Switzerland is a federal state located in Central Europe, east of France and north of Italy. It covers an area of 41,290 sq. km. and has a population of 7,318,638 (July 2003 est.). The capital city is Bern. Switzerland is one of the most multilingual countries in Europe. German (63.7%), French (19.2%), Italian (7.6%) and Romansh (0.6%), a Rhaeto-Romance offshoot of Latin, are the official languages in Switzerland. However, English is widely spoken in professional and commercial sectors. Switzerland has a literacy factor of 99%.
The two dominant principles of the Swiss Constitution of 1874 are federalism and democracy. Switzerland has a federal structure with three different political levels: Federation, cantons and local authorities. The Constitution provides that the cantons shall exercise all powers of government not delegated to the Federal Government and each canton has its own constitution, parliament, government and courts. All the cantons are divided into municipalities or communes.
President of the Swiss Confederation is both the chief of state and the head of government. The three major sectors of the Swiss National Government are the Federal Council, the Federal Assembly and the Federal Supreme Court. The executive body is the seven-man collegiate Federal Council, which is elected for a four-year term by the Federal Assembly usually from among its own members. Legislative branch of the Government is bicameral Federal Assembly consisting of the Council of States (46 seats - members serve four-year terms) and the National Council (200 seats - members are elected by popular vote on the basis of proportional representation to serve four-year terms). The judicial power is vested in the Federal Supreme Court (judges are elected for six-year terms by the Federal Assembly).
Switzerland is a prosperous and stable modern market economy with low unemployment and a highly skilled labor force. As it has virtually no mineral resources and a restricted surface area, it highly depends on foreign trade. Switzerland remains a safe haven for investors, because it has maintained a degree of bank secrecy and has kept up the long-term external value of its currency - Swiss Franc.
Swiss legal system is based on civil law influenced by customary law. The country accepts compulsory ICJ jurisdiction, with reservations. Principal corporate laws are Schweizerisches Obligationenrecht (Swiss Code of Obligations), Bundesgesetz ueber Schuldbetreibung und Konkurs (Swiss Federal law on Debt Collection and Bankruptcy), Bundesgesetz ueber die direkte Bundessteuer (Federal Law on Direct Taxation). Switzerland has tax treaties with the following countries: Australia, Austria, Belgium, Brazil, Canada, Denmark, Egypt, Finland, France, Germany, Great Britain, Greece, Hungary, Iceland, Indonesia, Ireland, Italy, Japan, Malaysia, The Netherlands, New Zealand, Norway, Pakistan, Portugal, Russia, Singapore, South Africa, South Korea, Spain, Sri Lanka, Sweden, Trinidad, Tobago, the U.S.A. Switzerland is a member of the UN, WTO, EFTA, OECD and FATF.
Under the Swiss Code of Obligations there are various types of companies operating in Switzerland. The most common ones are Aktiengesellschaft (Corporation) and Gesellschaft mit beshraenkter Haftung (Limited Liability Company).
Aktiengesellschaft (AG), or the Corporation, is the most popular form of legal entity in Switzerland, it is formed under a company name that is followed by the words "Societe Anonyme" or the abbreviation SA. Shareholders’ interests are represented by share certificates, the stated value of which marks the limit of a shareholder’s liability for the corporation’s debts. The corporation may claim payments from shareholders only if, and to the extent that, their shares are not fully paid in.
Gesellschaft mit beshraenkter Haftung (GmbH), or the limited liability company (Sаrl) retains some essential features of the corporation, i.e. the limited liability of the holders and the character of a company, but it also has some characteristics of a partnership, and namely, direct management and control by the holders. It is an association of two or more persons or legal entities, where members are personally liable to third parties up to the aggregate amount of the stated capital not paid in.
Other forms of business entities are not capitalised and include Partnership (can be formed as ordinary, general or limited partnership depending on the corporate goals), Association (designed for organisations that pursue non-profit objectives and engage in beneficial, scientific, cultural, political or social activities), Foundation (fund endowed for a defined purpose; assets set aside for that purpose become autonomous and acquire the status of a legal entity).
