Worldwide Tax Summaries--SWITZERLAND（1999-2000）(part1)
Worldwide Tax Summaries--SWITZERLAND（1999-2000）(part1)
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Changes in the past year include those in the Zurich and Geneva cantonal tax laws (see “ Corporation tax calculations” below) and in the rates of value-added tax.
TAXES ON CORPORATE INCOME
The Swiss Federation levies direct federal income tax at a flat rate of 8.5% on profits after tax. In addition, each canton has its own tax law and levies cantonal and communal income taxes at different rates.
Therefore, the tax burden of income (and capital) varies from canton to canton. Cantonal and communal taxes are generally imposed at progressive rates, based on the ratio of profit to capital and reserves. As a general rule, the approximate range of the maximum statutory income tax rate on profit for federal, cantonal and communal taxes is between 14.42% and 44.98% , depending on the company's profitability and place of residence.
Taxes are treated as tax-deductible expenses, so that the maximum effective tax rate varies between 12.6% and 31.02%.
A company is considered resident in Switzerland if its domicile is in Switzerland. The domicile of a company is the place designated as such in the company's statutes. Pursuant to federal tax law and cantonal tax laws, residency is also linked to place of ,management, which may be the center from which day-to-day activities are directed or the place where decisions of a managerial nature are taken.
Capital tax/As from January 1,1998 only cantons levy a capital tax, which is based on the corporation's capital and reserves. The tax rates vary from 1.89 to 9.48 per mil.
Value-added tax/Proceeds of sales and services effected in Switzerland are subject to value-added tax at the standard rate of 7.5% (6.5% up to December 31,1998). , 2.3% on goods for basic needs (2% up to December 31,1998) and 3.5% on services in connection with the provision of accommodation (3% up to December 31,1998).The taxpayer is generally entitled to offset against to offset against the value-added tax payable the amount of such tax charged by suppliers or paid on imports.
The same principles apply as for corporations, provided transactions with the head office or other branches are at arm's length. There is no withholding tax on profit transfers to the head office.
Inventory valuation/inventories may not be valued in excess of the lower of cost or market for tax and finanCIAl accounting purposes. Cost is generally determined by the FIFO or average method. LIFO is not found in practice.
As a concession, a reserve against stock contingencies may be set up in the books. It is admissible to the extent that it does not exceed one-third of cost or lower market value at the balance sheet date. If the reserve amounts to more than one-third, the speCIAl risks (e.g., obsolescence, slow-moving stocks) connected with the inventory must be substantiated to the satisfaction of the tax authorities.
Capital gains/Under the direct federal tax decree and the cantonal tax laws, all income earned (and losses suffered) by a company are generally classified as business income (or losses), with the following exceptions.
1. Capital gains on real estate-Certain cantons assess capital gains on the sale of real estate partly by ordinary taxes on income (difference between carrying amount and cost, i.e., recaptured depreCIAtion) and partly by a real estate profit gains tax (difference between cost and intrinsic sales value). Tax rates for the real estate profit tax vary considerably from canton to canton (Zurich-between 5% and 60%, depending on the duration of ownership and the amount of the taxable gain).
2. Capital gains on investments-At the federal income lax level, capital gain from the sale of a substantial participation (i.e., at least 20%) acquired after January 1, 1997 will be free of federal income tax after a minimum holding period of one year.
Capital gain from the sale of a substantial participation held prior to January I,1997 will be subject to federal income lax at a statutory rate of 8.5%. After January 1, 2007 capital gain resulting from a sale of a participation held prior to January 1,1997 can be sold free of federal income tax.
In certain circumstances, capital gain realized by a member of a Swiss group from the sale of a substantial participation held prior to January 1, 1997 to a foreign company member of the group can be set off against a provision in the same amount. This provision must be dissolved and the gain becomes subject to tax if prior to January 1, 2007 the participation is transferred out of the group, major parts of the assets and liabilities are sold or the participation is liquidated. After January 1, 2007 the provision set against the capital gain may be dissolved with neutral tax effect.
Intercompany dividends/For direct federal tax and in most cantons, dividends received by a Swiss corporation that owns at least 20 or SFr2 million of a domestic or foreign corporation's equity are, in effect, exempt from tax or taxed at reduced rates.
Foreign Income/Resident corporations are basically taxed on their worldwide income.
However, income attributable to foreign branches (bona fide permanent establishments
outside Switzerland) is not taxed in Switzerland but taken into account only to determine the rate of tax applicable to taxable income. The same rule applies for income from real estate situated abroad.
