Switzerland in the International Tax Planning System Swiss tax planning for international trading  and intellectual proper...
Agenda  www.ilf.ch <ul><li>Swiss corporate income tax </li></ul><ul><li>Trading, introduction </li></ul><ul><li>Swiss tax ...
Swiss Corporate Taxes www.ilf.ch <ul><li>Three taxation levels :    Federal, Cantonal and  </li></ul><ul><li>Municipal </l...
Swiss Corporate Income Tax (CIT)   www.ilf.ch <ul><li>Effective  overall  corporate income tax rate (federal, cantonal and...
Cantonal CIT Comparison (2008) www.ilf.ch effective ordinary rates 2008 including 8.5% federal CIT Canton City Min Max Bas...
Trading companies in Switzerland <ul><li>Since the 1920s commodities trading in Geneva </li></ul><ul><li>Neutral environme...
Swiss Trading Company or Branch (1) <ul><li>Corporate taxes </li></ul><ul><li>Ordinary federal corporate income tax applie...
<ul><li>Additional taxes if a Swiss company is used </li></ul><ul><li>1% stamp duty on all capital contributions to the co...
International  Group Company Company Company Group Client Client purchasing Swiss Branch Company Example Swiss Trading Bra...
Trading and Swiss VAT Aspects <ul><li>Main rule : no Swiss VAT due on the sale and purchase of the goods   as long as the...
Specialty: Swiss principal trading company www.ilf.ch Swiss  Principal Contract Manufacturer Customers Local  distributors...
Stripped buy-sell www.ilf.ch Swiss  Principal Customers Local  distributors Local  distributors Local  distributors sale 1...
Tax Aspects of Swiss Principal Company <ul><li>Manufacturing  profits fully taxed (as deemed Swiss source income) : 15 to ...
Off-shore Branch Swiss Company Swiss Company with Off-shore Branch head office functions, supervision, invoicing, financin...
Off-shore Principal Swiss Company Swiss Company with Off-shore Principal principal trading, assumption of risks head offic...
The use of off-shore companies   <ul><li>Although Switzerland generally takes a relaxed approach towards off-shore compani...
General value shift towards IP www.ilf.ch Source: WIPO IP PANORAMA 01 Slide 6/23 http://www.wipo.int/sme/en/multimedia/fla...
Best Global Brands 2008 www.ilf.ch source: www.interbrand.com
www.ilf.ch Intangible assets: more than just IP Source:  http://www.buildingipvalue.com/08_KI/46-50Deloitte.pdf
Key Building Blocks of IP value www.ilf.ch © Jeremy Lack, 2009 Type Purpose Method of Creation Potential Lifespan Copyrigh...
Switzerland – a top location for IP www.ilf.ch <ul><li>Multinational companies are rediscovering the value of intellectual...
Tax Aspects of Swiss IP Structures <ul><li>Swiss company beneficially owning and licensing intellectual property abroad : ...
International  Group Company Company Swiss  Company Group Contribution  of intangible  property Licensing Example Swiss Li...
Some other Swiss tax considerations <ul><li>Swiss safe harbor guidelines for tax purposes  :  - debt-to-equity ratio of ma...
www.ilf.ch
Swiss anti-treaty abuse rules www.ilf.ch <ul><li>Switzerland has  unilateral anti-treaty abuse rules  (the 1962 Decree) li...
www.ilf.ch Off-shore Branch Swiss Company Swiss IP Company with Off-shore Branch legal ownership,  IP registration,  head ...
Sublicensing while using Swiss treaties www.ilf.ch Final licensee Off-shore company Licensing IP Ownership  Sub-licensing ...
Some Swiss VAT Aspects of IP   <ul><li>The   allocation  or  contribution  of intellectual property to a Swiss entity (com...
Thierry Boitelle  Tax Partner [email_address]   Geneva office Rue du Général-Dufour 11 CH-1204 Geneva Tel. +41 22 322 25 0...
