Switzerland in the International Tax Planning System

Swiss tax planning for international trading

and intellectual property structures

Thierry Boitelle

Geneva, 9 April 2011

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Agenda

1. Swiss corporate income tax

2. Trading, introduction

3. Swiss tax structures for trading

4. Intellectual property, introduction

5. Swiss tax structures for IP

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Swiss Corporate Income Tax (CIT)

1. Effective overall corporate income tax rate (federal, cantonal and municipal) generally ranges from 15 to 25%, depending on the canton and the specific facts

2. Cantons such as Zug (2009 rate 15.79%) would be in the low range whereas cantons such as Zurich or Geneva are in the high range (Geneva 2009 rate 24.23%)

3. Each canton offers privileged taxation for foreign source income,such as international licensing or trading income privileged tax rates generally range from 9 to 12%

Incentive : move profitable trading functions (traders, buyers, sellers etc.) and/or valuable intangibles from high tax jurisdictions to Switzerland

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Cantonal CIT Comparison (2008)

effective ordinary rates 2008

including 8.5% federal CIT

Canton City Min Max

Basel-City Basel 14.89% 24.81%

Bern Bern 13.52% 22.88%

Fribourg Fribourg 15.07% 21.26%

Geneva Geneva 24.23%

Graubünden Chur 13.88% 29.10%

Obwalden Sarnen 12.66%

Vaud Lausanne 23.53%

Zug Zug 12.66% 15.97%

Zurich Zurich 20.80%

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Trading companies in Switzerland

• Since the 1920s commodities trading in Geneva

• Neutral environment, politically stable, international, excellent infrastructure etc.

• Stable and freely tradable currency (CHF)

• Low corporate tax rates and advance security (rulings)

• Grains, soy beans, vegetable oils, coffee, cacao, cotton, metals, oil and derivative products, coal,

diamonds, electricity, carbon emission rights, etc.

• Presence of extensive service industry, including notably shipping companies and brokers,

commodity financing banks and inspection and certification companies

CargillBungeLouis DreyfusLetascoLukoil

BNP ParibasCrédit AgricoleINGArcher Daniels Midland Mercuria

SGS CotecnaMediterranean Shipping Company SwissmarineVitol

• Some major names in the Lake Geneva Trading Area include (see also www.gtsa.ch) :

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Swiss Trading Company or Branch (1)

Corporate taxes

1. Ordinary federal corporate income tax applies at a rate of 8.5% (effectively 7.83%)

2. Privileged taxation available at the cantonal and municipal tax levels if :

(a) commercial (trading) activities essentially focused abroad; and

(b) limited activities on the Swiss market ; and

(c) the goods traded do not physically pass through Switzerland

3. Overall effective tax rate in such case 9 to 12% depending on the canton

4. Cantonal and municipal net wealth tax (possibly at reduced rates or on a reduced tax basis)

ad 2 (a) Income must be from foreign sources and expenses must be mainly foreign

as a rule of thumb: at least 80% for both criteria

ad 2 (b) Transparency rulings possible in Geneva for trading with Swiss based companies that

have the same privileged tax status

ad 2 (c) Special customs warehouses (ports francs) are not considered Switzerland in this respect

ad 3 In popular trading cantons such as Geneva and Vaud the effective rate is around 11.67%

and 11.46%, respectively, but for substantial trading profits digressive taxation is an option

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Additional taxes if a Swiss company is used

5. 1% stamp duty on all capital contributions to the company (unless an exemption is available,

e.g. in the case of a merger or business reorganization)

6. 35% dividend withholding tax, reduced partially or fully under double tax treaties or under the

EC-Swiss Parent-Subsidiary Provisions, if applicable

Swiss Trading Company or Branch (2)

If Swiss stamp duty or dividend withholding tax is an obstacle

Consider a Swiss branch structure :

- Branch profit distributions are not subject to Swiss withholding tax

- Branches are not subject to the 1% stamp duty on capital contributions

- Overall Swiss tax level can remain low (same as for company)

- Full or partial (e.g. 95%) branch profit exemption needed in the head office jurisdiction

(e.g. based on domestic low or a double tax treaty) ;

popular head office locations include Luxembourg, Cyprus and Malta

International Group

CompanyCompany Company

Group

Client Client

purchasing

SwissBranch

Company

Example Swiss Trading Branch

3rd partiessales

sales sales

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Trading and Swiss VAT Aspects1. Main rule : no Swiss VAT due on the sale and purchase of the goods

as long as the goods do not physically pass through Switzerland

2. Exception : allocation, sale or contribution of e.g. existing trading contracts to the

Swiss company or branch may be deemed an acquisition or import of services

3. Input VAT can be fully recovered - provided the company or branch :

a) is a registered VAT payer (prior to the import of services and/or before

making any payments abroad) ; and

b) fulfills certain compliance rules and VAT formalities

4. If trading activities are conducted together with VAT exempt activities

(e.g. financing) VAT complications arise with regard to the refund of input VAT

separate VATable activities from VAT exempt activities

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Specialty: Swiss principal trading company

Swiss Principal

ContractManufacturer

CustomersLocal

distributorsLocal distributorsLocal

distributors

3rd party or Group

contract

sales

delivery of goods

goods

purchase price

Group companies

distributionagreement

raw materials

•planning•sourcing•marketing•sales/pricing•management•administration

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Stripped buy-sell

Swiss Principal

Customers

Local distributorsLocal

distributorsLocal distributors

sale 1

delivery of goods

purchase priceGroup companies

sale 2purchase price

Local distributor makes sale 1 and only then buys the goods from Principal. No debtor’s risk, no risk on the goods.

