SWITZERLAND IN INTERNATIONAL TAX LAW

SWITZERLANDININTERNATIONAL TAX LAWXAVIER OBERSONHOWARD R. HULL

GENERAL OUTLINEIntroductionChapter 1. Swiss Domestic LawChapter 2. Swiss Treaty LawChapter 3. International Allocation of Taxable IncomeChapter 4. Double Taxation ReliefChapter 5. Anti-abuse ProvisionsChapter 6. Transfer PricingChapter 7. Non-discriminationChapter 8. Mutual Agreement ProcedureChapter 9. Exchange of InformationAppendicesAbbreviationsTranslations of Frequently Used TermsGeneral CONTENTSChapter 1. Swiss Domestic 4Overview of the Swiss Tax SystemA. Direct Taxation1. Introduction2. Individual income taxa. Taxable incomeb. Tax deductions3. Individual capital gains tax4. Individual wealth tax5. Corporate income taxa. Depreciationb. Corrections and provisionsc. Taxesd. Loss carry-forwardse. Thin capitalization6. Corporate capital tax7. Withholding taxB. Indirect taxation1. Introduction2. Stamp tax3. Value added taxa. Introductionb. Domestic turnover

10Contents4.c. Import of goodsGift and inheritance tax3636II. Jurisdiction to tax incomeA. Full tax liability1. Individualsa. Domicileb. Residency2. Corporationsa. Place-of-incorporation testb. Place-of-management test3. Partnerships4. Trusts5. Investment fundsB. Limited tax liability1. Income taxa. Enterprises, permanent establishments and immovablepropertyb. Personal servicesc. Pensions2. Withholding taxa. Taxable investment incomeb. Taxable persons36363737383838383939414141III. Special relief for individualsA. Lump-sum taxation for individuals1. Introduction2. Legal basis3. Qualifying persons4. Calculation of standard of living5. Calculation of comparative tax6. Availability of treaty reliefB. Taxation of capital gains1. Introduction2. Distinction between business and private assets3. Distinction between independent business activity andmanagement of personal wealth5051515152535354555555IV. Special relief for corporationsA. Relief for qualifying dividend income and capital gains1. Legal basis2. Companies for which relief is available3. Dividend income for which relief is available4. Capital gains for which relief is available5. Calculation of tax reliefB. Holding companies1. Legal basis58585960616163646441424445455057

112.C.D.E.F.G.Criteria to qualify for holding company statusa. Main purposeb. Long term participationsc. Absence of commercial activity in Switzerland3. Taxation of holding companiesDomiciliary companies1. Legal basis2. Criteria to qualify for domiciliary company status3. Taxation of domiciliary companiesa. Income from qualifying participationsb. Other Swiss source incomec. Other foreign source incomeInternational sales companies1. Criteria to qualify for the 50% ruling2. Taxation under the 50% rulingService companies1. Criteria to qualify for service company status2. Taxation of service companiesFinance branches1. Conditions to qualify for relief2. Basis of taxation3. Rates of taxationNewly established enterprises1. Legal basis2. Qualifying businessesa. Business for which relief is availableb. Newly established businesses (including diversification)c. The interests of the economyd. Non-qualifying businessese. Tax 7374747475757676Chapter 2. Swiss Treaty Law79I.79Sources of treaty lawII. Scope of tax treatiesA. Period in timeB. TerritoryC. TaxesD. Persons1. General principles2. Individualsa. Swiss residents subject to lump-sum taxationb. Habitual abode or registered office in Germanyc. Extended limited tax liability in Germany, the Netherlandsand Sweden3. Corporationsa. Luxembourg 1929 holding companies (milliardaires)808181828383848485858686

