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In Part 1 the authors outlined the tax rules for companies relocating business operations, other assets, and/or functions to Switzerland in the light of the Swiss corporate tax reform, emphasizing opportunities to achieve a tax neutral step-up in basis and allowing for subsequent tax-deductible amortizations.
Part 2 focuses on Swiss tax rules for relocation of individuals and companies out of Switzerland and outlines the exposure as well as the mitigation measures companies moving assets or functions should consider in view of potential exit taxation.
No Exit Taxation for Individuals
For individuals relocating their tax residence from Switzerland abroad, the liability to pay Swiss taxes ends as of the day of their actual relocation: This except for income and assets that remain subject to Swiss income taxation regardless of the owner’s tax domicile, such as for Swiss permanent establishments, Swiss real estate, and rights in rem and claims secured by Swiss real estate. The relocation of an individual’s tax residence out of Switzerland is not subject to any exit taxation at all. The end of Swiss tax residence generally requires that the relocating individual takes up tax residence in another state (but it does not require any level of taxation in such other state).
Individuals may move any privately held assets (inter alia movable assets situated in Switzerland, claims owed by persons who are tax resident in Switzerland, and securities issued by Swiss companies) out of Switzerland without facing any taxes, customs, or excise duties. Also moving out of Switzerland does not give rise to any taxation on Swiss real estate. While both Swiss residents and nonresidents may generally sell privately held assets without having to pay any Swiss tax on capital gains, the sale of privately held Swiss real estate is generally subject to real estate gains tax levied by the cantons and/or their municipalities.
Income taxation may apply, however, if an individual relocates business assets or business operations from Switzerland abroad, regardless of whether the individual remains in, leaves, or has already left Switzerland. In the case of relocation of business assets or business operations held by an individual, the income taxation rules are basically the same as for companies outlined in the following section (individual income tax rates differ, however, from corporate income tax rates).
Income Taxation of Companies Moving Assets out of Switzerland
When business assets are moved out of Switzerland such that they become out of scope of Swiss income taxation, the difference between the fair market value and the tax basis upon the exit generally becomes subject to corporate income tax. The corporate income tax rates widely vary in Switzerland, with ordinary tax rates ranging from approx. 11.4–23%, depending on the location. Apart from lower tax rates in specific situations, lower special tax rates may apply to hidden reserves realized no later than 2024 by a company that benefited from a special tax regime until the end of 2019.
Events generally resulting in income taxation of the hidden reserves pertaining to assets leaving the scope of Swiss taxation include:
- transfer of assets from a Swiss tax resident company or from a Swiss permanent establishment to a company tax resident in another country or to a non-Swiss permanent establishment;
- cross-border re-domiciliations of Swiss companies;
- cross-border emigration mergers of Swiss companies;
- a shift of the place of effective management of a Swiss company to abroad.
If the transaction is within the same legal entity or within the same group of companies, income taxation generally only applies to the extent that the relevant assets are not subject to Swiss corporate income taxation any more after the transaction. If the tax basis is maintained in Switzerland, transactions such as the following do not result in any exit corporate income taxation:
- transfer of fixed business assets or of business operations to a Swiss permanent establishment of a non-Swiss group company;
- cross-border re-domiciliations and cross-border mergers, if the company’s place of effective management remains in Switzerland and no tax treaty applies according to which the registered office would prevail over the place of effective management for the determination of its tax residency (which only very few of Switzerland’s tax treaties do);
- a shift of the place of effective management, if the registered office remains in Switzerland and no tax treaty applies according to which the foreign place of effective management would prevail over the Swiss registered office for the determination of its tax residency (which most of Switzerland’s tax treaties do).
Many intragroup restructurings within Switzerland can be effected tax neutrally. Depending on the transaction scheme, however, a five-year blocking period may apply. In case of alienation or relocation of assets out of Switzerland resulting in exit taxation during such blocking period, the hidden reserves tax neutrally transferred in the course of a previous tax neutral restructuring become subject to corporate income tax as well. Other taxes for which an exemption applied because of a tax neutral restructuring (e.g., real estate taxes, stamp duty on equity financing) may also subsequently become due in case of a relocation out of Switzerland that results in a violation of the applicable blocking period.
When it comes to exit corporate income taxation, the valuation of the relevant business or assets plays an important role. When relocating entire business operations, the valuation is generally based on the entire operation, taking a going concern approach. The tax authorities usually accept different valuation methodologies, including the discounted cash-flow method or the so called practitioner’s method (average of the double weighted capitalized net profit and the single weighted net asset value) that is widely used by the Swiss tax authorities. When a company previously moved business operations or assets to Switzerland and achieved a step-up in tax basis, the same valuation methodology shall generally apply for both the relocation to and out of Switzerland.
Income Taxation of Companies Moving Mere Functions out of Switzerland
While hidden reserves pertaining to certain assets are clearly in scope of exit taxation, this is less clear if a company merely moves functions without transferring any assets. In the case of a transfer of (formally documented or informal) contractual relationships, hidden reserves relating to such contractual relationship are generally in scope of taxation as well.
