Swiss Corporations
- Switzerland
- 01/01/2000
Most Swiss corporations are joint stock companies (“sociétés anonymes”, “Aktiengesellschaften”). Although there is a recent tendency to reinforce the role of the limited liability company (“société à responsabilité limitée“, “Gesellschaft mit beschränkter Haftung“), the corporate form of the joint stock company enjoys continuing popularity among domestic and foreign investors: it is easy to incorporate, requires a relatively small minimum share capital (100,000 CHF) and is governed by legislation which – although thoroughly revised in 1991 – remains comparatively simple and flexible. Whereas a limited liability company must disclose the identity of its members, public registers contain no information on the shareholders of a joint stock company.
Swiss law does not discriminate between foreign or domestically owned corporations nor is there any special legislation on foreign investments. Some restrictions on foreign ownership may, however, apply in specific areas (e.g. banking and real estate). In order to ensure that the company is permanently represented in Switzerland the majority of the directors (board members) of a joint stock company must be Swiss citizens residing in Switzerland: if the board consists of one director, he must have a Swiss passport and domicile; if there are, for instance, three directors, at least two must be Swiss and reside in Switzerland. The Swiss director(s) must further be given authority to sign on behalf of the company.
The fact that the company is registered in Switzerland and is required to have directors domiciled in Switzerland does not mean that the company may not be managed from abroad or have substantial business activities outside of Switzerland. In practice it is possible to have nominal directors, i.e. directors who transact business in strict compliance with instructions received from the shareholder. The company may further appoint a person designated by the shareholder (including the shareholder personally) as general manager or grant general or limited powers of attorney. Neither the general manager nor the company’s agents need to be Swiss citizens or residents. The company may obviously transact business and open subsidiaries, branches or representative offices outside of Switzerland.
The directors of the company, be they nominal or not, have the responsibility to ensure that the company is in compliance with the law. Recent legislation and court practice, partly designed to reduce Switzerland’s attractiveness for international money laundering activities, have considerably reinforced the civil and criminal liability of directors and increased the risks for nominal directors who blindly follow their principal’s instructions; today all reliable professionals require therefore to be in a position to survey the company’s business activities, and, in particular, want to be informed about all transactions executed by the company, bank accounts opened in its name and money transfers received on or made from such accounts, etc. However, while it is true that a Swiss company may not be used and managed in the same way as a corporation registered in an off-shore jurisdiction, the enhanced diligence of nominal directors should normally not be felt as an interference with the company’s business and may indeed often be a welcome safeguard against inconsiderate decisions provided the shareholder(s) and director(s) entertain a normal working relationship based on mutual trust.
The minimum initial capitalisation (share capital) of a joint stock company is 100,000 CHF divided into bearer or registered shares with a minimum par value of 10 CHF each. The share capital must be transferred in advance to a Swiss bank account opened in the name of the company to be formed. In-kind contributions are authorised but a complicated procedure must be followed. The contributions made by the shareholders in payment of the company’s issued share capital may be used to cover start-up costs or business losses. However, the company’s net asset value may not fall below 50% of the company’s equity capital, otherwise the directors and auditors normally have the legal obligation to notify the judge of the company’s overindebtedness, in which case the judge will declare the company bankrupt. In order to protect the interests of creditors and shareholders Swiss law requires that joint stock companies keep regular books of accounts in compliance with certain basic principles. In particular, the accounting must be complete, understandable, consistent and contain all relevant information. Valuations must be conservative and based on the assumption of the going concern. Set-offs between assets and liabilities or revenues and expenditures are prohibited and the company must make appropriate provisions for asset depreciation and contingencies. The annual accounts must be audited by auditors based in Switzerland who are independent from the board of directors or major shareholders of the company.
To form a Swiss company the founders (who may act in a fiduciary capacity on behalf of the future shareholders) hold a meeting before a notary to approve the company’s articles of association, appoint its director(s) and auditor and ascertain that the contributions to the share capital have been made as required by the law. The company is then incorporated by its registration in the Commercial Register based on the notarised minutes of the founders’ meeting. An excerpt from the Commercial Register is sufficient evidence that the company exists and is in good standing and may be obtained at any time against payment of a small fee.
Prior to incorporation the founders should obtain approval of the company’s name by the Federal Office of the Commercial Register and secure an address. In practice the company may be domiciled with one of its directors, a fiduciary company, etc. A Swiss company does not need to purchase or lease its own business premises or to employ local staff.
It takes normally between two and three days to incorporate a Swiss company, but up to two or three weeks to obtain the official excerpt from the Commercial Register which is necessary to make the company’s bank account operational. The costs of incorporation include notary fees (vary from canton to canton and depend on the amount of the share capital, in Geneva approximately 2,000 CHF for a share capital of 100,000 CHF), the fees of the Commercial Register (600 CHF for a capital of 100,000 CHF) and a federal stamp duty (due only if the issued share capital exceeds CHF 250’000.—).
