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Switzerland Becomes Attractive as a Treasury Location
Switzerland has never been perceived as an attractive location for treasury functions, especially not for the implementation of cross border cash pooling arrangements. This is mainly because of the so-called 10/20 rule (as discussed in more detail below), whereby every Swiss company had to account for and pay 35% withholding tax ("WHT") on the interest if it enters into interest-bearing loans from more than 10/20 non-bank lenders. From 1 August 2010, this rule has been amended. Under the new regime, most group financing activities such as physical cash pooling arrangements are no longer subject to WHT on the interest from loans from group companies even if the Swiss pool leader has more than 10/20 non-bank lenders. A Swiss company which is the leader of a physical cash pooling does not suffer from any Swiss issuance stamp tax ("IST") or WHT anymore and may still benefit from the current favourable Swiss corporate income tax regime whereby profits may be taxed at an effective corporate income tax rate of less than 10%. Taxand Switzerland examines the new rules and identifies why foreign groups should look at Switzerland when evaluating favourable locations for group treasury activities.
Under the current Swiss WHT regulations and according to the long standing practice of the Swiss tax authority, a Swiss-resident company which is the pool leader for a cash pool with zero balancing has to apply 35% WHT to the interest payments and IST on the issue of loans as soon as the pool includes more than 10 or 20 participants, depending on whether the pooling arrangement is classified as a bond or a cash bond for WHT purposes. This potential Swiss tax liability of the Swiss pool leaders means that they are not competitive in relation to pooling arrangements. In practice, the use of a Swiss company was a real "no-go" for certain Swiss cash pooling arrangements and for most cross border physical cash pooling arrangements.
The Swiss government has recognised that the current Swiss tax rules discourage Swiss and foreign entities from carrying out treasury activities in Switzerland and has now taken action. The ordinances for IST and WHT have been amended in such a way that most group financing activities such as physical cash pooling arrangements are no longer subject to WHT or IST. The new regime came into force and applies to all interest payments and existing arrangements as of 1 August 2010. The exemption from IST and WHT on interest on the pooling arrangements does not apply to all treasury activities and short term financing facilities. It applies to financing arrangements between group companies. A company is a group company if it is a member of a group and the group holds more than 50% of the shares in the company (full consolidation) according to the financial consolidated accounts of the group. The exemption does not, however, apply to financing arrangements with other affiliates and third parties. It also does not apply to Swiss companies having a finance group company outside Switzerland which issues a bond on the market with the guarantee of the Swiss parent company. In such a case, the 10/20 non-bank lenders rule continues to apply. The amendment to the IST and WHT regulations is therefore subject to certain conditions. The Swiss government wanted to encourage the group treasury activities within Switzerland but did not want to enable Swiss group companies issuing bonds outside Switzerland to transfer the proceeds from such issues to Switzerland without accounting for IST and WHT on the interest.
The new regime is attractive for non-Swiss groups of companies looking for a favourable location for their treasury activities. It is also favourable to Swiss groups, but only to the extent that Swiss groups do not issue bonds from outside Switzerland with a guarantee from a Swiss group company. Foreign groups, and Swiss groups which qualify for the exemption, will be able to have treasury activities in Switzerland and a Swiss company as the leader of a physical cash pooling arrangement, without incurring any IST and WHT and may still benefit from the current privileged Swiss corporate income tax regime whereby profits may be taxed at an effective corporate income tax rate of less than 10%.
The new IST and WHT rules will make Switzerland an attractive location for treasury activities. Foreign groups should look at Switzerland when evaluating favourable locations for group treasury activities. A relocation of treasury functions needs careful consideration and foreign groups should be prepared to make informed decisions to benefit.
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