding tax if a substantial part of the bond proceeds, i.e. 30% or more, f low back to Switzerland.58) Similarly, securities given on assets of the parent company, including on the stocks of the subsidiary that issues the bond, are treated as guarantees from the parent company for the purposes of this an-ti-avoidance rule.59)

This requalification rule only applies when a Swiss parent company acts as guarantor. Consequently, there is no withholding tax risk when a Swiss compa-ny guarantees a bond issued by its foreign parent company (so-called upstream guarantee) or by a foreign group company which is not a direct or indirect subsidiary (so-called cross-stream guarantee) .60) Under Swiss civil law, these guarantees must nevertheless be limited to the amount of reserves freely dis-tributable under Swiss commercial law and are considered as a distribution both from a civil law and tax law point of view61), which is why the SFTA ac-

55) Circular 6746 of the Swiss Bankers Association of 29 June 1993. Originally, a bond issued by a foreign subsidiary with the guarantee of the Swiss parent company was accepted as a foreign bond only if, in addition to the currently applicable conditions, it was denominat-ed in a foreign currency, if the tranches were placed with foreign investors and if the bond was not listed on a Swiss securities exchange, but these conditions were abolished over time.

56) Glauser, Obligation (Fn. 19), p. 89; Jaussi/Duss, Komm. VstG (Fn. 17), N. 48 ad. art. 9.57) Jaussi/Duss, Komm. VstG (Fn. 17), N. 48 ad. art. 9.58) Jaussi/Duss, Komm. VstG (Fn. 17), N. 48 ad. art. 9.59) This practice described in the official summary of unpublished decisions of the SFTA. See

Bauer-Balmelli/Küpfer, Praxis (Fn. 29), N. 28 ad. art. 4 par. 1 WHTC.60) Jaussi/Duss, Komm. VstG (Fn. 17), N. 50 ad. art, 9.61) See Glanzmann Lukas, Konzern-Kreditf inanzierungen aus Sicht der kreditgebenden

Bank, SZW, RSDA 3/2011, 229. This is also confirmed by the Swiss Federal Supreme Court in its decision 4A_138/2014, c. 4.2.



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cepts that they cannot justify a requalification of the bond as issued by the Swiss guarantor.

The other condition of this anti-avoidance practice is the direct or indirect f low-back of the bond proceeds in Switzerland. Although the published prac-tice only refers to the flow-back of the funds to the parent company, a f low-back to other Swiss group companies can be detrimental for withholding tax purposes. There is a direct f low-back to Switzerland if the foreign subsidiary which issued the bond lends funds to a Swiss group entity which accounts for a corresponding liability on its balance sheet. The flow-back can also be indirect if the issuer lends the funds to a foreign group entity which in turn grants a loan to a Swiss group company. Pre-existing loans from the foreign issuer to Swiss group companies are not considered detrimental if they have been in place for a certain period of time, but there is an indirect f low-back if the bond aims at refinancing an intercompany loan that has been recently granted to a Swiss company62). Because the concept of f low-back focuses on the existence of lia-bilities of a Swiss company towards the issuer, other transactions such as divi-dend distributions to the Swiss parent company or payments based on a con-tract are not considered as a f low-back of the bond proceeds to Switzerland. Other operations are, however, subject to a case-by-case analysis. This applies in particular to the capital increase of a Swiss subsidiary or the granting of loans to a Swiss company guaranteeing a foreign loan, for the exclusive pur-pose of financing activities of foreign companies (conduit activity). These op-erations should not be considered as f low-back to Switzerland. However, due to the lack of unequivocal practice of the SFTA regarding these matters, it is ad-visable to obtain a preliminary tax ruling clarifying the tax treatment of such transactions.

Under the practice of the SFTA, if there is a guarantee from a Swiss direct or indirect parent company and if the proceeds of the bond directly or indirect-ly flow back to Switzerland, the bond is deemed issued by the Swiss parent company. The withholding tax liability thus arises at the level of the parent company. This can create technical difficulties because the parent company is not the debtor of the interests and thus not in a position to economically transfer the tax to the creditors by withholding it on the interest payments. This practice is criticized in the literature63). However, it has little impact since companies normally all take into account these anti-avoidance rules when they structure their financing transactions.

62) Jaussi Thomas/Pfirter Markus/Ghielmetti Costante, Fremdfinanzierung im schweize-rischen Unternehmenssteuerrecht, Muri/Bern, 2010, p. 207.

63) Glauser, Obligation (Fn. 19), pp. 89-90.



