Switzerland is one of the most attractive business locations globally, thanks to its stable economy, clear legal frameworks, and significant tax advantages. Establishing a branch office is an efficient way to access the Swiss market. Below, we provide an overview of the tax framework and strategic opportunities for foreign companies setting up branch offices in Switzerland.

How Are Branch Offices Taxed in Switzerland?

A branch office is legally considered part of the foreign parent company. If it constitutes a permanent establishment in Switzerland, it triggers a local tax obligation. A permanent establishment is defined as a fixed business facility existing for at least 12 months where a substantial part of the company’s activities is conducted. This includes management offices, branch offices, business premises, manufacturing plants, workshops, sales outlets, permanent representatives, mines, quarries, or construction sites.

Key Taxation Highlights:

✔ Profit Taxation: Branch offices are subject to limited tax liability in Switzerland (Art. 51 para. 1 lit. b Federal Tax Act). Losses from the foreign parent company cannot be offset.
✔ Tax Obligation: At a minimum, profits earned in Switzerland are taxed (Art. 52 para. 2 Federal Tax Act).
✔ Double Taxation Treaties: Switzerland’s extensive network of double taxation agreements (DTAs) helps avoid international tax disadvantages for cross-border transactions.

Facilities solely used for storage, display, or delivery of goods are excluded from the definition of a permanent establishment.

What Are the 5 Key Advantages of Establishing a Branch Office?

1. Cantonal Tax Autonomy:
   Tax rates vary by canton, allowing strategic location choices to optimize tax burdens. In attractive cantons like Zug or Lucerne, effective corporate tax rates can be as low as 12%.
2. Loss Carryforward:
   Initial losses incurred by the branch office can be offset against future profits, reducing the tax burden during the early years.
3. Low Setup Costs:
   No share or corporate capital is required. The process involves fewer formalities than establishing a new company, saving both time and resources.
4. VAT Input Tax Deduction:
   Branch offices with an annual global turnover exceeding CHF 100,000 are subject to Swiss VAT. However, input tax deductions often result in financial relief.
5. No Withholding Tax on Profit Transfers to the Parent Company:
   Profit transfers to the head office are not treated as dividends and are exempt from Swiss withholding tax.

What Are the 3 Main Obligations and Challenges of Setting Up a Branch Office?

While branch offices offer numerous tax benefits, they also come with specific responsibilities:

1. Accounting and Tax Allocation:
   Although branch offices lack independent legal personality and are not explicitly subject to Swiss accounting obligations (as per Art. 957 Swiss Code of Obligations), it is common practice to maintain a separate income statement and balance sheet. This simplifies VAT reporting, especially for cross-border transactions. Tax allocation must be performed appropriately.
2. Transfer Pricing Compliance:
   Transactions between the parent company and the branch office must comply with the arm’s length principle and international transfer pricing guidelines.
3. Labor and Social Security Contributions:
   Employees in Switzerland are subject to local labor laws and must be integrated into the Swiss social security system.

What Strategic Considerations Are Key for Tax Optimization in Switzerland?

Selecting the right location within Switzerland is crucial for tax efficiency. Companies can further reduce tax burdens within the group through strategic transfer pricing, provided that these practices comply with legal requirements.

Establishing a branch office provides foreign companies with direct access to the Swiss market while offering significant opportunities for tax optimization. However, careful planning and adherence to all legal and tax regulations are essential to ensure long-term success. At LINDEMANNLAW, our team of tax experts has extensive international experience and is ready to provide tailored advice to help your business thrive in Switzerland and beyond. Contact us today to ensure your business is fully equipped to address the complexities of the Swiss legal and tax landscape.

Disclaimer:
The strategies and information provided herein are for general informational purposes only and do not constitute legal advice. Businesses should consult with a qualified attorney at LINDEMANNLAW for tailored legal advice specific to their individual circumstances and to ensure compliance with applicable laws and regulations.