Our firm regularly assists clients with the incorporation of Swiss companies and provides professional advice on all related issues. Our fees are calculated on a time-spent basis. In our experience fees and disbursements (including notary and other fees) for setting up a joint stock company normally amount to approximately 10,000 USD. The annual corporate maintenance costs typically include:
- director’s fees (normally around 4-5,000 CHF per nominal director); - domiciliation fees (approximately 1,000 CHF); - accounting and auditor’s fees (calculated on a time-spent basis).
Taxes
In Switzerland direct corporate taxes are levied at the federal, cantonal and municipal level. Federal taxes include:
- Corporate Profit Tax:
Raised at a fixed rate of 8.5%. The taxable profit is calculated on the basis of the profit and loss account provided the legal accounting rules have been observed, with certain tax-specific adjustments (e.g. for business expenses, depreciations and provisions which are commercially not justified, transactions with shareholders or affiliated companies which have not been concluded at arm’s length, etc.). Corporate profit tax is assessed on an annual basis. Paid corporate tax is considered a tax-deductible business expense.
- Withholding Tax on Profit Distributions
A 35% withholding tax applies to profit distributions (dividends and constructive dividends). Constructive dividends are disbursements by the company to its shareholders or affiliated persons (e.g. payment of a salary, interest on loans, etc.) which appear in the company’s accounts as ordinary business expenses but are the result of transactions which would not have been concluded or have been concluded on other terms had there not been a privileged relationship between the contracting parties (i.e. there is a disproportion between the consideration received and the disbursement made). The 35% withholding may normally be reclaimed by Swiss tax residents. Tax residents of other jurisdictions may obtain a partial or total reimbursement of the tax if they benefit from a double tax treaty concluded by Switzerland (provided the dividends are declared in the country of their tax residence).
- Tax on capital
The tax on capital (net worth, equity) has recently been abolished at the federal level.
While federal taxes are identical throughout the country, the 26 cantons enjoy considerable tax autonomy. A federal law on the harmonisation of direct taxes entered into force on January 1, 1993 and must be implemented by the cantons until the end of the year 2000. Aimed to reduce tax competition between cantons this law will considerably standardise the way in which cantons assess taxes. Nevertheless cantonal tax laws will continue to differ in more respects than just the applicable tax rates.
Under the law on tax harmonisation all cantons must tax the profit and the equity (net worth) of corporations. The assessment of taxable profit does not differ in principle from its assessment at the federal level. Taxable equity includes:
- the issued share capital; - open reserves (difference between the company’s net assets and its issued share capital according to its balance sheet); - undisclosed reserves (are not reflected in the balance sheet and consist of an under-evaluation of assets or over-evaluation of liabilities where the difference between the accounting value and the real value of the relevant assets and liabilities would otherwise be taxable as profit); - shareholders loans or loans from affiliated persons which are economically equivalent to equity capital (thin capitalisation rules).
The equity tax is levied at an aggregate rate of between 0.3 and 0.5% (cantonal and municipal level).
Municipal taxes are added to cantonal taxes and normally represent a specific percentage thereof. Certain special taxes (e.g. parish tax) may be levied in addition.
In the canton of Geneva, for instance, profit is taxed at the fixed rate of 10%. Municipal taxes have to be added so that the maximum rate for the year 2000 in Geneva is 23.4% (plus 8.5% federal tax which makes a total overall corporate tax rate of 31.9%). The cantonal tax on equity is levied at the rate of 0,18%. Approximately the same amount is due as municipal tax so that the maximum equity tax rate amounts to approximately 0.36%. In Geneva the municipalities further levy a professional tax which is a kind of turnover tax (max. 0.17% of gross income for manufacturing and sales activities, 0.6% in the service industry).
Tax privileges
The following corporations may obtain a special tax status:
- holding companies; - newly created companies; - domiciled companies; - service companies.
The holding privilege and the tax status of the service company exist under both federal and cantonal law while the other privileges are available at the cantonal level only. Some tax privileges may be cumulated (e.g. newly created domiciled companies). The preferential tax status must be negotiated in advance and be confirmed by a ruling of the local tax authorities which is normally granted for a limited, although renewable, period (typically 5 years).
The tax reduction available to pure and mixed holding companies was introduced to alleviate double taxation of the same profits within groups (taxation first at the level of the subsidiary and then at the level of the holding company). The holding privilege consists of the following:
- Profit tax payable by the holding company is reduced in the proportion which the net income from qualifying direct investments bears to the overall net income. Net investment income is calculated as gross income (dividends, etc.) less financial costs (interest on loans obtained to finance the investment and equivalent expenses) and administrative costs (assumed to be 5% of the net income unless the company proves that the actual costs are lower). To qualify for the holding reduction the relevant investment (holding) in the equity of another company must be directly held and amount to at least 20% of its issued share capital or have a fair market value of not less than 2,000,000 CHF.