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IV. Practical issues with loan agreements and syndicated loan agreements involving a Swiss borrower

1. Risk of requalification of syndicated loan agreements as debentures

Syndicated loans are loans that are provided to a borrower by a group of lenders and are arranged and administered by one or several banks known as lead ar-rangers.64) Syndicated loans mainly aim at diversifying the credit risk among several lenders and are thus in general entered into when the amount lent is high. They are in general subscribed by banks in particular on the primary market, but loans to leveraged borrowers whose credit ratings are speculative grade and pay higher interest rates sometimes attract collateralized loan obliga-tion vehicles, hedge funds, insurance companies or other types of institutional investors. Syndicated loans are in principle based on standard agreements. In Switzerland, the model agreements from the Loan Market Association are of particular importance, although they are then adapted to take into account cer-tain Swiss law provisions.

Syndicated loans are based on written debt acknowledgements for fixed amounts. In addition, they represent a closed financing transaction in that the same conditions apply to all syndicate participants. As a consequence, syndi-cated loans can qualify as a loan debenture if more than 10 non-banking credi-tors participate in the syndicate and if the loan is for an amount that exceeds the CHF 500,000 threshold. Given that the SFTA considers that loans qualifying as loan debentures are taken into account to determine whether a borrower has issued cash debentures, Swiss borrowers must also make sure, if some of the syndicate lenders are non-banking creditors, that this does not lead them to have more than 20 non-banking creditors.

In view of this withholding tax risk on interests, although lenders are in principle economically protected from the withholding tax by gross-up clauses, Swiss borrowers generally give a representation that they will not have more than 20 non-banking creditors for the entire duration of the loan agreement. Because syndicated loan agreements, in particular in leveraged transactions, often allow for transfers by the lenders to a maximum of 10 non-banking cred-itors, this means that the borrower can have 10 other non-banking creditors. Borrowers sometimes enter into multiple loan agreements or credit facilities. In such case, the number of non-banking creditors permitted under each credit agreement must be reduced in order to ensure the compliance of the borrower with the «20 non-banking creditor rule».

Syndicated loans or credit facilities are sometimes offered to multiple bor-rowers from the same group. Because Swiss tax rules restrict the lenders in their ability to transfer loans, lenders may be unwilling to apply them to the whole agreement. In this case, a practical solution is to divide the loan or the

64) Lombardini Carlo, Droit bancaire suisse, Zurich/Basel/Geneva, 2002, p. 550.



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credit facility in tranches. Only one tranche will be at the disposal of the Swiss group companies and subject to the Swiss non-banking creditor rules. Theother tranches can thus be free of these restrictions.

Finally, it has to be noted that this type of contractual language is also needed when a Swiss parent company guarantees a syndicated loan of oneof its subsidiaries. Indeed, in such case, the interplay between the «Swiss non-banking creditor rules» and the anti-avoidance principle creates a with-holding tax risk that is to be mitigated by the insertion of the appropriate con-tractual provisions in the syndicated loan agreement entered into by the for-eign subsidiary.

2. Transfer restrictions

Lenders, in particular, in the context of syndicated loan agreement, generally want to be able to trade their loans to third parties, including to non-banking investors such as investment funds or other institutional investors. Such trades are usually authorized by the standard agreements reflecting the accepted mar-ket practice, albeit with certain restrictions.65) They can take three legal forms: novation (or transfer), assignment or sub-participation. Following a transfer, the purchaser enters into a contractual relationship with the borrower and as-sumes right and obligations. In case of assignment, the purchaser receives rights only, but he can exercise them directly against the borrower. Finally, a sub-participation arrangement is a contractual relationship between the origi-nal lender and the sub-participant based on the same terms as the contract be-tween the lender and borrower. The lender thus remains the lender of record to the borrower and there is no direct contractual relationship between the sub-participant and the borrower.

From a Swiss withholding tax point of view, the possibility to transfer or assign the loan creates a withholding tax risk because investors who become creditors of the borrower following the transfer of loan tranches are taken into account for the purpose of the «Swiss non-banking rules».66) As a consequence, when the borrower is in a strong position it is common to restrict the transfer possibilities to banking creditors only. Alternatively, in particular for leveraged transactions where higher liquidity in the secondary market is often desired by the lenders, the loan agreement can provide for a right of the lenders to transfer loan tranches to an agreed number of creditors or to a right to transfer the tranches only with the consent of the borrower, such consent being then typical-ly withheld by the borrower if it would result in a breach of the so-called «Swiss

65) See Clause 25 of the Loan Market Association («LMA») Multicurrency Term and Revolv-ing Facilities Model Agreement for Investment Grade Borrowers and Clause 29 of the LMA Senior Multicurrency Term and Revolving Facilities Agreement for Leveraged Transactions.

