(June 24, 2015)
On June 24, 2015 the Swiss Federal Department of Finance (FDF) issued a press release announcing that in view of the negative outcome of the consultation, for the time being the Swiss Federal Council would refrain from proposing a complete reform of the withholding tax system to Parliament. The press release also states that the withholding tax exemption for capital instruments of systemically important banks should be expanded and thus ensure greater system stability. According to the press release, during its meeting of June 24, 2015, the Swiss Federal Council instructed the FDF to prepare a dispatch. Furthermore it is stated that the appropriateness of reforming the withholding tax system should be re-examined at a later date.
According to the press release withholding tax makes a considerable contribution to Swiss federal receipts and plays a safeguard role for income and wealth taxes. It also states that the current design of the tax has room for improvement. Furthermore it states that Swiss groups frequently avoid the tax by financing themselves through foreign companies. According to the press release in this way, value-added is created abroad, companies incur expenses for maintaining foreign structures and the safeguard role of the tax is only partly fulfilled.
In the autumn of 2014 the Swiss Federal Council initiated a legislative project to address these drawbacks. The reform supposedly would have strengthened the Swiss capital market and the safeguard purpose of withholding tax. This would have been achieved technically by switching from the debtor principle to the paying agent principle.
As a result of the negative outcome of the consultation during its meeting of June 24, 2015, the Swiss Federal Council decided for the time being not to pursue a switch from the debtor principle to the paying agent principle. Instead, it is proposing an extension of the temporary tax exemption for CoCos[1] and write-off bonds[2]. According to the press release a similar exemption should also be established for bail-in bonds[3]. The press release furthermore states that all of the exemptions should come into effect on January 1, 2017 and be limited to a five-year period. It also states that the FDF has been instructed to prepare the corresponding dispatch by September 2015.
According to the press release the paying agent principle should be discussed again before the planned exemptions for CoCos, write-off bonds and bail-in bonds expire.
With respect to the outcome of the Consultation the press release notes the following:
“While many of those who participated in the consultation acknowledged the advantages of the proposed reform, they were against implementing it at the current time. They advocated waiting until after the introduction of the automatic exchange of information (AEOI) at the international level and also the discussion on the future of banking secrecy in Switzerland. The Swiss Bankers Association rejects the reform proposal and, backed by economiesuisse, instead supports the partial transition to a reporting system in Switzerland too.”
Attached to the press release was an attachment titled Ergebnisbericht «Vernehmlassungsverfahren zum Bundesgesetz über das Schuldner- und das Zahlstellenprinzip bei der Verrechnungssteuer».
For further information click here to be forwarded to the press release as issued by the Swiss FDF in this respect.
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[1] Contingent convertible bonds (CoCos) are defined in more detail in Articles 11 to 13 of the Banking Act. CoCos are bonds which can be converted into equity capital (mostly shares) if a trigger event occurs (e.g. the issuing bank's common equity falls below a certain defined ratio). CoCos are one of the too big to fail measures.
[2] Write-off or write-down bonds are also defined in more detail in Articles 11 to 13 of the Banking Act and are another of the too big to fail measures. Unlike CoCos, these bonds are not converted into equity capital if a trigger event occurs, but are instead written off.
[3] Bail-in bonds are bonds that were approved by FINMA at the time of issuance as debt issued in compliance with regulatory requirements. In the event of insolvency, they can be converted or written down in accordance with Article 31 paragraph 3 of the Banking Act.