When the legal form of a foreign business entity roughly corresponds to a Swiss legal form as defined in the Code of Obligations (partnership, corporation, etc.), the foreign firm may establish branches in Switzerland. At least one branch manager with power to sign alone, or two branch managers who can sign jointly, must reside in Switzerland.
There are certain limitations on the activities conducted by Swiss companies, and namely these companies cannot undertake the business of banking, insurance, assurance, reinsurance, fund management, collective investment schemes or any other activity that would suggest an association with the banking or finance industries unless properly licensed under the legislation.
The first step in establishing a company in Switzerland is to submit the proposed company’s name to the federal Register of Commerce for approval. Names of companies incorporated in Switzerland cannot be identical or similar to any existing company name and cannot imply government patronage. Also the following words are not allowed unless a company is properly licensed under the legislation: bank, building society, savings, insurance, assurance, reinsurance, fund management, investment fund, Switzerland, state, country, municipality, principality, Red Cross and their foreign language equivalents.
Company becomes a legal entity when it is entered in the Commercial Register of the Canton in which it is to have its legal domicile. The following documentation must be submitted to the Register:
- Public Deed of Incorporation executed before a Notary Public (Founders of the company hold an organizational general meeting at which they adopt and sign a Deed of Incorporation drawn up by a notary public. Founders subscribe to all the initial shares, elect members of the initial board of directors and the auditors, whose names must be included in the incorporation deed)
- Statute, which represents the internal rules of the company and mandatory include such issues as the headquarters location, the corporate goal, the amount of the capital stock, the number, value and type of shares, and the management.
- Confirmation by a bank that the share capital is held with an account (The company’s paid-in capital must be put in escrow with a Swiss bank prior to the company’s incorporation).
- Consent to act forms signed by the proposed directors
- Application to the Commercial Register covering the above documentation, and including the notarised signature of the person appointed to represent the company
A federal issuance capital tax of 1% is levied upon incorporation or subsequent capital increase on the amount of the registered capital exceeding CHF 250,000. With a minimum share capital of CHF 100,000, incorporation expenses would include notary fees of about CHF 2,500/3,000, registration fees of CHF 600/800 and fees for legal advice ranging from CHF 3,000 to CHF 5,000.
Language of the corporate documents is one of the Swiss official languages, but foreign language translations can be obtained. Registered office must be maintained in the canton of incorporation.
Minimum required authorised share capital for a corporation is CHF 100,000. Share capital must be divided into shares with par value of at least CHF 0.01 each. Prior to the company’s registration minimum of 20% of the par value of each share, but at least CHF 50,000 must be paid up. The funds can be placed with an account set up specifically for this purpose in Switzerland or can be transferred to the account of the legal firm assisting in the company’s registration.
When the share capital exceeds CHF 250,000, a capital duty of 1% is payable on the amount over CHF 250,000. Corporation may issue registered, bearer shares and preference shares. Bearer shares must be paid up in full and are transferable by simple delivery.
Shareholders of a corporation may be individuals or companies, residents of Switzerland or not. At least three shareholders (who may act in a fiduciary capacity) are required, but this requirement has no practical consequences after the formation of the corporation. It should be noted that no information on shareholders is available in the commercial register, but bank character references on the beneficial owners must be provided to the local representatives/trust management company.
- Limited Liability Company
Minimum stated capital for a limited liability company is CHF 20,000 and maximum is CHF 2 million. At least 50% of the capital must be paid in and disclosed in the bylaws at the time the company is founded. The funds can be placed with an account set up specifically for this purpose in Switzerland or can be transferred to the account of the legal firm assisting in the company’s registration. The Limited Liability Company does not have shares, instead, the owners’ equity participation is registered in the Commercial Register. Participation certificates are similar to shares, but lack voting rights. They may only be transferred before a notary public.
