Switzerland is not only noted for its beautiful montane scenery but it is also valued for its location as an international base for business. In turn, business people are rewarded with financial, social, political, and economic stability and a complementary favourable fiscal atmosphere. With respect to commodity trading, Zug and Geneva are hubs for this activity.
These amenities alone define why Swiss holding companies are revered. The holding companies can assist and support businesses in a wide a variety of fields including banking, law, accounting, insurance, and corporate services. Tax concessions or exemptions make Swiss holding companies recognised around the world as well. A variety of tax exemptions are in place for holding companies that relate to cantonal and federal taxes when certain criteria are followed and met.
In Switzerland, 26 cantons are represented. Geneva is the most important of these cantons from a financial point of view. The tax system in Switzerland grants holding companies the privilege of a tax-exempt status when they follow the listed criteria:
- The company must not feature business activity in the country. However, certain activities are approved. These activities include the management of the company’s investments and the company itself. Also, services can be provide on behalf of a consolidated group and intellectual property can be held. In addition, debt financing is allowed for subsidiaries.
- The company must state that its primary activity is the management of equity-type investments.
- Over the long term, a company’s participation must amount to two-thirds of its assets or the income derived from its capital gains and dividends must represent two-thirds of its income. Participation includes corporation shares, cooperatives, or limited liability companies.
Exempt Tax Status on the Cantonal Level
When these above criteria are met for a Swiss holding company, the business can enjoy tax-exempt status at the cantonal level. Also, any income that is derived from commissions, royalties, interest, or management fees is exempt from the same tax.
Federal Tax Exemptions
With respect to the federal tax, all income is subject to the current tax rate. However, any dividend income or capital gains that are associated with the disposal of accepted participations are subject to a deduction in this respect. Normally, this results in a complete exemption of the federal income tax.
Defining a Qualifying Participation
Because a participation deduction offers tax relief on dividends derived from qualifying participations, it is helpful to define these participations. As of April 2016, a qualifying participation was defined as a participation of at least 10% of capital stock or a participation whose market value was CHF 1 million at the minimum. CHF is the currency symbol for the Swiss franc.
The above-mentioned participation deduction is approved for capital gains on the sale of qualifying participations too. The participation that is sold must represent at least 10% of the business’s equity and must be held for a year before a sale. Many tax changes are scheduled for the first of 2018 that will reduce taxes, thereby making Switzerland a continually attractive place to do business.