66) Guideline S-02.128 in relation to syndicated credit facilities of January 2000, points I.1 and 4.



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non-banking rules». Lenders often seek not to apply these restrictions when there is an event of default and it is thus standard practice to provide for such an exception, in particular in the context of the leveraged market.

Syndicated loan agreements often authorize lenders to enter into sub-par-ticipation arrangements. Even if the original lender enters into sub-participa-tion arrangements with a number of non-banking creditors which would exceed the thresholds of the «Swiss non-banking rules», these types of arrangements are acceptable from a Swiss withholding tax perspective as long as the sub-par-ticipants do not become creditors of the borrower. However, the SFTA accepts to disregard sub-participations only if there is an explicit provision in the agree-ment that prohibits lenders to enter into a sub-participation which would result in the sub-participant becoming a creditor of the borrower, acquiring rights against the borrower or becoming entitled to exercise rights against the borrow-er. As a consequence, it is market practice to insert into loan or credit facilities agreements with Swiss borrowers such provisions. Similar provisions can also be included to prevent an assignment or a transfer through a derivative or any type of contract aiming at hedging credit risks of the lender.

This type of contractual clauses obviously only offer withholding tax pro-tection to the borrower. Sub-participation arrangements can, however, have withholding tax consequences for the lender if he is Swiss resident and fulfils the conditions for the issuance of a loan or a cash debenture.

3. Gross-up clauses

In general, the market expectation is that the borrower will pay the interests without any withholding tax. It is thus market practice to include in syndicated loan agreements a gross-up provision, according to which the borrower agrees to increase the payments to the lenders in order to leave them with an amount equal to the gross interests which would have been due without the tax.67) These provisions, however, generally contain protection mechanism for the borrower and do not apply when the withholding tax is due as a result of a breach by a lender, for instance a transfer that was not permitted under the agreement.

From a Swiss tax point of view, the general principle is that the withholding tax must be economically charged to the recipient of the income, which must be correspondingly reduced.68) From a civil law point of view, the Swiss Federal Supreme Court has stated in that agreements which contravene this principle, such as gross-up clauses, are void.69)

In response to this restrictive case law, the SFTA has developed a practice, which allows the parties to a credit agreement, to provide for a clause econom-

67) See Clause 13 of the LMA Multicurrency Term and Revolving Facilities Model Agreement for Investment Grade Borrowers and Clause 18 of the LMA Senior Multicurrency Term and Revolving Facilities Agreement for Leveraged Transactions.

68) Article 14 par. 1 WHTC.69) SFSC 131 III 546; SFSC 118 Ib 317, 324; SFSC 108 Ib 475.



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ically equivalent to a gross-up clause. This practice requires the following con-ditions: • The credit agreement contains a clause in the section about interests whe-

reby the interests must be adapted if the withholding tax is due (so-called «minimum interest clause»);

• the withholding tax is computed on the grossed-up interest amount; • the borrower and the lenders commit to co-operate in order to obtain a

withholding tax refund or relief, • the borrower and the lenders assumed in good faith that the interests

payments from the borrower would not be subject to withholding tax.70)

This practice has been developed by the SFTA and now represents a market practice, which is taken into account when drafting loan agreements with Swiss borrowers. Nevertheless, there remains some uncertainty about the validity of these minimum interest clauses because gross-up or minimum interest clauses are contractual provisions that would have to be reviewed by a civil tribunal in case of litigation between the parties. This notwithstanding, it is safe practice to include such clauses since the civil courts would probably rely on the SFTA’s interpretation and established market practice when interpreting the relevant provision of the WHTC for civil law purposes.

V. Proposed legislative reform to strengthen the Swiss capital market

As previously explained, international capital markets have only a limited ac-ceptance of bonds and similar debt instruments, which are subject to tax at source. Even investors who have a full right to tax refund dislike dealing with tax refunds or tax credits because it is administratively costly and sometimes prevents them from using their funds for a certain period of time. The 35% Swiss withholding tax on interests from bonds thus reduces the attractiveness of the Swiss debt capital market.