12Contents4.5.6.7.b. Madeira offshore companiesPartnershipsTrustsInvestment fundsPermanent establishments8787888989III. Interpretation of tax treaties89IV. Interaction between Swiss treaty law and Swiss domestic law92Chapter 3. International Allocation of Taxable Income95I.Business profitsA. Principles of taxation1. General principle2. Shipping, inland waterways transport and air transportB. Permanent establishment defined1. Legal basis2. Fixed place of businessa. Treaty definitionb. Swiss domestic law3. Representatives4. Subsidiaries5. The impact of e-commerceC. Allocation of profits1. Principles of international treaty lawa. In generalb. Swiss treaty policy2. Swiss rules of applicationa. Introductionb. Companiesc. Partnershipsd. IndividualsD. Swiss treatment of foreign losses1. Swiss businesses with permanent establishments abroad2. Non-resident businesses with permanent establishments 105106106107111111111111II. Income from immovable propertyA. Principles of taxationB. Allocation of income1. Immovable property held by individualsa. Total taxable income attributable to immovable propertyb. Deductions attributable to immovable propertyc. Allocation of mortgage interest and social deductionsd. Rate of taxation2. Immovable property held by businessesa. Operational propertyb. Traders in property113113114114114115115116116117117112

13c.Investment property118III. Investment incomeA. Dividends1. Definition2. Taxation in the State of the beneficiary3. Taxation in the State of sourcea. Limited tax liabilityb. Beneficial ownershipc. Treaty abused. Extraterritoriality4. Relief from economic double taxationa. Introductionb. United Kingdomc. France5. Procedural issuesa. General principlesb. Special rules in the United States-Switzerland tax treatyB. Interest1. Definition2. Rules of taxationC. RoyaltiesD. Capital 125127127127128128IV. Personal services incomeA. Independent personal servicesB. Dependent personal services1. General rules2. Short-term employment (international transfers)3. Employment in international transport4. Frontier workersa. Austriab. Francec. Germanyd. Italye. LiechtensteinC. Directors' feesD. Artistes & sportsmenE. Government service and members of diplomatic missions andconsular postsF. V. Pension incomeA. Private pensionsB. Public pensions137137139VI. Other income139136136

14ContentsChapter 4. Double Taxation Relief141I.141Double taxation definedII. Relief from concurrent full tax liabilityA. IntroductionB. IndividualsC. Other persons142142142143III. Relief from concurrent limited tax liability144IV. Relief from concurrent full and limited tax liabilityA. Introduction to commonly used methods1. Deduction method2. Exemption method3. Credit method4. Comparative chartB. Methods applied in Switzerland1. Swiss domestic lawa. Swiss residentsb. Non-residents2. Swiss treaty law144144144144145145145145145146146V. Credit method applied in SwitzerlandA. IntroductionB. Eligibility1. Swiss residents2. Foreign tax at source3. Swiss income tax4. Absence of treaty abuse5. Significant amountsC. Calculation of tax credit1. Foreign tax at source2. Swiss income taxa. Gross treaty favored incomeb. Net treaty favored incomec. Swiss tax rateD. 1151Chapter 5. Anti-abuse Provisions153I.155155155156156157158Anti-abuse provision in Swiss domestic lawA. IntroductionB. Sources of lawC. Treaty abuse in the 1962 Abuse Decree1. Scope of application2. Broad definition of treaty abuse3. The 1962 Abuse Circular

15a. Abusive transfer of income to non-qualifying personsb. Inappropriate profit distributionsc. Fiduciary relationshipsd. Foreign-controlled family foundations or partnerships4. The 1999 Abuse Circulara. Companies qualifying for reliefb. Conditions of the 1999 Abuse CircularD. Consequences of non-compliance158160162163163163168169II. Anti-abuse provisions in Swiss tax treatiesA. Treaties which refer to 1962 Abuse DecreeB. Treaties which include 1962 Abuse DecreeC. Other anti-abuse provisionsD. The United States-Switzerland Tax Treaty1. Introduction2. Individuals3. Public Establishments4. Companies (total benefits)a. Active trade or business testb. Headquarters testc. Stock exchange testd. Predominant interest teste. Derivative benefits test5. Companies (limited benefits)a. Shareholder testb. Base erosion test6. Partnerships7. Trusts and estates8. Family foundations9. Pension trusts and not-for-profit organizations10. Triangular cases11. Discretionary 5185185187187187187187188Chapter 6. Transfer Pricing191I.191IntroductionII. Arm's length pricesA. IntroductionB. Arm's length methods1. Traditional transaction methodsa. Comparable uncontrolled price method (CUP)b. Resale price methodc. Cost plus method2. Transactional Profit Methodsa. Profit Split Methodb. Transactional Net Margin Method (TNMM)C. The Swiss approach193193194194194195195195195195196

