FDF expert group recommends reform of withholding tax to the Federal Council

Following the first unsuccessful reform efforts of the Federal Council in 2014, the expert group once again points out the urgency of the need for action and submits concrete proposals.

On Friday, 8 March 2019, a group of experts from the Federal Department of Finance consisting of representatives of the Swiss Bankers Association, the Conference of Financial Directors, Economiesuisse and Swissholdings, the Swiss Insurance Association, the State Secretariat for Economic Affairs and the State Secretariat for International Financial Matters presented a report to the Federal Council recommending, among other things, that no withholding tax should be levied on interest investments of domestic legal entities and foreign investors.

This recommendation is based on the comprehensive reform of the withholding tax that the Federal Council prepared for consultation in December 2014 with the aim of strengthening Switzerland's capital market and the safeguarding purpose of the withholding tax. Due to the subsequent negative outcome of the consultation process in 2015, the Federal Council decided not to submit a comprehensive reform of the withholding tax to Parliament and decided to suspend the project for the time being and to instruct the Federal Department of Finance to appoint a group of experts for this procedure.

The so formed expert group has been working since 2015 and considers the need for action identified by the Federal Council to be urgent and explains in its report:

The decision not to levy withholding tax on interest investments of domestic legal entities and foreign investors should help to improve the basic conditions for Switzerland as a business location: it should enable Swiss corporations to issue bonds on the domestic market and to locate intra-group financing activities in Switzerland. Investment funds should receive the same treatment as corresponding direct investments.

In order to strengthen domestic tax security and prevent tax evasion, withholding tax should continue to be levied on private individuals resident in Switzerland. In addition, withholding tax should now also be levied on foreign securities held by individuals resident in Switzerland at a Swiss bank.

In connection with the implementation of the required measures, the Commission of Experts has developed a proposal based on an annual collection of tax.

In its report, the expert group also expresses the urgency of examining possibilities for strengthening the equity market. In this context, a reduction of the withholding tax on dividends from currently 35% to 15% should be considered. The current tax rate of 35% is extremely high as compared to international standards and would be detrimental to Switzerland as a business location.

In the opinion of the expert group, the exceptions with regard to mandatory convertible bonds (Cocos) and bonds with debt waiver (Write-off-Bonds), which are already exempt from withholding tax, should be maintained.

Authors: Dr. Samuel Bussmann, Daniela Arth

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