Planning Cross-Border Dividends Correctly
Swiss withholding tax of 35 per cent also affects foreign investors and multinational groups. Those familiar with the relevant treaties can reduce double taxation – but must overcome several hurdles.
When the CFO of a German industrial group recorded the first dividend from its new Swiss subsidiary, the tax reality of cross-border distributions became apparent: without a prior request for the notification procedure, the Swiss withholding tax was triggered – tying up capital abroad for the time being. Although a distribution without deduction would have been possible under the notification procedure, timely planning is crucial. Cases like this illustrate how tax structuring decisions can impact liquidity and why they should ideally be addressed before the first dividend payment is made.
An often overlooked yet central issue in international structures is the taxation of capital income at source. Its relevance increases when cross-border investments involve multiple tax jurisdictions.
Applying for a Refund
Switzerland levies a withholding tax of 35 per cent on interest from customer deposits, bond interest and dividends. Given the numerous bilateral and multilateral treaties to avoid double taxation, questions about international taxation frequently arise in practice.
If an individual resident abroad holds shares in a Swiss company, they may apply for a partial refund of the Swiss withholding tax on dividends. This requires the existence of a double taxation treaty between the two countries providing for such relief. Conversely, individuals resident in Switzerland may claim relief from foreign withholding taxes on dividends received from foreign investments, provided that the applicable double taxation treaties allow for such relief.
Relief for Corporate Groups
Switzerland has concluded double taxation treaties with numerous countries that provide for partial relief or even full exemption from withholding tax on profit distributions within a corporate group, subject to certain conditions. As a result, withholding tax on dividends paid from a subsidiary to its parent company can often be reduced to 0 per cent. This applies equally to distributions abroad as to those into Switzerland.
Relief from Swiss withholding tax is not granted automatically. It must either be claimed in the form of a refund claim of the tax already paid – or, within a corporate group, alternatively by filing an advance request for the notification procedure instead of paying the withholding tax. Once approved, such authorisation is valid for five years. Every refund application and every request for the notification procedure concerning cross-border dividends is carefully reviewed by the Swiss Federal Tax Administration (FTA).
Conditions Subject to Review
A key requirement for claiming treaty benefits – in addition to residence in a contracting state – is that the applicant must be the beneficial owner of the dividend. This is generally the shareholder. According to practice and case law, beneficial ownership does not exist where obligations between the shareholder and a third party ultimately result in the dividend being economically attributable to that third party.
In addition, the FTA examines whether there is any treaty abuse – meaning whether structures are primarily designed to obtain treaty benefits that would otherwise not be granted. The substance of the foreign recipient company is closely scrutinised: Does it have its own personnel and premises? Is it operationally active? Does it hold further participations? Does it have sufficient equity? If the company lacks sufficient substance, the FTA will deny the refund of withholding tax or refuse the notification procedure.
Anyone investing across borders or operating international group structures should not leave withholding tax consequences to chance. It is advisable to clarify beneficial ownership in advance, within a corporate group to timely apply for the notification procedure with the FTA , and to assess the impact of group reorganisations on existing relief arrangements. Only careful planning ensures liquidity is preserved and tax disadvantages in cross-border dividend payments are avoided.