Switzerland To Amend Withholding Tax Regime

On September 11, the Swiss Federal Council adopted a dispatch on the temporary retention of certain withholding tax (WHT) exemptions and the introduction of a new exemption for bail-in bonds.

In Switzerland, WHT is levied on interest, participation income, lottery winnings, and certain insurance benefits. It is collected from the debtor of the taxable item, in accordance with the debtor principle. It is refunded only if the corresponding income is declared. The Council had proposed a move to a paying agent system, under which the debtor would transfer the full gross amount to the paying agent (typically a bank).

In June, the Council said that while many of those who participated in its consultation acknowledged the advantages of the reforms, they opposed immediate implementation. As a result, it proposed an extension of the temporary tax exemption for contingent convertible bonds (CoCos) and write-off bonds, and the introduction of a similar exemption for bail-in bonds.

The Federal Council has now confirmed that the existing exemptions for CoCos and write-off bonds will be maintained for a limited period. A temporary exemption will be introduced for bonds that were approved by the Financial Market Supervisory Authority at the time of issue and that can be written down or converted into equity capital as part of restructuring procedures in the event of (threatened) insolvency (bail-in bonds).

The Council said these exemptions create a competitive tax environment and boost the stability of Switzerland's financial center. It intends to discuss the proposed switch to a paying agent system again before the exemptions for CoCos, write-off bonds, and bail-in bonds expire. The Federal Department of Finance will submit a new proposal to the Federal Council after the upcoming referendum on the "Yes to the protection of privacy" initiative.