EXAMPLE:
Net income = 100, net profits from investments = 20, overall net income = 80. Proportion net investment income/overall net income = 20/100 = 20%.
Tax reduction (federal tax): 8.5 × 0.2 = 1.7 ; reduced tax rate: 6.8.
The holding reduction on income from qualifying investments (excluding capital gains) is granted at both the federal and cantonal level. - Under federal law net income from qualifying investments includes capital gain received in the event of the sale of such investments (holdings) provided the investment sold consisted of not less than 20% of the issued share capital of another company and was held during more than one calendar year. This tax privilege may also be granted by the cantons.
- If the corporate purpose of the corporation consists mainly in administering holdings in other companies and the corporation does not have any commercial activities in Switzerland it pays no cantonal profit tax at all provided the value of, respectively the income from its holdings represent in the long term at least 2/3 of its total asset value, respectively its overall income. This tax privilege does not extend to income from real estate owned by the corporation nor is it available at the federal level. Obviously if such a company derives its income exclusively from qualifying investments as defined above it is also not liable for federal profit tax but as a result of the application of the general holding privilege discussed above.
The cantons may offer tax privileges to new companies in the form of full or partial tax holidays or otherwise for up to ten years (normally the effect of the tax exemption decreases over the years proportionately to the amortisation of the initial investment). These privileges are designed to attract new investments to the canton and are therefore granted only to companies which proceed to significant investments, create new employment and generally represent an interest for the development of the local manufacturing and service industry.
Reductions on cantonal taxes are granted to so-called domiciled companies. The tax status of these companies is very close to the traditional concept of an off-shore business as an entity which does not transact business in the country where it is incorporated. Domiciled companies were thus initially not allowed to have manufacturing, trading or other business activities in Switzerland; their activity in the country was limited to the administration of assets (holdings, loans, intellectual property, etc.). However, the law on tax harmonisation was changed in 1997 and today business in Switzerland is admitted as long as it plays a subordinate role and the company’s activities are mainly oriented towards foreign countries (not all cantons have already implemented this change).
Practically all cantons grant a special tax status to domiciled companies (called “sociétés auxiliaires“ in Geneva, “Domizilgesellschaften” in Zug, “Verwaltungsgesellschaften” in Zurich, “sociétés de domicile” in Jura, etc.). The typical conditions are the following:
- The shares of a domiciled company may not be held by local tax residents. Some cantons further require that a specified percentage of the shares be held by foreigners (in Jura, for instance, 85%) or that the company be controlled by foreign persons.
- Administrative activity normally generates only so-called passive income (dividends, capital gains, interest, royalties, etc.). There is a basic assumption that a company needs minimal office space and staff to perform such activities. Consequently there may be restrictions on the size of the domiciled company’s offices and the number of its employees in some cantons (for instance, Zurich) and some cantons do not allow a domiciled company to have its own offices or staff (for instance, Zug).
- Where the company employs staff in Switzerland it is obviously difficult to define what may be considered as business activity outside of Switzerland. While a domiciled company may definitively not manufacture in Switzerland, it may conduct its trade and perform its services from Switzerland. In general trading activities are considered as foreign business if the goods are not imported to or exported from Switzerland (some cantons, for instance Zug, admit the export of Swiss goods), service activities if the service is rendered to a person who is not a Swiss resident. Typically the business of a domiciled company is not connected with the Swiss market and could be transacted with the same success in any other part of the world (e.g. local marketing services are not admitted even if rendered to a foreign company).
- As indicated above a domiciled company does not forfeit its status if it conducts business in Switzerland as long as its main interests lay abroad. Cantons normally define the maximum proportion of active revenues from Swiss sources in overall revenues (in Zug, Fribourg and Geneva, for instance, Swiss revenues may not exceed 20% of total revenues, in Neuchatel 5%, in Jura only 15% of the total profit may be generated in Switzerland, etc.).
Domiciled companies are taxed as follows:
- revenues from Switzerland are taxed at the ordinary rate; - revenues from abroad are taxed according to the importance of the headquarters of the company in Switzerland for the generation of the company’s profits.