Dividends, interest and royalties from Swiss or foreign sources are included in assessable income. However, in certain cantons speCIAl methods of assessment may apply for dividend and other income originating outside Switzerland. For dividends, a relief is generally available as described above under "Intercompany dividends' The irrecoverable portion of foreign withholding taxes of most treaty countries can be credited against the
related Swiss income taxes on the same income. Foreign withholding taxes of all nontreaty countries and those of Pakistan and the United States are not creditable, but, they are deductible for income tax purposes.
Undistributed income of foreign subsidiaries is not taxed in Switzerland.
Stock dividends/Stock dividends received by a Swiss corporation are not taxable if the book value of the investment is left at original cost. If a stock dividend is recorded with a corresponding credit to the income statement, it will be treated in the same way as a cash) dividend. Stock dividends distributed by a Swiss corporation will be treated like cash
Depreciation and depletion/Depreciation of tangible and intangible fixed assets is allowed to the extent it is "commerCIAlly justified." For tax purposes, the straight-line or the declining-balance method may be used.
Depreciation and amortization not recorded in the statutory .accounts are not deductible for tax purposes. The following are the maximum annual rates of amortization and depreCIAtion permitted for direct federal tax purposes. (Most cantons have adopted them for cantonal and communal tax
purposes; some cantons have higher rates.)
RATE PER ANNUM
STRAIGHT LINE DECLINING
Vacant plots, land without structures Nil Nil
Dwelling houses of real estate companies and
worker colonies 1 2
Office, shop or cinema theater buildings 2 4
Buildings of the restaurant and hotel trade 3 6
Factories, warehouses and industrial immovable
property 4 8
Railroad sidings; water, gas and electricity mains
for industrial purposes; storage tanks;
containers 10 20
Office furniture and machines, workshop and
storeroom equipment 12.5 25
Machinery, equipment and vehicles
(excluding motorcars) 15 30
Machinery and equipment used in more than one shift
or used under heavy conditions (e.g., road-construction
machines), automobiles 20 40
Machine toots, larger hand tools; hotel and
restaurant crockery, cutlery, and linen 22.5 45
EDP (hardware and software), automatic control
systems, security equipment, and electronic
instruments 20 40
Goodwill, patent license and other rights
of use 20 40
Special (higher) rates of depreCIAtion may be allowed for assets used only for short periods or for assets under intensive use (e.g., shift work); these rates must in general be agreed on with the competent tax authority.
Some cantons allow special accelerated depreCIAtion on a case-by-case basis.
Recaptured depreciation on the sale of depreCIAted property is classified as normal business income.
Net operating losses/For direct federal tax purposes, losses may he carried forward for seven years. For cantonal and communal taxes, loss carryforward varies from canton to canton. There is no loss carryback for direct federal tax purposes. For cantonal and communal taxes, loss carryback is allowed in the canton of Thurgau.
Payments to foreign affiliates/interest, royalties and license and other fees to foreign affiliates are allowable as deductions to the extent that they meet the arm's-length test,i.e., are equivalent to charges that would be made by an unrelated third party. The debt equity ratio should in general not exceed 6:1. Any interest paid on excessive debts is basically not deductible for tax purposes.
Taxes/All taxes paid or due are deductible for direct federal as well as cantonal and communal tax purposes.
Tax is levied on each corporation as a separate entity, i.e., a parent company and its Swiss subsidiaries are taxed separately, and only the dividends from but not the profits of the subsidiaries are taxed in the parent company's hands and form the basis of relief.
Inward and capital investment/Many cantons offer a great variety of incentives for newly established companies or for expansion investments, such as finanCIAl grants, favorable credit facilities and real property, tax holidays, or significant tax reliefs for cantonal and communal tax
purposes for up to ten years. In some cantons a tax holiday for federal tax
purposes may even be granted if certain conditions are met. In practice, tailor-made agreements with would-be investors are concluded with the cantonal authorities concerned.
Other Incentives/Holding corporations as well as corporations not performing business activities within Switzerland may in many instances be entirely exempt from cantonal and communal income taxes. Significant relief from cantonal and communal income taxes may be obtained for other speCIAl-purpose corporations, such as research, management or auxiliary
The statutory rate of Swiss withholding tax is 35%. Relief, if any, is generally granted by refund. The following table shows the remaining tax for the recipient. Credit for the unrelieved portion of Swiss withholding tax may be available in the country of the recipient.
TREATIES IN FORCE
RECIPIENT PORTFOLIO HOLDINGS (1) INTEREST (2) ROYALTIES (3)
% % % %
and individuals Nil(4) Nil(4) Nil Nil
Nontreaty 35 35 35 Nil
Australia 15 15 10
Austria 5 5 5
Belgium 15 10 10
Bulgaria 15 5 &nb