Federal Council wants to reform withholding tax

news-single-imgcaption" style="width:240px">Investors, with the exception of natural persons domiciled in Switzerland, will no longer have to pay withholding tax on interest income. (Keystone)

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Withholding tax and trading stamp duty are detrimental to the Swiss capital market. In addition, the current withholding tax system has shortcomings in its guarantee function. The Federal Council wants to correct the situation and put on Friday a reform of the withholding tax law. The consultation ends on July 10.

Interest payments on Swiss corporate bonds are subject to withholding tax of 35%. Swiss bonds are therefore unattractive to most investors, even if they are entitled to partial or full tax refund.
Swiss corporate groups regularly circumvent withholding tax by issuing their bonds through foreign companies. Trading stamp duty also weighs on bond trading.

Paying agent

To deal with these problems, the Federal Council wants to move to the paying agent principle and abolish the stamp duty on Swiss bonds.

Currently, a company, such as Novartis or Nestlé, which issues a bond, pays withholding tax (35%) levied on interest from which the holder benefits. With the new principle, the company would pay all the interest to this person and it would be up to the bank (paying agent) of the person concerned to levy or not withhold tax.

Unlike the debtor, the paying agent knows the identity of the investor. It is therefore able to levy withholding tax only in cases where the guarantee function requires it.

Strengthened market

Investors, with the exception of natural persons domiciled in Switzerland, will no longer have to pay withholding tax on interest income. This will strengthen the third party capital market. Corporate groups will be able to issue their bonds from Switzerland without obstacles due to withholding tax. The same will apply to the internal financing activities of the groups.

Paying agents will technically be able to levy withholding tax on foreign securities yields as well. The taxation of the latter will therefore also be guaranteed when natural persons domiciled in Switzerland deposit securities with a Swiss bank.

This measure will fill an important gap in the withholding tax guarantee function and will contribute effectively to the fight against tax evasion in Switzerland. The Confederation, the cantons and the municipalities will benefit. If the paying agent is domiciled abroad, the automatic international exchange of information will normally apply.

Attract investors

With the reform, it will be more attractive for investors to buy Swiss bonds from securities dealers domiciled in Switzerland, due to the elimination of stamp duty. This will result in a slight recovery in securities and asset management activities, the government believes.

The new withholding tax will result in a one-time decrease in revenue estimated at 750 million francs. At the federal level, it will be covered by provisions previously established and will therefore have no budgetary effect.

Recurrent reductions in revenue estimated at CHF 165 million are also to be expected, given the current level of interest rates. These losses will be borne up to 90% by the Confederation and up to 10% by the cantons.

On the other hand, due to the filling of the gap in the guarantee function, revenue will increase by 35 million francs, according to estimates. As for the abolition of the trading stamp duty on Swiss bonds, it will lead to a reduction in revenue estimated at 50 million francs for the Confederation. (Awp)

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