The taxation of foreign revenues is based on the assumption that these revenues are mainly due to activities carried on outside of Switzerland and that Switzerland should therefore only tax the proportion generated by the activity conducted in Switzerland. This proportion is traditionally defined based on an assumption, i.e. a fixed percentage (normally within the range of 10 - 20%) which is defined in the law or negotiated in advance with the local tax authority:
- Geneva taxes 20% of the foreign-source profit at a maximum rate of 23.4% (cantonal and municipal taxes), which corresponds to an effective tax rate of 4.68% (plus 8.5% federal tax). - Fribourg does not tax foreign revenues. It will, however, have to implement federal legislation yet and is therefore expected to tax 10% of foreign-source profit as from January 1, 2001 at a maximum rate of 22% (cantonal and municipal taxes), which corresponds to an effective tax rate of 2.2% (plus 8.5% federal tax). - Neuchatel taxes 1-15% of foreign-source profit (probably 10% as from 2001). The resulting tax rate (cantonal and communal taxes) is 3.5 – 5% (plus 8.5% federal tax). - Jura taxes 1-10% of foreign-source profit. The resulting tax rate (cantonal and communal taxes) is a maximum of 2% (plus 8.5% federal tax). - Zug, Switzerland’s traditional low tax jurisdiction, distinguishes domiciled and mixed companies. The foreign revenues of domiciled companies are not taxed, but Zug will also need to implement federal law and is expected to apply an effective tax rate of 1-2% (cantonal and municipal tax) plus 8.5% federal tax. Domiciled companies may not have offices and staff in Switzerland and Swiss revenues (contrarily to mixed companies). As concerns mixed companies, 25% of foreign-source profit is taxed, which results in an effective tax rate of 2.9% cantonal and municipal tax (plus 8.5% federal tax).
A different percentage may apply to passive income from foreign sources (dividends, interest, etc.). In Geneva, for instance, only 15% of foreign loan interest is taxed and this percentage is further reduced to 2.5% if the loans have been granted to foreign affiliated companies, which results in an effective tax rate of maximum 3.51%, respectively 0.585%. Dividends from qualifying holdings are exempt from tax based on the holding privilege discussed above. Some cantons also offer a lower equity tax rate to domiciled companies.
Commercially justified expenses must be deducted from the corresponding revenues.
Domiciled companies may not cumulate the privileged tax status and benefits from double tax treaties, i.e. they may not claim tax relief in Switzerland (a tax credit against Swiss taxes) for foreign source income which is taxed in accordance with the provisions outlined above.
In addition, tax practice admits – subject to certain conditions – a flat deduction for business expenses made abroad up to 50% of gross earnings.
EXAMPLE:
SALES REVENUES 1,000,000 CHF ./. PURCHASES 500,000 CHF DIRECT COSTS (COMMISSIONS, ETC.) 100,000 CHF
GROSS PROFITS 400,000 CHF ./. DEDUCTION OF OVERHEAD EXPENSES UP TO 50% OF GROSS PROFIT …200,000 CHF ADMINISTRATIVE EXPENSES HEADOFFICE 5,000 CHF TAXES PAID 20,000 CHF
NET TAXABLE PROFIT 175,000 CHF
This rule makes it possible for domiciled companies to transfer up to 50% of their gross earnings in the form of business expenses to affiliated companies without having to pay tax (and, in particular, withholding tax on dividends) on such transfers.
The domiciled company should not be confounded with the service company. A service company is a company which, as its main or exclusive purpose, renders services in the fields of financing, management, marketing or technical assistance to companies of the same group (companies are considered as belonging to the same group if they are comprised in the group’s consolidated accounts). Service companies may negotiate a tax status under which they are allowed to calculate their profits as a percentage of their overall expenses (normally 5%). This “tax privilege” – available under federal and cantonal law - is an application of transfer pricing rules. If they meet the conditions specified by applicable legislation domiciled companies may obtain the same treatment as service companies.
EXAMPLE:
PROFIT MARGIN = 5% EXPENSES = 100,000 CHF PROFIT = 5,000 CHF taxed at ordinary rate (e.g. in Geneva ca. 23.4% cantonal and municipal and 8.5% federal tax).
NOTE: if gross revenues according to the profit and loss statement exceed 105%, profit is taxed based on the real profit resulting from the company’s profit and loss statement!
EXAMPLE COMBINED SERVICE / DOMICILED COMPANY GENEVA:
PROFIT MARGIN = 5 % (minimum) of expenses.
a) expenses in Switzerland;
b) expenses abroad for or by foreign staff;
c) expenses abroad by Swiss staff: split 50%/50% between a) and b).
5% of a) (assumed profit from Swiss sources) is taxed at the ordinary tax rate (max. 23.4% cantonal and municipal + 8.5% federal tax).
20% of the profit from foreign sources (5% of b)) is taxed at the ordinary rate, which corresponds to an effective tax rate of 4.68 % cantonal and municipal taxes + 8.5% federal taxes.
SIMPLIFIED METHOD:
PROFIT = 5% of overall expenses.
50% of the profit is assumed to come from Swiss, 50% from foreign sources. 100% Swiss-source profit is taxed, id. 20% of foreign-source profit, which is 60% of overall profit (50% + 1/5×50%). The effective tax rate is therefore 60% of max. 23.4% cantonal and communal tax = 14.04% (plus 8.5% federal tax).