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Tax Aspects of Swiss Principal Company1. Manufacturing profits fully taxed (as deemed Swiss source income) : 15 to 25 %

as a general rule 30% of commercial overall income is deemed manufacturing

income

2. Remaining commercial profits from foreign sources are partially taxed in Switzerland

and partially allocated to the distribution entities abroad (and as such exempt under

Swiss income tax law)

generally 50% of remaining 70% commercial income is exempt

3. At the cantonal and municipal tax levels generally 70 to 95% of foreign source

commercial income can be exempt

4. Effective overall tax rate on the foreign source commercial income : 5 to 9%

5. Swiss and other income fully taxed, but foreign source income may benefit from

cantonal and municipal privileged taxation

Off-shoreBranch

SwissCompany

Swiss Company with Off-shore Branch

head office functions, supervision, invoicing, financing

trading, execution, logistics, documents, transport, customer relations, etc.

Possible to get advance ruling (APA) in Switzerland based on functional analysis (functions, assets and risks) and/or transfer pricing report

Effective overall tax ranges from 0 to 12% (safe harbor likely around 5 to 6%)

international profitallocation

Off-shorePrincipal

SwissCompany

Swiss Company with Off-shore Principal

principal trading, assumption of riskshead office functions, supervision, invoicing, financing

trading, execution, logistics, documents, transport, customer relations, etc.

Possible to get advance ruling (APA) in Switzerland based on functional analysis (functions, assets and risks) and/or transfer pricing report

Effective overall tax ranges from 0 to 12% (safe harbor likely around 5 to 6%)

trading profits

service fee

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The use of off-shore companies

 • Although Switzerland generally takes a relaxed approach towards off-shore companies (tax haven companies), one needs to be careful when using them for tax planning. If a taxpayer wishes to use off shore companies it is generally recommended not do so unless an advance tax ruling is obtained from the Swiss tax authorities

• The use of off-shore companies also triggers effective management questions for a range of Swiss taxes (income tax, withholding tax, VAT, etc.). This implies that if the off-shore company doesn't have enough substance and has certain links to Switzerland, the Swiss tax authorities may consider it being a Swiss resident company and tax it as such

• Under the Swiss holding system, which can effectively provide for a participation exemption, off-shore companies can be held by a Swiss parent company and dividends received and capital gains realized can be tax-free. There is no subject-to-tax requirement, there are no CFC rules and no activity tests etc

• Off-shore companies that own shares in a Swiss company, however, are subject to the high Swiss dividend withholding tax of 35%. In certain cases this can be reduced to 0%, e.g. by interposing an EU holding company, but Switzerland will strictly test the substance and beneficial ownership at that level and may eventually look through to the ultimate shareholder and still apply the 35% rate

 

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Source: WIPO IP PANORAMA 01 Slide 6/23http://www.wipo.int/sme/en/multimedia/flash/01/

General value shift towards IP

In the « New World » intangibleassets are becoming more valuablethan traditional tangible assets

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Best Global Brands 2008 source: www.interbrand.com

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Intangible assets: more than just IP

Source: http://www.buildingipvalue.com/08_KI/46-50Deloitte.pdf

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Key Building Blocks of IP value

Type Purpose Method of Creation Potential Lifespan

Copyrights /

Authors Rights

Rights relating to original/creative works, including literary,

dramatic, musical, artistic works (incl. software).

Automatic (possible

fixation requ’t); ©

Life of author + 50-70

years

Databases

(EU)

Additional sui generis rights for substantial investments in obtaining,

verifying or presenting data.

Automatic 15 years from creation

Trade secrets Rights given to owners of confidential information (technical or

commercial) that is valuable, specific, and ascertainable, and which

is treated as such.

Automatic, but must be

continuously maintained

as such

Indefinite

Domain

Names

Right to a unique alpha-numeric address on the Internet, obtained

from ICANN.

Registration only (via

registrar)

Indefinite, if renewed

Designs /

“Design

Patents”

Rights to original appearance of the whole or a part of an industrial

or handcrafted product resulting from the features of the lines,

contours, colors, shape, texture, and/or materials used.

Mainly registration, but

can be automatic (e.g.,

unregistered EU).

14 (USA) or 25 (EU)

years if renewed

(unreg’d EU = 3 years)

Utility Patents Rights to exclude others from making, using or selling inventions

that are useful, novel and non-obvious in exchange for publishing

this information. The inventions must be sufficiently described to be

practicable by a person of ordinary skill in the art. The claims define

the scope of the right.

Registration only (NB.

