Interest payments in general are tax deductible and not subject to Swiss withholding tax at the level of a Swiss acquisition company. However, since there is no tax consolidation or group taxation for income tax purposes, the interest deduction is only tax efficient to the extent the acquisition company has its own taxable income. Otherwise, debt pushdown structures or the creation of taxable income at the acquisition company level should be considered.
Interest deduction limitations may apply to related party debt, that is, debt provided by shareholders, related parties or third parties where the debt is secured by related parties. Thin capitalisation rules set a limit for maximum loan amounts by shareholders or related parties that are accepted by Swiss tax authorities. The maximum amount of accepted debt is determined by applying the safe-haven rates (ie, a per cent amount of allowed debt per asset category, such as 100 per cent debt-financing for cash or 70 per cent for participations or IP), which are set out in a circular of the Federal Tax Authority. The percentages are applied onto the fair market value of the corporation’s assets. Related party debt exceeding that maximum permitted debt calculated on this basis will be treated as equity for tax purposes; accordingly, interest payments on such exceeding debt will be treated as constructive dividends that are subject to 35 per cent Swiss dividend withholding tax and non-deductible from the taxable profit of the company.
Further, such deemed equity is also subject to annual capital tax. In order to avoid adverse withholding tax consequences, loans to the Swiss acquisition company may be granted interest-free, if this is possible from a lender’s perspective. Such interest-free loan would - other than a subsequent waiver of interest - not trigger stamp duty of 1 per cent on equity contributions. Where the direct shareholder provides debt in excess of the thin capitalisation limitations but benefits from a full dividend withholding tax relief (eg, based on a double tax treaty or as Swiss resident corporation holding at least 20 per cent in the Swiss target), the withholding tax cash out could be avoided by a proactive, timely notification of the hidden dividend distribution.
In addition, interest on related party debt must comply with arm’s-length terms. Circulars published annually by the Federal Tax Authority set out the maximum safe haven interest rates that may be paid by a Swiss company on shareholder or related party loans, generally with higher rates if the loans are denominated in foreign (non Swiss francs) currency. If the debt does not qualify as deemed equity (see above) and the safe haven interest rates are complied with, the interest is generally tax deductible. Higher interest rates may be accepted if the arm’s-length character or a third-party test can be evidenced. This question can be addressed in a tax ruling to obtain certainty.
With respect to interest withholding tax, the Swiss ‘10/20/100 non-bank rules’ need to be considered in case a bond is issued by a Swiss acquisition company or a ‘collective fundraising’ scheme is used. In this case, withholding tax of 35 per cent is levied on interest due that can be refunded based on Swiss domestic law for a Swiss lender or depending on the applicable double-tax treaty for a foreign lender. A loan facility qualifies as a collective fundraising where the aggregate number of non-bank lenders (including sub-participations) to a Swiss company under a facility agreement exceeds 10 (if granted under equal conditions) or 20 (if granted under different conditions, eg, various tranches or facilities), and the total amount of such debt exceeds 500,000 Swiss francs. Cash pooling does not amount to collective fundraising, unless the aggregate number of non-bank lenders exceeds 100 and the total amount of such debt exceeds 5 million Swiss francs. The Swiss withholding tax exposure under the 10/20/100 non-bank rules may be mitigated under certain conditions if acquisition debt is granted to a foreign entity and lent on to a Swiss subsidiary (acquirer). The borrowing via a foreign subsidiary of a Swiss parent could, however, trigger Swiss interest withholding tax, if the collective fundraising criteria are met by the foreign borrowing subsidiary, the Swiss parent guarantees the debt and the borrowed funds are lent on to a Swiss group company (based on recently introduced rules, there is an exemption to this treatment in case the foreign subsidiary does not lend more than its equity to a Swiss group company and in case the set-up is not considered a tax avoidance). Further, federal and cantonal Swiss withholding taxes on interest may arise if a loan is directly or indirectly secured by Swiss real estate; the tax rate depends on the location of the real estate. However, many Swiss double tax treaties reduce withholding taxes on interest to zero.
The tax-efficient pushdown of acquisition debt on the target level is not easy to achieve, as Switzerland has no consolidation for income tax purposes. A debt pushdown of acquisition debt by merging the acquisition company with the target company generally is viewed as abusive from a tax perspective by the Swiss tax authorities if the acquisition company had no taxable income to set off the interest expenses itself. Debt pushdown can typically per current practice be better achieved by strategic buyers (Swiss operating acquisition companies with their own taxable income) or by careful structuring. The distribution of debt financed dividends (leveraged dividends) whereby the target company resolves a dividend that is not directly settled in cash but left outstanding as an interest-bearing downstream loan towards the shareholder or settled by the assumption of external acquisition debt and the allocation of interest expenses to the target company may be possible, always within the limitations of the thin capitalisation rules. In addition, debt financed intercompany acquisitions, such as the acquisition of shares or assets from group companies by the Swiss target against an interest-bearing loan may be possible.
Back to top