The Swiss withholding tax is a pivotal aspect of Switzerland’s taxation system, particularly for foreign investors. This tax is levied on various types of income originating in Switzerland, including dividends, interest, and royalties. Given its very high rate of 35% and strict rules with regard to its refund, it is of the essence that every investor with investments in Switzerland understands how this tax works.
How is the Swiss withholding tax charged and what are its rates?
Swiss withholding tax applies to
✔ dividends paid by Swiss companies,
✔ interest on Swiss bonds and notes (including structured notes),
✔ interest paid by Swiss banks,
✔ distributions made by Swiss collective investment schemes to the extent such distributions are not derived from capital gains or income from direct holdings of Swiss real estate,
✔ certain life insurance payments.
Swiss withholding tax is set at a flat rate of 35%. The tax is deducted at the source, meaning that the payer of the income withholds the tax before distributing the remaining amount to the foreign investor.
Can the withholding tax be absorbed by the Swiss payor?
Unfortunately, it is not possible to avoid the deduction of Swiss withholding tax. The payor of the taxable payment—such as a Swiss company distributing dividends or a Swiss bank paying interest to its clients—is legally required to deduct the withholding tax directly from the gross payment. As a result, the recipient of the payment will only receive a net amount equivalent to 65% of the gross payment.
If the payor fails to deduct the withholding tax as required, this can lead to material adverse consequences. In such instances, the total amount paid to the recipient is deemed to represent the net payment of 65%, rather than the gross amount. Consequently, the Swiss withholding tax is calculated on a grossed-up basis, which means that the actual payment is retroactively treated as 65% of a larger gross amount. This adjustment results in an effective withholding tax rate of approximately 54% on the original payment.
It is therefore crucial for payors to ensure compliance with Swiss withholding tax obligations to avoid these complications and potential liabilities.
Are there cases in which the Swiss withholding tax does not have to be deducted?
There are only a few specific exceptions to the general requirement to deduct Swiss withholding tax from taxable payments. One of the most notable exceptions applies to dividend payments made by a Swiss subsidiary to Swiss corporate shareholders who hold an interest of 10% or more in the subsidiary. In such cases, while the dividend must still be reported to the Swiss tax administration, no withholding tax deduction is required. This exemption simplifies the process for qualifying domestic corporate shareholders and ensures efficient handling of intra-group dividend payments within Switzerland.
For foreign parent companies, a different mechanism may apply. If a foreign parent company is entitled to a full or partial exemption from Swiss withholding tax on dividends paid by a Swiss subsidiary under the provisions of an applicable double taxation treaty, this exemption or reduction can often be granted upfront. This means that the withholding tax does not need to be deducted in full and subsequently reclaimed through a refund process. Instead, the exemption or reduction is applied directly.
Another important exception pertains to distributions made by Swiss investment funds to foreign investors. If at least 80% of the fund’s income originates from foreign sources, such distributions made to foreign investors are not subject to Swiss withholding tax.
What are fiduciary deposits? Why is no withholding tax deducted from interest payments on such deposits?
To enable foreign bank customers to receive interest income from bank deposits without being subject to Swiss withholding tax, the Swiss tax authorities have authorized the use of fiduciary deposits. Under this arrangement, a client of a Swiss bank can instruct the bank to place their deposit with a foreign bank on behalf of the client but under the name of the Swiss bank, thus without disclosing the identity of the client. The Swiss bank acts as an intermediary and is obligated to forward all payments received from the foreign bank directly to the client. These interest payments are not subject to Swiss withholding tax because the interest is paid to the client by the foreign bank and not by the Swiss bank.
How can I recover the withholding tax?
The recovery of Swiss withholding tax depends primarily on the residency and legal status of the person or entity applying for a refund.
For Swiss-Resident Individuals
Swiss-resident individuals can reclaim withholding tax by declaring the taxed income (e.g., dividends or interest) in their annual tax return. The withholding tax is then credited against their overall tax liability or effectively refunded as part of the tax assessment process.
For Swiss Entities
Swiss companies and other legal entities must file a reclaim form directly with the Federal Tax Administration (FTA). This application can be submitted in the year following the receipt of the taxable payment. If the application fulfils formal and material requirements, Swiss withholding tax is refunded to the applicant.
For Foreign Investors
Foreign investors can reclaim Swiss withholding tax under the terms of applicable double taxation treaties (DTTs) between Switzerland and their country of residence. These treaties are designed to prevent double taxation and typically reduce the withholding tax rate below the standard 35%, depending on the type of income and treaty terms. For instance:
✔ Interest income: Treaty rates generally range from 0% to 10%.
✔ Dividends on portfolio investments: Treaty rates typically range from 10% to 15%.
To claim a refund, foreign investors must submit a country-specific reclaim form to the FTA, along with supporting documentation such as proof of residence in a treaty country, evidence of income received (e.g., dividend or interest statements) and of withholding tax deducted.
The FTA reviews these applications and, if all requirements are met, refunds the applicable amount. It is worth noting that many countries grant foreign tax credits for any residual Swiss withholding tax that cannot be reclaimed, further mitigating potential double taxation. In optimal cases, this ensures that foreign investors do not incur additional tax expenses.
The Swiss withholding tax system plays a pivotal role in shaping the tax landscape for foreign investors, with significant implications for those earning income from Swiss securities and other taxable assets. While the standard withholding tax rate of 35% may seem high at first glance, Switzerland’s extensive network of double taxation treaties offers opportunities to reduce this burden and reclaim withheld amounts, provided investors navigate the system carefully.
Need help managing Swiss withholding tax? Our team of experienced tax professionals is available to assist you in optimizing your investment structure, ensuring compliance, and facilitating the recovery of withholding tax. Please do not hesitate to contact us for tailored advice and comprehensive support.