Shareholders of a limited liability company may be individuals or companies, residents of Switzerland or not. Minimum of two shareholders, who may also act in a fiduciary capacity, are required. Information on shareholders is filed with the commercial register.
The day to day management of Switzerland companies is undertaken by directors. Minimum number of directors is one, who must be a Swiss or EU national residing in Switzerland. If more than one director is appointed, the majority of them must be Swiss or EU nationals residing in Switzerland. Corporate directors are not permitted. Apart from this, each director must be a shareholder of the company (either directly or in a fiduciary capacity holding at least one share) or the representative of a corporate shareholder. Information on directors is filed with the commercial register. Meeting of the Board of directors are to be held in Switzerland.
All companies established in Switzerland must maintain books of account and internal records reflecting the financial position and results of the company’s operation. Financial statements are required to be held in Swiss francs pursuant to the Code of Obligations.
All corporations must be audited annually. Except for banks, insurance and a few other selected companies there is no requirement to file statements with a government agency. However financial statements and tax returns should be presented together with the auditor’s report at the annual general meeting, which must be held annually within six months after the close of the business year. Shareholders approve annual financial statements, discharge the board of directors from liability to the shareholders arising from their action during the preceding years and approve distribution of profits. They may also amend the company’s statutory documents, appoint or remove directors or auditors. Auditors can either be independent persons or companies domiciled in Switzerland. For limited liability companies appointment of auditors is optional.
I. General overview of the Swiss taxation system
In Switzerland there are three levels of taxation: federal, cantonal and municipal. Thus the overall taxation on the Swiss company's net income will be the result of the addition of the federal income tax and the cantonal and municipal income taxes.
Federal income tax rate is 8.5%, cantonal and municipal income tax rates depend on the canton and on the municipality where the company is located. As a rule of thumb, it can be said that the overall effective rate ranges between 19% and 26% depending on the place of incorporation. In Geneva, overall effective income tax rate amounts to approximately 24.3%. The base for calculation of income tax is net income as per profit and loss account.
Ordinary corporate capital tax rate also depends on place of incorporation and ranges between 0.1% and 0.6%. The base for capital tax is the company’s share capital and its open reserves.
If a company has a legal seat in Switzerland or has effective place of management in Switzerland, it will be subject to unlimited tax liability in respect to its worlwide income and capital. Tax liability will be limited if a company has a permanent establishment in Switzerland or real estate located in Switzerland. In this case the scope of taxation will be income and capital allocated to Switzerland.
Companies liable to tax in Switzerland must file a tax return on a yearly basis. The tax return must be filed within six months from the closing date, though a three-month time extension can in principle be obtained. The yearly tax assessment is then issued by the cantonal tax administration and the tax payment due dates depend on the cantons. The usual practice for Swiss companies is to pay installments in respect to the tax due during the fiscal year.
II. Privileged tax rulings
Several privileged tax rulings may apply to companies incorporated in Switzerland. Swiss tax authorities are used to grant advance tax ruling to taxpayers, therefore it is possible to know the exact tax regime prior to incorporation of a company.
Auxiliary company ruling
Companies residing in Switzerland but developing their commercial activities outside of that country and limiting the role of their Swiss headquarters to a mere back office or administrative "function" qualify as “auxiliary companies”. Auxiliary companies can be active in international trading operations, licensing of intellectual property rights (patents, trade marks), can operate as European headquarters, etc.
Tax privileges for auxiliary companies on their foreign sources income include: 1) up to 80% exemption on cantonal and municipal income tax, but no reduction is available at the federal level; 2) thus the effective income tax rate ranges between 9% and 13%; 3) reduced tax rate for capital tax (between 0.02% and 0.2%).
In Geneva, the application of this privileged taxation allows to reduce the cantonal and municipal effective tax rates to 4.68%. Taking into account the federal income tax burden, the overall effective tax rate of auxiliary companies amounts to 11.65% on commercial foreign source income (including federal, cantonal and municipal taxes). Swiss source commercial income as well as other financial incomes are taxed at ordinary rate of 24.3%.