It is often uncertain whether taxation may only take place with respect to the goodwill pertaining to the actually agreed remaining term of the contract or a deemed arm’s length term, or with respect to the goodwill pertaining to the potential contractual relationship without limitation in time. In practice, it is often possible to stay clear of any exit taxation if a formal agreement providing for an arm’s length term is terminated with the ordinary notice period ending before the relocation.
If a shift of functions just involves transferring business opportunities (without any assets or contractual relationships) and reducing or stopping activities in Switzerland while building up the same or similar activities abroad, it is unclear whether such mere shift of business opportunities is in scope of exit taxation.
With the Swiss corporate tax reform that became effective as of the beginning of 2020, a new provision was introduced allowing a tax neutral step-up in tax basis in case of the relocation of assets and/or functions to Switzerland as well as income taxation of hidden reserves in case of the relocation of assets and/or (mere) functions out of Switzerland. Under the rules existing until 2019, it was unclear whether there was a sufficient legal basis for exit taxation in case of shift of mere functions. The new provision introduced as of 2020 generally provides for such exit taxation. Nevertheless, there are scholars taking the position that the new rule may only apply to a shift of functions within the same legal entity (i.e., a shift of mere functions to another (group) company would not give rise to any exit taxation).
Even if exit taxation may apply to the shift of mere functions, the calculation method of the taxable basis that can be allocated to such functions often remains unclear. In case of a relocation of trading/distribution functions from an agent or limited risk distributor, it can be argued that an independent third party would under no circumstances be entitled to more than the net earnings of one year under Swiss commercial law rather than to an eternal future profit. In the case of cost-plus arrangements, it is often possible to successfully argue that no taxable goodwill relates to the functions compensated on such basis, provided the immediate costs caused by the relocation are included in the basis for cost plus taxation.
In any case, functions may only be in scope of Swiss exit taxation provided such functions are actually shifted to an entity or branch that is not subject to tax in Switzerland. No exit taxation may apply if the relevant function/activity in Switzerland just ceases to exist without being replaced in any other jurisdiction. Because the Swiss tax authorities must actually be aware of a shift of the relevant functions to a branch or entity outside Switzerland, cases of actual exit taxation of mere functions are rare. This might change in the future because of the newly introduced provision for exit taxation of mere functions as well as because of country-by-country reporting, which might allow the Swiss tax authorities to track the shift of functions within MNEs to a certain extent.
Swiss Withholding Tax Upon Exit of Legal Entities
Switzerland levies a dividend withholding tax on (actual and deemed) distributions and on exits of companies limited by shares, limited liability companies, and cooperatives that are tax resident in Switzerland.
Upon a taxable exit, the difference between a company’s fair market value and the value of its statutory capital and capital contribution reserves created since 1997 reflected in its statutory financial statements becomes subject to dividend withholding tax at the statutory rate of 35%, unless a relief applies based on a double taxation treaty. Unlike corporate income tax, there is no comparable step-up in basis upon the beginning of tax liability in Switzerland for dividend withholding tax purposes.
The only way to avoid a deferred dividend withholding tax exposure upon the relocation of assets to Switzerland is to do so by way of contribution (or by way of acquisition of assets by previously contributed cash as well as by debt-financed acquisitions). The contribution must come from an immediate shareholder of the Swiss company, allowing the contribution value to be reflected as statutory capital and/or capital contribution reserves in the statutory financial statements of the Swiss company.
Switzerland has a very wide network of double taxation treaties with some 100 treaties overall. Most of these treaties provide for a partial relief from Swiss dividend withholding tax. As regards distributions from qualifying shareholdings to their parent companies, a number of bilateral treaties as well as an agreement between Switzerland and all EU member states generally provide for a full relief from Swiss dividend withholding tax. Therefore, with a well-elaborated investment structure in Switzerland, it is often possible to completely avoid withholding tax exposure in an exit.
Measures to Mitigate Exit Tax Exposure
The following measures may help to mitigate exit taxation exposure:
- phasing out instead of instantly transferring functions out of Switzerland;
- intragroup agreements documenting that intangible assets are not owned by the company leaving or transferring the functions linked to such intangibles out of Switzerland;
- intragroup service agreements with the Swiss company which provides the services that will be relocated. Such service agreements should include an arm’s length notice period, and a termination notice respecting the notice period should be issued before the exit;
- in case of cost-plus arrangements, including all costs relating to the exit in the cost basis;
- clearly documenting in intragroup agreements that there is no minimum transaction volume to be processed via the Swiss company;
- leaving assets which would otherwise become subject to exit income taxation in a Swiss branch;
- structuring investments in Switzerland in a way allowing full treaty relief from Swiss dividend withholding tax;
- in case no full dividend withholding tax treaty relief applies, transfer assets to Switzerland by way of contribution from a direct shareholder and reflect the fair market value of the contribution as statutory capital and/or capital contribution reserves in the statutory financials of the Swiss company.
Silvia Zimmermann is Counsel and Jonas Sigrist is a Partner at Pestalozzi Attorneys at Law Ltd, Zurich.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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