What are investment holding companies and how are they used in the wealth management?
Investment holding companies, sometimes referred to as family investment companies are vehicles specifically structured to hold, manage, and grow family wealth. They are commonly used to facilitate succession planning, tax efficiency, and asset protection across generations.
By consolidating assets within a single company, investors retain direct oversight and decision-making authority over investments, distributions, and company governance. This structure enables highly tailored wealth management and succession planning strategies. As closed companies, investment holding companies can facilitate the smooth transfer of wealth between generations. Shares may be allocated to family members according to the founder’s wishes, supporting long-term legacy and estate planning.
What are the tax efficiency strategies that can be implemented with an investment holding company?
Investment holding companies can be used in different ways to optimize the total tax burned pertaining to portfolio investments:
- Accumulation of income: Income generated within a holding company is taxed at the entity level, but not at the shareholder’s level. Shareholders are not immediately subject to personal income tax or withholding tax on such income. This allows for reinvestment of the full amount, enhancing compounding returns.
- Lowering the applicable personal income tax rate: Shareholders have discretion over the amount and timing of dividend distributions from the holding company. By controlling distributions, shareholders can meet not only their liquidity needs but also manage the timing and amounts of payments to avoid higher progressive tax brackets.
- Participation exemption for substantial investments: If an investment holding company holds at least CHF 1 m in a single equity (or a 10% interest in another company), it may qualify for the participation exemption. As a result, dividends from such investments will be subject to an effective tax rate of approx. 0.6%-1% (depending on the canton)
- Leveraging low corporate income tax rates: Investment holding companiess benefit from low corporate income tax rates (11%-20% depending on the canton). When dividends are eventually distributed from the PIC to individual shareholders, they are taxed at a significant discount (30%-50%) at the shareholder level.
Do such companies offer tax advantages for Swiss investors?
Investment holding companies can increase tax efficiency for Swiss investors, if they are structured and managed correctly. Such structures benefit from the lower corporate income tax rate on the one hand and the reduced tax rate on dividends distributed from such company to its shareholders. The actual benefit depends on individual circumstances, the canton of incorporation, and the costs of maintaining the structure. Professional tax advice is recommended to ensure optimal results.
Example: High-Net-Worth Individual in Zurich.
A Zurich resident with an annual investment income of CHF 10,000,000 is considering whether to invest directly or through an investment holding company based in Zug.
Tax parameters:
- Personal effective income tax rate: 38.5% (federal:11.5%, cantonal/municipal: 28.5%
- Corporate income tax rate in Zug: 11.9%
- Taxation of dividends from qualifying participations:
- 70% of the dividend income at the federal level
- 50% of the dividend income at the cantonal/municipal level
Assets held directly by the investor:
Taxable income of CHF 10,000,000
Income tax of 3,850,000
Assets held through a legal entity:
Taxable income at entity level: 10,000,000
Corporate income tax: 1,190,000
Distribution to the shareholder: 8,810,000
Federal income tax: 8,810,000 x 0.7 x 11.5% = 709,205
Cantonal /municipal income tax: 8’810,000 x 0.5 x 28.5% = 1,255,425
Total tax expense: 3,154,630
Tax savings: 695,370
The tax savings can be enhanced due to the participation exemption available at the company’s level. Dividends from shareholdings with a market value of CHF 1,000,000 benefit from the participation exemption. This regime renders dividends from such holdings virtually tax free at the corporate level, further increasing overall tax efficiency.
Assuming that one half of income received by the entity are dividends that benefit from the participation exemption, our example will look as follows:
Assets held through a legal entity:
Taxable income at entity level: 10,000,000
Dividend income subject to participation exemption: 5,000,000
Corporate income tax: 5,000,000 x 11.9% = 595,000
Distribution to the shareholder: 9,405,000
Federal income tax: 9,405,000 x 0.7 x 11.5% = 757,103
Cantonal /municipal income tax: 9,405,000 x 0.5 x 28.5% = 1,340,213
Total tax expense: 2,097,316
In this scenario, the tax savings are significantly greater, resulting in a much higher return on investment compared to direct investments.
This example demonstrates that, for a Swiss individual taxpayer, using a private investment company can be tax efficient in certain cases. However, if maximizing tax efficiency is the primary objective, the structure must be carefully planned. In particular, the private investment company must have sufficient substance at its registered office to ensure that the tax authorities in the shareholder’s canton of residence recognize it as a separate taxpayer. This is necessary to avoid a “look-through” approach or the determination that the company’s effective place of management—and thus its tax domicile—is at the shareholder’s place of residence. A robust substance will avoid falling into a tax trap.
Can I set up a company in an offshore jurisdiction with a 0% tax rate?
Such a company can, of course, be established. However, Swiss tax authorities are likely to apply a “look-through” approach, attributing the income and assets of the offshore company directly to the Swiss-resident shareholder. As a result, the intended separation between the company and the individual for tax purposes is disregarded. From a tax perspective, using an offshore company is generally not an efficient or effective strategy for Swiss taxpayers. Therefore, Swiss taxpayers are typically better served by transparent and compliant structures within Switzerland or other jurisdictions with which Switzerland has robust tax agreements.
I already have an operating company. Can I use this company for my private investments?
From a tax perspective, using an operating company can be advantageous, especially if the company is based in a low-tax jurisdiction, such as a low-tax canton or a foreign country. In this case, investment income will be subject to lower tax rates, and tax authorities will generally recognize the company as a separate taxpayer, rather than attributing the investment income directly to the shareholder.
However, it is important that the use of an operating company for investments aligns with the company’s legal charter and governance. Additionally, adequate business processes must be established to ensure the smooth operation of both the core business and the investment activities.
Does an investment holding company offer tax advantages to institutional investors, such a pension funds?
As Swiss pension fund are exempt from income tax and can in many cases benefit from preferential foreign withholding tax rates under double tax treaties, such structure is not recommendable. Should a Swiss pension fund require an investment vehicle (e.g. for risk management purposes), it should set up a tax-transparent entity, e.g. a limited partnership, that will allow the pension fund to fully benefit from the preferential double tax treaty rates.
If you are considering the use of an investment holding company or other wealth structuring tools to enhance tax efficiency, LINDEMANNLAW provides tailored legal and tax services to support your objectives. Our team assists high-net-worth individuals and families with complex structuring, regulatory compliance, and succession planning in both Swiss and international contexts. To discuss how we can support your specific needs, please contact us.
