INTERNATIONAL TAX PLAZA - Switzerland - Federal Council wishes to avoid double taxation of permanent establishments

(September 19, 2014)

During its meeting of September 19, 2014, the Swiss Federal Council initiated a consultation on an ordinance regarding a flat-rate tax credit in the case of double taxation agreements (DTAs). As a result of the ordinance, foreign companies' permanent establishments in Switzerland should be granted the flat-rate tax credit in the future and thereby system-related over-taxation is to be avoided. The consultation closes December 23, 2014.

From the press release as issued by the Swiss Federal Department of Finance in this respect: “The revision of the ordinance affects permanent establishments in Switzerland that are part of a company domiciled in a country with which Switzerland has signed a DTA. If these permanent establishments receive revenue from dividends, interest or royalty payments from a third state with which Switzerland also has a DTA and a non-recoverable withholding tax (residual tax) is levied on this revenue by the third state, cases of double taxation can arise under current law, i.e. residual tax is levied on the revenue and it is also taxed in Switzerland if it is attributed to the permanent establishment. If the company's country of domicile eliminates the profits of the permanent establishment in Switzerland, i.e. exempts them from taxation (exemption method), it cannot credit the residual taxes from third countries to its own taxes, as it does not levy any tax on the revenue in question.

In such cases, a flat-rate credit of the residual taxes from third countries has not been possible in Switzerland to date, as foreign companies' permanent establishments are considered as non-established persons here under DTAs. Only persons established in Switzerland can claim the flat-rate tax credit at present. In the future, granting of the flat-rate tax credit to foreign companies' permanent establishments in Switzerland will be conditional on a DTA existing between each of the countries involved, i.e. Switzerland, the third country and the country of domicile of the company to which the permanent establishment belongs. Likewise, the permanent establishment must be taxed as normal in Switzerland.“

For more information click here to be forwarded to the full press release as issued by the Swiss Federal Department of Finance in this respect, which will open in a new window.