Holding companies tax ruling
Also privileged tax ruling is available for holding companies. Holding companies are not allowed to carry out any commercial activity, except assistance to related companies (e.g. in accounting, legal and tax matters) and must have 2/3 of their assets qualified as participations or 2/3 of their income must derive from participations.
Tax privileges for holding companies include: 1) 100% exemption on cantonal and municipal income tax; 2) reduction of income tax at federal level (possibly down to approximately 0%); 3) reduced capital tax rate (between 0.02% and 0.2%).
Principal company ruling
The Swiss company of an international group qualifies as a principal if it sells its goods through foreign affiliates or group companies (commissionaires or agents) acting in their own name or in the name of the Swiss principal, but in any case for the account of the Swiss principal in the customer’s country.
According to this practice, the Federal Tax Authority accepts to consider, under certain circumstances, that the commissionaires qualify as foreign permanent establishments of the Swiss principal with the consequence that only part of the income realized by the Swiss principal is subject to taxation in Switzerland, the balance being allocated to the foreign permanent establishments by way of an ordinary international allocation of income.
The Federal Tax Authority position is that a principal might realized three categories of income: (i) income arising out of the sale of goods (commercial income); (ii) manufacturing income and (iii) other income (including, without limitation, financial income, commission income, royalties, license fees). From these categories of income, only the commercial income can be subject to an international income allocation, i.e. partially allocated to the foreign permanent establishments of the principal and consequently exempted from Swiss income taxes. The two others categories of income (manufacturing income and other) are fully taxable in Switzerland. The manufacturing income is deemed to represent 30% of the overall manufacturing and commercial income. The remaining 70% is considered as commercial income. Up to 50% of the commercial income can be attributed to the foreign commissionaires and is consequently exempted from federal income tax.
The above is applicable at the federal tax level, at cantonal and municipal income tax levels the regimes can vary from a canton to another.
Fifty / fifty tax ruling
This privileged tax regime is applicable to international trading companies and companies engaged in intellectual property operations (licenses, trade marks, etc) and provides that 50% of gross margin is income tax deductible. The companies applying this method are not required to commercially justify the said expenses. Thus effective income tax rate ranges between 5%-7%.
It should be emphasized that the flat 50% deduction should be attractive only in the cases in which the net margin of the company is higher than half of its gross income. When it is not the case, the company (or branch) will be in a better position by deducting its effective expenses rather than the flat 50% deduction.
III. Other corporate taxes
Capital contribution tax is levied upon incorporation of the company, as well as upon any subsequent capital increase. The rate is 1% and is computed on the value received by the company in exchange for the participation rights. Companies formed with a capital that is lower than CHF 250'000 are exempt from issuance stamp tax. No issuance stamp tax is due if a branch of a foreign company (not a subsidiary) is set up in Switzerland. Since January 1, 1998 there is no more annual capital tax at the federal level, but all cantons levy an annual capital tax, which is deductible from the corporate profit (the rate varies from 0.02 to 0.1%).
Withholding tax at the rate of 35% is levied on gross dividends paid by Swiss corporations to their stockholders or to related parties. The tax can be fully or partially recovered by Swiss residents or by residents of countries with which Switzerland has a double tax treaty.
Double taxation treaty with Russia provides that:
- withholding tax on dividends (paid by a Swiss company to a Russian company, or paid by a Russian company to a Swiss company) cannot exceed 5% (the rate is 15% if the shareholders owns less than 20% in the company distributing dividends)
- withholding tax on interests cannot exceed 10% (5% if the creditor is a bank)
- no withholding tax can be levied on royalties paid by a Swiss company to a Russian resident, or paid by a Russian company to a Swiss resident.
Value added tax (VAT) is currently levied at the rate of 7.6% (some reduced rates apply with respect to certain goods or services). Swiss companies carrying commodity trading activity outside in Switzerland are not obliged to register for VAT purposes in Switzerland. They can however opt voluntarily for their registration as VAT taxpayer, and are thus able to deduct input tax.