16Contents1. In general2. The methods applied196196III. Consequences of inappropriate transfer pricing practicesA. Initial adjustment1. Income tax2. Withholding taxB. Corresponding adjustmentC. Secondary adjustment198198198199199200Chapter 7. Non-discrimination201I.201IntroductionII. Treaty lawA. Scope of applicationB. Unlawful discriminations1. Discrimination on the grounds of nationality2. Discrimination against businessesa. Introductionb. Permanent establishmentsc. Deductibility of disbursements202202202202204204204206III. Bilateral agreements with the EU207IV. Swiss domestic law207Chapter 8. Mutual Agreement Procedure209I.209IntroductionII. Request by taxpayersA. ConditionsB. Procedure1. Presentation of taxpayer's objections2. Examination by the competent authority3. The mutual agreement procedure proper4. Application of the mutual agreement211211212212212213214III. Request by competent authorities214Chapter 9. Exchange of Information215I.216IntroductionII. OECD model treatyA. Treaty applicationB. Implementation of domestic lawsC. Limitations216217217217

17III. Exchange of information in SwitzerlandA. General principlesB. Special rules1. The United States-Switzerland tax treaty2. The France-Switzerland tax treatyC. Procedure218218219219221221IV. International judicial assistanceA. General principlesB. Procedure221221222V. Impact of the draft EU Directive on the taxation of savings222Appendices225Swiss tax treatiesI.International tax treaties signed by Switzerland*(List of States, scope, dates and publication references)225II.Rules of application of Swiss tax treaties*(List of Swiss unilateral rules of application of tax treaties)229III. Treaty relief from Swiss withholding tax*(List of maximum tax rates on Swiss source dividend and interestincome)231IV. Treaty relief from Swiss tax at source on pensions*(List of situations where treaty relief is available on Swiss sourcepensions)237V. Treaty relief from foreign tax at source*(List of maximum tax rates on foreign source dividend, interest, royaltyand pension income)239OECD Model TreatyVI. Summary of the rights to tax under the OECD Model TreatyTax credit mechanismVII. Tax credit ordinance of August 22, 1967 modified on March 9, 2001(TCO)*VIII. First ordinance of application dated December 6, 1967 modifiedon March 23, 2001 (TCO 1)*IX. Second ordinance of application dated February 12, 1973 (TCO 2)*X. Notice concerning tax credits of April 1982 (DA-M)*Anti-abuse provisionsXI. Checklist of anti-abuse conditions under Swiss domestic lawXII. Federal decree on measures against the improper use of tax treatiesconcluded by the Swiss Confederation of December 14, 1962(The 1962 Abuse Decree)Published in French.245247259271273277

18XIII. Federal circular of explanation dated December 31,1962(The 1962 Abuse Circular)XIV. Federal circular of explanation dated December 17, 1998(The 1999 Abuse Circular)XV. Checklist of conditions under Limitation on Benefits clause in theUnited States-Switzerland tax treatyXVI. Explanations to the questions on Form 82C or on the questionnaireto Form 823 concerning the qualification under Article 22 ofthe Double Tax Convention between the United States andSwitzerland of October ions of Frequently Used Terms319General Bibliography323

Chapter 6. Transfer Pricing 191 I. Introduction 191 II. Arm's length prices 193 A. Introduction 193 B. Arm's length methods 194 1. Traditional transaction methods 194 a. Comparable uncontrolled price method (CUP) 194 b. Resale price method 195 c. Cost plus method 195 2. Transactional Profit Methods 195 a. Profit Split Method 195 b.