Taxation of Dividends

Taxation of Dividends, Interest and Royalties in Switzerland

In Switzerland, the tax treatment of dividends, interest and royalties constitutes a specialised field requiring in-depth mastery of Swiss legislation. Our law firm has the expertise needed to navigate this complex system combining federal direct tax, cantonal and municipal taxes, and double taxation treaties. The Swiss tax regime presents notable specificities, particularly with the anticipatory tax of 35% levied at source on certain investment income. Understanding the mechanisms for reduction or refund of this tax, as well as legitimate tax optimisation opportunities, represents a considerable advantage for investors and companies operating in Switzerland.

The Dividend Taxation Regime in Switzerland

In Switzerland, dividends are subject to a taxation system characterised by its multi-level structure. At the federal level, dividends are subject to the anticipatory tax of 35%, levied directly at source. This deduction constitutes a guarantee for the tax administration, but is not definitive for Swiss residents who may request a refund under certain conditions.

For individual residents in Switzerland, dividends are incorporated into taxable income. However, since the corporate tax reform II, a substantial relief was introduced in the form of partial taxation. Thus, where participations represent at least 10% of the share capital or equity of a company, dividends are only taxed at:

• 70% at the federal level
• Between 50% and 70% at cantonal level, depending on the canton

For Swiss legal entities, the system is different. Companies holding at least 10% of the capital of another company, or participations with a market value of at least CHF 1 million, may benefit from participation relief. This mechanism prevents triple economic taxation by reducing profit tax proportionally to the ratio of net participation income to total net profit.

Cantonal Specificities in Dividend Taxation

Switzerland being a federal state, each canton has fiscal autonomy that generates notable differences in the treatment of dividends:

• Certain cantons such as Zug or Schwyz offer particularly advantageous tax rates
• Other cantons offer more generous abatements on the taxable base for dividends
• Progressive tax scales vary considerably from one canton to another

For foreign investors, the 35% anticipatory tax may be partially or fully refunded depending on the double taxation treaties (DTTs) concluded between Switzerland and their country of residence. Our law firm regularly accompanies international clients in these refund procedures, which require in-depth knowledge of the applicable treaties and specific administrative formalities.

Taxation of Interest in Switzerland

The tax treatment of interest in Switzerland presents features distinct from those of dividends. Contrary to a widespread belief, not all interest is subject to anticipatory tax. Only interest from client deposits at Swiss banks, bonds issued by Swiss debtors and certain collective investment schemes is subject to this 35% tax.

For individual residents in Switzerland, interest received is fully taxable as movable asset income, without benefiting from the partial taxation applicable to dividends. This difference in treatment may influence investment strategies, sometimes favouring dividend-oriented investments over interest-bearing ones.

Interest Exempt from Anticipatory Tax

Several categories of interest are not subject to anticipatory tax, including:

• Interest on mortgage loans
• Interest on loans between non-bank companies
• Interest paid by foreign debtors
• Interest on foreign bonds, even held in a Swiss bank account

In the international context, Switzerland has concluded numerous double taxation treaties that generally provide for a reduction or even elimination of withholding tax at source on interest paid to non-residents. These treaties prevent the same income from being taxed twice, in both the source country and the country of residence of the beneficiary.

For companies, interest paid generally constitutes deductible expenses from taxable profit, subject to thin capitalisation rules and interest rates consistent with the arm's length principle. The FTA publishes annual circulars specifying acceptable interest rates for advances or loans in Swiss francs and foreign currencies.

Tax Treatment of Royalties in Switzerland

Royalties represent remuneration paid for the use or licensing of copyrights, patents, trademarks, designs, models, plans, formulas or secret processes. In Switzerland, the tax treatment of royalties presents advantageous specificities that contribute to the country's attractiveness for companies holding intangible assets.

Unlike dividends and certain interest, royalties paid by a Swiss debtor to a Swiss or foreign beneficiary are not subject to the 35% anticipatory tax. This absence of withholding tax constitutes a major asset of the Swiss tax system in an international context.

Taxation of Royalties for Individuals

For individual residents in Switzerland, royalty income is taxable as:

• Income from self-employment, if the creative activity is carried on professionally
• Movable asset income, if the activity is occasional or if the person simply holds acquired rights

In the first case, social contributions are due, but deductions for income acquisition costs are possible. In the second case, taxation occurs without specific deductions linked to the acquisition of such income.

Taxation of Royalties for Legal Entities

For Swiss companies, royalties received are incorporated into taxable profit. However, several cantons have established favourable tax regimes for income from intellectual property, notably in the form of a patent box.

This regime, introduced as part of the TRAF tax reform, allows reduced taxation of income from patents and comparable rights. The relief rate may reach up to 90% depending on the canton, making Switzerland particularly attractive for innovative companies and research and development centres.

For royalties paid abroad, the absence of Swiss withholding tax considerably simplifies international financial flows. Nevertheless, these payments must respect the arm's length principle to be fully deductible from the taxable profit of the Swiss company paying them.

Impact of Double Taxation Treaties

Switzerland has developed an extensive network of double taxation treaties (DTTs) covering more than 100 countries. These international agreements play a fundamental role in determining the tax treatment of dividends, interest and royalties in a cross-border context.

DTTs generally follow the OECD model, with certain specificities specific to each bilateral negotiation. They provide for maximum withholding tax rates that are often lower than ordinary rates, particularly for dividends and interest.

Reduction of Source Withholding Tax Rates

For dividends, treaties generally provide for:

• A reduced rate of 15% for ordinary dividends (instead of the 35% anticipatory tax)
• A preferential rate of 0% to 5% for dividends paid to companies holding a substantial participation (generally at least 10% or 25% of the capital)

For interest, many treaties provide for complete exemption from withholding tax at source, or limit it to a maximum rate of 5% to 10%.

Regarding royalties, although Switzerland does not levy withholding tax on such payments, the treaties ensure that the beneficiary's country of residence will not apply excessive withholding either, thus facilitating technology transfers and the use of intellectual property internationally.

Recovery Procedures and Tax Relief

To benefit from treaty advantages, two main procedures exist:

• The refund procedure: the anticipatory tax is levied at the full rate of 35%, then the beneficiary requests a refund of the difference between this rate and the treaty rate
• The relief at source procedure: on prior application, the Swiss debtor may directly apply the reduced rate provided by the treaty

Our law firm has significant expertise in these administrative procedures, which require in-depth knowledge of the specific forms for each country and strict deadlines to be observed.

Calculation Example: Dividend Taxation for an Individual Shareholder

Summary: Tax Treatment of Dividends, Interest and Royalties

Frequently Asked Questions on Dividend Taxation in Switzerland