On 27 September 2019, the Swiss Federal Council issued additional guidelines on a proposed reform of the Swiss withholding tax (“WHT”) and Swiss stamp tax (“SST”) regimes (hereafter, “the Proposal”). A copy of the Federal Council’s press release can be found here (only available in German, French and Italian).
The Proposal includes (1) the introduction of a new WHT on interest based on the “Swiss paying agent” principle, and (2) an exemption from SST for transactions with debt securities issued by Swiss entities.
1. Proposed new WHT on interest
The primary purpose of the Proposal is to strengthen the Swiss debt capital market by enabling Swiss companies to raise debt capital out of Switzerland without incurring WHT (currently Swiss companies suffer from a competitive disadvantage due to the Swiss WHT leakage on interest paid to Swiss and foreign investors).
Under the Proposal, an exemption from Swiss WHT would be introduced on interest payments made by Swiss companies to (i) Swiss resident corporate investors, and (ii) all foreign resident investors. However, the 35% WHT would remain applicable on interest paid to Swiss resident individuals.
In addition, it is proposed that Swiss WHT will be expanded to include all interest-bearing investments held by Swiss resident individual investors through an account at a Swiss bank (i.e. also on foreign securities). The liability to account for and pay the 35% WHT would rest with the Swiss paying agent involved in the transaction (typically the Swiss bank).
This proposed regime (i.e. a paying agent system with an extended WHT liability) for Swiss resident individuals reflects a perceived political compromise to maintain the appearance of Swiss banking secrecy in a domestic context. As a result of such Proposal, a significant proportion of Swiss resident individual investors will likely suffer from the cash flow disadvantages of this new WHT, as well as the additional administrative burden.
The introduction of a paying agent system will also raise numerous practical issues for Swiss financial institutions. For example, Swiss banks would have to calculate the income components embedded in all structured products and units in funds (including alternative investments) and account for and pay WHT to the Swiss tax authorities, probably even if the product or the fund does not make any distributions.
This is definitely not good news for Swiss banks. The introduction of a paying agent system would require significant investment in the development of new IT systems, whilst also exposing Swiss banks to considerable tax risks (since we understand that the new system would be part of the current WHT law, which includes very broad anti-avoidance provisions with no special exclusions for inadvertent errors).
2. Proposed new SST exemption for Swiss debt securities
The abolition of SST has been a wish of the Swiss (and International) finance industry for many years. The Proposal includes an additional exemption from SST for transactions with Swiss debt instruments (i.e. to encourage foreign debt investment into Switzerland), but this is not the end of SST.
Swiss securities dealers (mainly Swiss banks) will still have to deal with SST on any taxable transactions with Swiss non-debt securities and foreign securities, and therefore will have to continue to maintain appropriate systems to properly account for and pay SST.
This is an unexpected proposition, especially in an environment where many jurisdictions have introduced (or are talking about introducing) some form of financial transaction tax system.
We do not expect that the current Proposal will be implemented without further amendments. This is because (1) the introduction of a Swiss paying agent system for WHT does not make much sense in the current environment of tax transparency, exchange of information and negative interest rates, and (2) the exemption from SST on Swiss debt securities will very likely be challenged as being an unacceptable gift.