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Boitelle Tax Planning Swiss Trading Ip Structures (Etig 9 April 2011)

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Typical Swiss trading and IP structures explained from a Swiss tax perspective

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Boitelle Tax Planning Swiss Trading Ip Structures (Etig 9 April 2011)

  1. 1. Switzerland in the International Tax Planning System Swiss tax planning for international trading and intellectual property structures Thierry Boitelle Geneva, 9 April 2011
  2. 2. Agenda www.ilf.ch <ul><li>Swiss corporate income tax </li></ul><ul><li>Trading, introduction </li></ul><ul><li>Swiss tax structures for trading </li></ul><ul><li>Intellectual property, introduction </li></ul><ul><li>Swiss tax structures for IP </li></ul>
  3. 3. Swiss Corporate Taxes www.ilf.ch <ul><li>Three taxation levels : Federal, Cantonal and </li></ul><ul><li>Municipal </li></ul><ul><li>Taxes are deductible from taxable profits on all three levels </li></ul><ul><li>Federal taxes </li></ul><ul><li>(1/3 of total tax burden) </li></ul><ul><li>Flat corporate tax rate on profit: 8.5% </li></ul><ul><li>Effective rate: 7.83% </li></ul><ul><li>No federal net wealth tax </li></ul><ul><li>Stamp Duty: Capital > CHF 1 Mio. : 1% </li></ul><ul><li>VAT 7.6% </li></ul><ul><li>Withholding tax: 35% on dividends and in some cases on interest, but no tax on royalties </li></ul><ul><li>Cantonal and Municipal Taxes </li></ul><ul><li>(1/3 + 1/3 of total tax burden) </li></ul><ul><li>Vary in each Canton and Municipality </li></ul><ul><li>Corporate income taxes </li></ul><ul><li>Capital gains taxes </li></ul><ul><li>Real estate taxes </li></ul><ul><li>Net wealth tax : 0,1% to 0,5% of net wealth </li></ul><ul><li>Advance tax rulings can be obtained on a case-by-case basis </li></ul>
  4. 4. Swiss Corporate Income Tax (CIT) www.ilf.ch <ul><li>Effective overall corporate income tax rate (federal, cantonal and municipal) generally ranges from 15 to 25%, depending on the canton and the specific facts </li></ul><ul><li>Cantons such as Zug (2009 rate 15.79%) would be in the low range whereas cantons such as Zurich or Geneva are in the high range (Geneva 2009 rate 24.23%) </li></ul><ul><li>Each canton offers privileged taxation for foreign source income , such as international licensing or trading income  privileged tax rates generally range from 9 to 12% </li></ul><ul><li>Incentive : move profitable trading functions (traders, buyers, sellers etc.) and/or valuable intangibles from high tax jurisdictions to Switzerland </li></ul>
  5. 5. Cantonal CIT Comparison (2008) www.ilf.ch effective ordinary rates 2008 including 8.5% federal CIT Canton City Min Max Basel-City Basel 14.89% 24.81% Bern Bern 13.52% 22.88% Fribourg Fribourg 15.07% 21.26% Geneva Geneva 24.23% Graubünden Chur 13.88% 29.10% Obwalden Sarnen 12.66% Vaud Lausanne 23.53% Zug Zug 12.66% 15.97% Zurich Zurich 20.80%
  6. 6. Trading companies in Switzerland <ul><li>Since the 1920s commodities trading in Geneva </li></ul><ul><li>Neutral environment, politically stable, international, excellent infrastructure etc. </li></ul><ul><li>Stable and freely tradable currency (CHF) </li></ul><ul><li>Low corporate tax rates and advance security (rulings) </li></ul><ul><li>Grains, soy beans, vegetable oils, coffee, cacao, cotton, metals, oil and derivative products, coal, diamonds, electricity, carbon emission rights, etc. </li></ul><ul><li>Presence of extensive service industry, including notably shipping companies and brokers, commodity financing banks and inspection and certification companies </li></ul>www.ilf.ch Cargill Bunge Louis Dreyfus Letasco Lukoil BNP Paribas Crédit Agricole ING Archer Daniels Midland Mercuria SGS Cotecna Mediterranean Shipping Company Swissmarine Vitol <ul><li>Some major names in the Lake Geneva Trading Area include (see also www.gtsa.ch ) : </li></ul>
