CFE Forum 2010Information Across Borders15 April 2010, Brussels

Situation in Switzerland

Prof. Pascal HinnyPartner, Lenz & Staehelin, ZurichProfessor of tax law, University of Fribourgpascal.hinny@lenzstaehelin.com+41 58 450 8000

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Contents

Exchange of Information

Tax treatment of Swiss holding-, domiciliary- and mixed companies

Current economic and tax climate in Switzerland after the financial crisis

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Main Swiss (international) tax issues

• Exchange of information under tax treaties

• Tax treatment of Swiss holding-, domiciliary- and mixed companies

• Acquisition of stolen bank data in France and Germany

• U.S. – UBS saga

• Relationship with Italy

• Special tax treatment for bonus payments, hedge-funds, globally acting banks, currency transactions

• Financial Problems of neighbour countries

• Destabilized Euro/British-£/U.S.-Dollar

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Extended exchange of informationNew tax treaties

• So far only exchange of information for the proper application of the tax treaty

• Extended information in case of tax fraud (as opposed to mere tax evasion)

• March 13, 2009 Switzerland withdraw its reservation to OECD 26

• Since then negotiation of 23 new / amended tax treaties• Exchange of information according to OECD 26 (on request / no fishing

expeditions / foreseeably relevant / no retroactive effect / subsidiarity / reciprocity and legal protection)

• Other significant enhancements: reduction of WHT / arbitration clauses / elimination of discriminatory practices

• Switzerland now compliant with international standards on exchange of information

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Exchange of information (2)Swiss expectations due to adherence to OECD principles

• Application of discriminatory practices of OECD-/EU-MS justified by limited

exchange of information so far• Application of EC-treaty freedom non-discrimination principles under EC-

Swiss treaties by EC-MS and ECJ• Other discriminatory practices applied towards Switzerland abandoned

• Switzerland expects that transparency is increased regarding• Beneficial ownership in trusts and opaque corporations (see FATF on

money laundering), e.g. in UK and U.S.• Adherence of Far Eastern Countries to the same principles (e.g.

Singapore)

• Switzerland is looking forward to OECD peer review for equal application of

transparency principles

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Exchange of information (3)Neighbour countries tactics

• Switzerland concerned of tactics of neighbours’ countries• use of illegally acquired data unclear and based on untested legal

grounds• non-transparent procedure of acquisition of stolen data vs. request

for full transparency regarding personal situation of its citizens• humiliation and intimidation of tax evaders• governments encourage breach of neighbour countries’ laws• rude approach of neighbours’ countries diplomacy

• Switzerland not prepared to exchange information re stolen data

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Holding-, mixed- and domiciliary companies (1)European Commission argument

• February 2007: European Commission resolved that Swiss tax

treatment of holding-, domiciliary- and mixed company treatment

infringes Free Trade Agreement (1972) between Switzerland and EC

• European Commission applies Art. 107 TFEU (former Art. 87 TEC)

and Code of Conduct principles on non-MS situation

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Holding-, mixed- and domiciliary companies (2)Consultations with European Commission

• Switzerland rejects the technical position taken by the EC

• OECD “approved” tax treatment in 2004 HTP-Report

• Switzerland discusses the following amendment of the current

holding-, domiciliary- and mixed company treatment:• Pure letter-box companies: Abolition of special tax treatment • Holding companies: Prohibition of business activities• Holding / mixed company: Increase of tax basis

• So far, no agreement and no change in Swiss tax treatment

• In parallel: Preparation for major corporate tax reform

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Holding-, mixed- and domiciliary companies (3)Adopted changes of corporate tax law as from 2011

• Tax free repatriation of shareholder‘s capital contributions (important

in case of inbound transactions)

• Tax free replacement of business assets, i.e. no realization of

untaxed reserves on assets in case of replacement. Applicable also

to 10% share-holdings

• Participation exemptions: Threshold for qualifying participations

reduced to 10 % / FMV CHF 1m (10% for capital gains) from

previously 20%/CHF 2m (20% capital gains)

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Holding-, mixed- and domiciliary companies (4)Proposed changes of corporate tax law

• Abolition of Issuance Stamp Tax on debt and equity contribution

• Resolving of problems re intra group financing (cash-pooling)

• Enhancement of participation exemption (full exemption)

• Cantons are free to abolish annual tax on corporations’ equity

• Unlimited loss carry-forward

• Loss transfer within group of companies (including foreign losses)

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Switzerland: Current Economic ClimateIn general

• Only few public money employed to bail out suffering industries

• Less tax revenue from various industry sectors expected. However, no or few public budget deficits in 2009

• Unemployment at 4.2% (March 2010)

• Switzerland is concerned about• financial problems of neighbor countries / destabilized Euro/£/US-$• increasing pressure (and distrust) on corporate and individual tax payers in

these countries• increasing migration of affluent and mobile tax payers• hostility among friendly countries to defend economic interests• increasing tax compliance cost (transfer pricing, information exchange etc)

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Switzerland: Current Economic Climate Characteristics of Swiss system

• Pluralistic, highly democratic and coalition based political system with relatively weak governmental power results in conservative policy making

• Pros: Stability, foreseeability• Cons: Quick and firm reaction often not possible

• Reliable and efficient service industry / infrastructure

• Still relatively reasonable public spending attitude

• Liberal legal framework, including liberal labour law

• Safe / nice environments / everything is neatly together

• Not a member of, but strong ties with EU

• But: Relatively high living cost due to continuously high demand

Leading position in various global competitiveness reports

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Switzerland: Current Economic Climate Characteristics of Swiss (tax) system (1): General

• Federal State System with powerful cantons. 2/3 of direct tax levied

at cantonal level. Strong competition among Cantons, also on tax

rates• Ordinary corporate overall effective tax rate: 12 –23%; special tax

treatments for holding- and mixed companies• Individual tax rates: 19 – 42%; up to 80% exemption on dividend

income• Stable / reliable tax system• Efficient ruling process, i.e. advance information on tax treatment

• Large treaty network featuring 99 tax treaties based on OECD

standards

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Switzerland: Current Economic Climate Characteristics of Swiss (tax) system (2)

Tax rates

• Tax rates approved by Swiss people in public votes after serious public discussions

• Each community defines it own multiplier in a public vote annually

• Moderate rates and relatively flat progression of tax rates

• Big differences among cantons and communities; but equalization procedures

Results in

• Good acceptance of tax burden

• Efficient delivery of public goods

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Summary

• Switzerland compliant with int. exchange of information standards

• Expectations / recommendations• discriminatory practices applied to Switzerland abandoned• transparency criteria applied equally (trusts, opaque corporate

regimes, Far Eastern Countries, “cheap” treaties etc.)• implementation and consolidation of the results now (theoretically)

achieved, before further hectic activity is undertaken• return of productive and friendly working relationship• compliance measures to increase transparency must be

proportionate• tax payers (financing governmental spending) treated with trust,

dignity and acknowledgment