Withholding tax reform

In order to keep Switzerland as a business location attractive and competitive, the Federal Council explained why it is necessary to amend the Withholding Tax Act and recommends that the changes be accepted at the vote scheduled for 25 September 2022.

In Brief

The federal government currently levies a withholding tax of 35 per cent on interest income from bonds. In order not to inhibit Switzerland as a business location, a number of Swiss companies issue their bonds abroad at a loss in terms of jobs and tax revenues. On the other hand, the Confederation, the cantons and municipalities as well as various public-law companies, such as hospitals, issue their bonds domestically and thus face higher financing costs. The reform also aims to eliminate this disadvantage.

Under the reform, Swiss bonds issued after 1 January 2023 will be exempt from withholding tax, while interest earned on existing bonds will continue to be subject to tax. Another objective of the reform is to abolish the trading tax levied on Swiss bonds. This makes it more attractive to buy such bonds through securities dealers domiciled in Switzerland. A referendum has been launched against this project. According to the referendum committee, the reform will lead to huge tax losses and an increase in tax crime.

The Federal Council and parliament recommend that the project be accepted. The reform would strengthen the bond market and the Swiss business location to the benefit of all, because it would allow jobs currently located abroad to be brought back to Switzerland and the lost tax revenues to be recovered. Already within a few years, Switzerland could benefit from higher revenues.

The vote will take place on 25 September 2022.

Objectives of the reform

The reform project aims to generate added value and create jobs in our country.

The reform is intended to encourage companies to issue their own bonds from Switzerland at competitive conditions. Thanks to the reform, the Confederation, cantons and municipalities would also be able to offer their bonds at lower interest rates.

With the abolition of the trading tax on Swiss bonds and certain securities, it will become more attractive for investors to trade these bonds domestically.

The withholding tax is… in the crosshairs of the Federal Council

Specific Elements of the Reform

• Interest income from newly issued Swiss bonds is exempt from withholding tax. However, withholding tax will continue to be levied on interest income from outstanding bonds.
• For natural persons domiciled in Switzerland, interest income from bank assets also remains subject to withholding tax. All other investors are exempt.
• Interest income from bonds received from collective investment schemes (funds) will be paid without withholding tax.
• The trading tax on Swiss bonds will be abolished. In particular, the following will not be subject to the tax: the issue, redemption and brokerage of units in foreign money market funds with a limited residual term, as well as the purchase and sale of Swiss or foreign participations of at least 10 per cent in the share or share capital of other companies.

Preservation of the guarantee function

The reform essentially preserves the guarantee function of withholding tax. As far as natural persons domiciled in Switzerland are concerned, interest from client assets will continue to be subject to withholding tax. For legal entities and foreign investors, the obligation to keep accounts or the automatic exchange of information ensure that interest income is taxed correctly.

Partial and balanced abolition

With the reform, withholding tax is only abolished in cases where it is more harmful than beneficial. The reform only affects a small part of the revenue from it. The tax continues to be levied on dividends, which form a large part of the revenue. The withholding tax therefore remains an important source of revenue.

Financial Consequences

The Federal Council believes that many companies will start to raise capital in Switzerland again as soon as the reform comes into force. The impulses generated by the reform will promote value and job creation. These impulses will have a positive impact on profit and income tax revenues in particular. Consequently, the reform could generate additional tax revenues for the Confederation, the cantons and the municipalities.

The repercussions of the reform measures are partly quantifiable and partly, where data are lacking, unquantifiable.

As far as the trading tax is concerned, the quantifiable measures will lead to a revenue shortfall of around CHF 25 million per year, since Swiss bonds will be exempt from it. As far as withholding tax is concerned, the loss of revenue in the year of entry into force is expected to amount to several tens of millions of francs. The shortfall in revenue from withholding tax and trading tax will be 90% and 100% respectively borne by the Confederation.

In the following years, the lost revenue from this tax will increase, as more and more maturing bonds will be replaced by tax-exempt bonds. Under constant economic conditions and interest rates, in the long term the loss of revenue due to the quantifiable measures will amount to CHF 215 to 275 million per year. If the level of interest rates continues to rise, the loss of revenue due to the reform will also increase.

Among the non-quantifiable measures is the abolition of the trading tax on foreign money market funds and participations by at least 10 per cent. Furthermore, it is not possible to determine any financial impact due to changes in the behaviour of natural persons domiciled in Switzerland. The measure to exclude double reimbursements guarantees withholding tax revenues.

However, these estimates need to be relativised taking into account growth opportunities. The incentives to issue bonds from Switzerland will in fact have an impact from the year the reform comes into effect. Therefore, in the best-case scenario, the reform could be self-financing already in the year of entry into force. Overall, the cost-benefit ratio of the reform is therefore very favourable.

The question on the board

Do you want to accept the amendment of 17 December 2021 of the Federal Withholding Tax Act (ATSG) (Strengthening of the Third Party Capital Market)?

YES

The Federal Council and Parliament want to bring the jobs transferred abroad and the lost tax revenues back to Switzerland. The reform strengthens the bond market and the business location in our country. At best, the reform could already be self-financing in the year it comes into force.

NO

For the referendum committee, the reform will result in increased tax criminality and revenue losses of up to CHF 800 million. The committee believes that it will mainly be foreign investors who will benefit from the reform, while the withholding tax will continue to be levied on the bank accounts of Swiss citizens.

Source: admin.ch