The tax status of holding companies from 1 January 2020
2 August 2019
Up until now, Switzerland has applied two tax statuses to companies that have holdings in other companies (holding companies), in particular with regard to the dividends that they receive from their branches, capital gains realised on sales of the holdings, and equity capital that is subject to cantonal capital tax.
The first status, known as reduction for holdings (réduction pour participations, RP), is the standard status applicable to dividends received by any company that holds at least 10% of the capital of another company, or holds less than 10% but has a market value of at least CHF 1,000,000 in qualifying holdings as of the first day of holding this share. This status gives rise to a federal and cantonal tax reduction on profit, to the extent of the proportion of the dividends received by the parent company in relation to its total profit: for example, if the dividends received by the holding company represent 40% of its total annual profit, a corresponding 40% tax reduction will be granted for the tax due on its total annual profit. Nevertheless, the final result is the same as it would have been if the dividends had been exempt from the basis of calculation. Using the exemption method and a hypothetical tax rate of 10%, a company with a total profit of CHF 1,000, of which CHF 400 comes from a dividend, must pay CHF 60 in tax (CHF 1,000 – CHF 400 = CHF 600 x 10% = CHF 60). With RP status, the tax payable by this company is initially CHF 100 (CHF 1,000 x 10%), before being reduced by 40%, the proportion of the dividend in relation to the total annual profit. Thus, the final amount due is also CHF 60.
Capital gains realised by a holding company on sales of its holdings in branches also benefit from this regime if the holding sold represents at least 10% of the other company’s capital and the holding company has held this share for at least one year at the time of the sale. On the other hand, this tax reduction cannot be claimed for holdings of under 10%, even if their market value is more than CHF 1,000,000.
As regards taxation of the holding company’s equity capital, only the cantons can levy tax on this. For companies with RP status, this tax rate is the same as what is applied to other companies, and depends on the rate applicable in the canton in which the company’s registered office is located.
The second status, known as holding status, can be availed of by companies whose holdings, or the dividends that they draw from them, represent at least two thirds of their total assets or two thirds of their total revenues (the “2/3 test”). Companies that meet at least one of these thresholds are eligible – in the canton in which their registered office is located – to both an exemption for their dividends and capital gains deriving from qualifying holdings and a total exemption for their other income for the purpose of cantonal taxation. This income is no longer subject to 7.83% federal tax (pre-tax rate). Thus, one of the main appeals of this regime is the ability to be eligible for a very low tax rate (7.83%) for income other than dividends, such as interest income, licence fees, and dividends and capital gains deriving from non-qualifying holdings.
As regards cantonal capital tax, companies with holding status are not subject to the same rate as the one applicable to other companies, but instead enjoy a significantly lower rate in most cantons.
Following international pressure, Switzerland has had to abandon a number of special corporation-tax regimes – in particular the holding status, which will end on 31 December 2019.
From 1 January 2020, the only status remaining in force for holding companies with holdings in other undertakings will be reduction for holdings. The eligibility conditions for this status, as outlined above, remain unchanged.
However, it is worth remembering that in many cantons, the tax reform approved by Swiss voters also comes with a parallel tax reform, essentially consisting of a significant reduction in the cantonal tax rate for profits and capital. This will have a considerable impact on holding companies.
For example, in Geneva, the reform approved by voters will result in both federal and cantonal tax on profits to fall from 24% to 14% (pre-tax rate).
Therefore, a company that currently meets the conditions for RP status will continue to be exempt from tax on dividends and capital gains received from its qualifying holdings, and will also see its capital tax reduce significantly. For its other income (such as interest, royalties, income from services or business activities, and income from non-qualifying holdings), the company will enjoy a considerably lower rate of tax on profits (see the above example regarding Geneva).
A company that previously had holding status and whose income consists purely of dividends or capital gains on the sale of qualifying holdings will see no change in practical terms, since this income will continue to be exempt under RP status.
On the other hand, the tax rate for dividends and capital gains deriving from the non-qualifying holdings of a company that previously had holding status will increase somewhat. For example, in Geneva it will rise from 7.83% to 14%. The same will apply for other, non-holding-related income realised by a company, such as interest and royalties.
Do not hesitate to contact us if you would like us to reassess your situation or if you have any questions regarding the tax regime for holding companies.
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