In December 2014, the Swiss Federal Council launched a legislative reform aiming at strengthening the Swiss capital market. In that regard, it issued an explanatory report71) and a draft federal code72) concerning some important changes of the federal withholding tax system. The Federal Council wishes to refine the withholding tax system to facilitate the raising of debt capital within

70) See Bauer-Balmelli/ Küpfer, Praxis (Fn. 29), N. 20 and N. 34 ad. art. 14 par. 1 WHTC.71) Explanatory report of 17 December 2014 concerning the federal code regarding the appli-

cation of the debtor and paying agent systems to withholding tax, available at http://www.admin.ch/ch/f/gg/pc/documents/2641/Principe-agent-payeur_Rapport-expl_

fr.pdf (accessed 31 March 2015). 72) Available at http://www.admin.ch/ch/f/gg/pc/documents/2641/Principe-agent-payeur_Projet_fr.pdf

(accessed 31 March 2015).



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Switzerland. This draft legislation has been submitted to interested parties for comments to be submitted by March 2015.

At the core of the proposed reform and in order to strengthen the Swiss capital market, in particular for bonds, notes and money market instruments, the Federal Government intends to switch from the debtor system to the so-called paying agent system. However, the current regime will continue to apply to income from Swiss participation rights, as there is no need for action in that respect from a capital market view point.

Under the paying agent system, the legal duty to levy, deduct and pay fed-eral withholding tax on taxable income would be shifted from Swiss issuers to Swiss paying agents, i.e. custodians such as banks. The debtor would thus pay the taxable benefit without tax deduction (gross value) to the paying agent. It would then be up to the paying agent to levy withholding tax depending on certain attributes of the investor (beneficiary or beneficial owner), which the paying agent would have to determine.

Regarding interests deriving from bank accounts, the debtor of the income and the paying agent are generally the same. Therefore, the introduction of the paying agent system would not result in substantial adaptations in comparison with the current legal regime.

Under the current withholding tax regime, withholding tax is collected by the Swiss debtor of the income irrespective of who the beneficiary of the in-come is, even in the case where investors are entitled to claim a withholding tax refund. With the paying agent system, the paying agent would have to levy the tax only it the income is paid to a certain type of beneficiary based on the fol-lowing principles: • Swiss resident individuals: withholding tax would be levied on all in-

come paid to Swiss resident individuals. This withholding tax would serve a guarantee function and Swiss individuals could then request a refund if certain conditions are met. Moreover, the Swiss paying agent would have to withhold the tax if the income is paid to a Swiss resident economic beneficiary of formally paid to a foreign company.

• Swiss resident legal persons: withholding tax would only be levied on income paid to legal persons who are not obliged to keep regular accoun-ting records according to article 957 para. 1 of the Code of Obligations73) and are not subject to regular or restricted audit in accordance with artic-les 727 and 727a CO.

• Foreign investors and institutional investors: withholding tax would not apply on income paid to institutional investors or foreign investors. This is probably the main change from a fiscal policy point of view.

Under the current legislation, as explained before, interests paid to Swiss or foreign creditors on bonds or similar debt instruments issued by a Swiss domi-

73) Code of Obligations of 30 March 1911, «CO».



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ciled issuer are subject to withholding tax. Any benefit of a financial nature, based on a debt and which is not considered as a repayment of capital, is con-sidered as taxable income. The draft legislation proposes some changes to the current legislation.

According to the draft legislation, interest on bonds, mortgage notes, annu-ities letters and assets included in balance sheet liabilities, including accrued interest in case of transfer would be subject to withholding tax pursuant to the paying agent system.

Under the new system and in order to fight discrimination against assets held in Switzerland which are subject to withholding tax and as the same time to strengthen the «guarantee function» of withholding tax, income from for-eign issuers would also be subject to withholding tax if the taxable benefit pass-es through a Swiss paying agent. This would constitute an important change as income deriving from securities of foreign issuers held with a Swiss custodian is currently exempt from Swiss withholding tax.

In its explanatory report, the Federal Council also highlights that the pay-ing agent system would create the risk that Swiss resident individuals would use foreign paying agents to escape Swiss withholding tax. Two measures are foreseen to limit this risk: • First, compliant taxpayers who prefer a declaration instead of withhol-

ding tax would be able to opt for the declaration procedure. Hence, they would not be deprived of cash as it is the case with the withholding tax.

• Second, taxpayers intending to evade taxes by using foreign paying agents would be confronted with the automatic exchange of information at an international level.


Documents

Swiss withholding tax aspects of financing · loans, including intercompany loans, are not subject to tax. The concept of The concept of debenture is thus central in withholding tax