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IN127 - The Use of Swiss Companies for International Trade
Companies incorporated in zero tax jurisdictions, or under laws that exempt a company from tax on the grounds that its shareholders are not resident in that jurisdiction, often encounter problems when trading internationally.
Tax authorities from the countries of trading partners may have anti-avoidance legislation. This may disallow expenditure when calculating tax liabilities if this expenditure is paid to a company incorporated in a jurisdiction that is black listed by the country from which the expenditure has arisen.
There are a number of solutions to this problem, such as trading through a UK agent or using a UK Limited Liability Partnership.
Use of a Swiss Company
An effective alternative solution, and, simultaneously a means to obtain a tax residence certificate, is to trade through a Swiss company.
Swiss companies are subject to Swiss Federal Tax at a rate of 8.5%, plus a local “Canton” tax. Tax rulings for the Canton tax can be obtained from the Geneva Authorities for Geneva based companies conducting commercial activities outside of Switzerland. Typically the Geneva Authorities will agree to tax foreign source commercial income at rates between 2.6% and 5.6%.
This means that a company buying goods from Company A and selling them to Company B, where both companies A and B are not resident in Switzerland, will be charged a Swiss company tax rate of between 11.1% and 14.1%, depending on the ruling received.
Treatment of Withholding Tax
Switzerland has a withholding tax rate of 35% on dividends. This can, however, be reduced to between 5% and 10% where the dividend is paid to a person or company resident in a tax treaty jurisdiction. The withholding tax can be reduced to nil where it is paid under the EU Parent/Subsidiary Directive, which Switzerland enjoys access to.
A Tax Efficient Structure using a Swiss Company
The following structure should be considered where the ultimate shareholder resides in a tax-free or non-treaty jurisdiction.
Please note that if a dividend was paid directly from a Swiss company to a trust in an offshore location a 35% withholding tax would apply.
Dixcart would therefore propose the structure overleaf, interposing a holding company between the Swiss company and the offshore trust. The suggested holding company is incorporated in Portugal and licensed prior to 31st December 2000 to operate in the Madeira Free Trade Zone.
Such a holding company is known as an SGPS. These companies are able to receive dividends from Swiss companies under the EU Parent/Subsidiary Directive and therefore such dividends are paid free of withholding tax. In order to take advantage of the EU Parent/Subsidiary Directive the holding company must have maintained the holding for at least two years. On disposal of the Swiss company and subject to certain conditions, there will be no liability to capital gains tax. Other income, such as interest and management fees is subject to tax at 22.5%.
As the holding company is licensed to operate in the Madeira Free Trade Zone, there is then no withholding tax on the onward payment of dividends to the offshore trust.
Dixcart Management (Madeira) Lda. has a number of shelf companies with licences to operate in the Free Trade Zone of Madeira, issued prior to 31st December 2000. They are therefore able to enjoy the tax position described above, through to 2011.
Summary
A Swiss company can be effectively used as an entity within an international trading structure. Tax efficiencies can be enjoyed with regard to the relatively low rate of tax payable on the international trading profits of the Swiss company. In addition, if structured correctly, any withholding tax can be reduced to zero.
Additional Information
For additional information regarding Swiss companies please speak to your usual Dixcart contact or to Christine Breitler in out Geneva office.