US add’l requirements

of “first to invent” &

subjective duties)

20 years from date of

application (if they

issue)

Trademarks Rights to exclusive use of words, symbols, objects, colors, sounds,

smells etc., by which consumers can identify the source of products

or services.

Use (™) or registration

(®) by classes of goods

(Nice).

Indefinite, if

registrations are

renewed, and brand is

used.

© Jeremy Lack, 2009

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Switzerland – a top location for IP• Multinational companies are rediscovering the value of intellectual property they

have developed and acquired over the years

• Many of them have already moved R&D, licensing or trademark operations to Switzerland

• Fast moving consumer good industry has been driving this trend (partially with Principal companies)

• More recently companies in the field of (bio)pharma and life sciences are setting up substantial IP operations in Switzerland

• As a national IP champion (with companies like Novartis and Nestlé), Switzerland provides for top-notch IP protection and offers an infrastructure and service industry meeting the highest standards

• Combined with attractive structures providing for low taxation, Switzerland is probably the preferred on-shore location to hold, own and exploit IP

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Tax Aspects of Swiss IP Structures

Swiss company beneficially owning and licensing intellectual property abroad :

• Limited use of the local infrastructure : tax advantages at the local tax levels (i.e. cantonal and municipal)

• Effective overall corporate income tax burden of 9% to 12% (depending on the canton) on net licensing income and possible future capital gains on the IP

• Deduction of expenses relating to the income (i.e. R&D expenses, salaries, legal fees, costs of financing and depreciation)

• Extensive Swiss double tax treaty network with low WHT rates on royaltiesand tax credits for any residual WHT

• Zero withholding tax in qualifying inter-company relations between CH and EU Member States (based on the EC-Swiss Interest and Royalty Provisions)

International Group

CompanyCompany

Swiss Company

Group

Contribution of intangible property

Licensing

Example Swiss Licensing Company

Royalties

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Some other Swiss tax considerations

• Swiss safe harbor guidelines for tax purposes :

- debt-to-equity ratio of maximum 70%, a maximum EUR interest rate of 3.5% (2010)

- maximum depreciation of 20% straight-line or 40% of declining book value

• Rulings - confirmation from the Swiss tax authorities in advance, regarding :

a) corporate income tax advantages

b) the cost structure and fees paid to related or unrelated foreign parties

(advance pricing agreements)

c) valuation of the IP upon entry and upon exit

• Branch alternative - if the 35% Swiss dividend WHT tax is an important obstacle

Swiss licensing branch typically combines a company in an excellent treaty

jurisdiction (e.g. Hungary or Luxembourg) with the Swiss corporate tax benefits

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Swiss anti-treaty abuse rules

• Switzerland has unilateral anti-treaty abuse rules (the 1962 Decree) limiting

the use of Swiss double tax treaties by foreign-controlled Swiss persons

most notable rule is the anti-base erosion provision : not more than 50% of

the (gross after residual WHT) treaty protected royalties can be paid out as

expenses to parties not entitled to the treaty (i.e., persons or entities abroad)

NB depreciation of IP purchased from a foreign party falls in 50% limit !

NB2 Practice relaxed if the Swiss company employees at least one

competent person

• In addition, if and to the extent double tax treaties concluded by CH are used to

reduce foreign withholding taxes, treaty based anti-abuse provisions apply

e.g. full Swiss taxation required under treaties with BE, FR and IT

e.g. LOB provisions in the treaties with the US, France and Colombia

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Off-shoreBranch

SwissCompany

Swiss IP Company with Off-shore Branch

legal ownership, IP registration, head office functions, supervision

e.g. licensing activities, R&D, invoicing, collection of royalties

Possible to get advance ruling (APA) in Switzerlandon the international profit allocation (functional analysis and/or transfer pricing report)

Effective overall tax ranges from 3 to 10% (safe harbor likely around 6%)

allocation of intangibles

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Sublicensing while using Swiss treaties

Final licensee Off-shorecompany

LicensingIP

Ownership

Sub-licensing

Royalties

(≤ 50%)

SwissCompany

Royalties

• Switzerland does not levy withholding tax on royalties paid

• Stringent anti-treaty abuse rules (base erosion test in particular) generally up to 50% can be paid to off-shore IP owner

• Effective overall tax rate around 6% plus residual WHT if any

spread ≥ 50%tax rate 9 - 12%

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Some Swiss VAT Aspects of IP

1. The allocation or contribution of intellectual property to a Swiss entity (company

or branch) is considered an import of services subject to 8% import VAT

2. Input VAT can be fully recovered - provided the company or branch :

a) is a registered VAT payer

(prior to the import of the intangibles into Switzerland and/or before

making any payments abroad)

b) fulfills compliance rules and VAT formalities

3. If licensing activities are conducted together with VAT exempt activities, VAT

complications might arise, especially with regard to the refund of input VAT

4. Holding companies can now qualify as a VAT payer and as such reclaim input VAT

Thierry Boitelle

Tax Partner

boitelle@ilf.ch

Geneva office

Rue du Général-Dufour 11

CH-1204 Geneva

Tel. +41 22 322 25 00

www.ilf.ch

BONNARD LAWSON