  7. 7. Swiss Trading Company or Branch (1) <ul><li>Corporate taxes </li></ul><ul><li>Ordinary federal corporate income tax applies at a rate of 8.5% (effectively 7.83%) </li></ul><ul><li>Privileged taxation available at the cantonal and municipal tax levels if : (a) commercial (trading) activities essentially focused abroad; and (b) limited activities on the Swiss market ; and (c) the goods traded do not physically pass through Switzerland </li></ul><ul><li>Overall effective tax rate in such case 9 to 12% depending on the canton </li></ul><ul><li>Cantonal and municipal net wealth tax (possibly at reduced rates or on a reduced tax basis) </li></ul>www.ilf.ch ad 2 (a) Income must be from foreign sources and expenses must be mainly foreign  as a rule of thumb: at least 80% for both criteria ad 2 (b) Transparency rulings possible in Geneva for trading with Swiss based companies that have the same privileged tax status ad 2 (c) Special customs warehouses (ports francs) are not considered Switzerland in this respect ad 3 In popular trading cantons such as Geneva and Vaud the effective rate is around 11.67% and 11.46%, respectively, but for substantial trading profits digressive taxation is an option
  8. 8. <ul><li>Additional taxes if a Swiss company is used </li></ul><ul><li>1% stamp duty on all capital contributions to the company (unless an exemption is available, e.g. in the case of a merger or business reorganization) </li></ul><ul><li>35% dividend withholding tax, reduced partially or fully under double tax treaties or under the EC-Swiss Parent-Subsidiary Provisions, if applicable </li></ul>Swiss Trading Company or Branch (2) www.ilf.ch If Swiss stamp duty or dividend withholding tax is an obstacle Consider a Swiss branch structure : - Branch profit distributions are not subject to Swiss withholding tax - Branches are not subject to the 1% stamp duty on capital contributions - Overall Swiss tax level can remain low (same as for company) - Full or partial (e.g. 95%) branch profit exemption needed in the head office jurisdiction (e.g. based on domestic low or a double tax treaty) ; popular head office locations include Luxembourg, Cyprus and Malta
  9. 9. International Group Company Company Company Group Client Client purchasing Swiss Branch Company Example Swiss Trading Branch 3rd parties sales sales sales
  10. 10. Trading and Swiss VAT Aspects <ul><li>Main rule : no Swiss VAT due on the sale and purchase of the goods  as long as the goods do not physically pass through Switzerland </li></ul><ul><li>Exception : allocation, sale or contribution of e.g. existing trading contracts to the Swiss company or branch may be deemed an acquisition or import of services </li></ul><ul><li>Input VAT can be fully recovered - provided the company or branch : </li></ul><ul><ul><li>is a registered VAT payer (prior to the import of services and/or before making any payments abroad) ; and </li></ul></ul><ul><ul><li>fulfills certain compliance rules and VAT formalities </li></ul></ul><ul><li>If trading activities are conducted together with VAT exempt activities (e.g. financing) VAT complications arise with regard to the refund of input VAT  separate VATable activities from VAT exempt activities </li></ul>www.ilf.ch
  11. 11. Specialty: Swiss principal trading company www.ilf.ch Swiss Principal Contract Manufacturer Customers Local distributors Local distributors Local distributors 3rd party or Group contract sales delivery of goods goods purchase price Group companies distribution agreement raw materials <ul><li>planning </li></ul><ul><li>sourcing </li></ul><ul><li>marketing </li></ul><ul><li>sales/pricing </li></ul><ul><li>management </li></ul><ul><li>administration </li></ul>
  12. 12. Stripped buy-sell www.ilf.ch Swiss Principal Customers Local distributors Local distributors Local distributors sale 1 delivery of goods purchase price Group companies sale 2 purchase price Local distributor makes sale 1 and only then buys the goods from Principal. No debtor’s risk, no risk on the goods.
  13. 13. Tax Aspects of Swiss Principal Company <ul><li>Manufacturing profits fully taxed (as deemed Swiss source income) : 15 to 25 %  as a general rule 30% of commercial overall income is deemed manufacturing income </li></ul><ul><li>Remaining commercial profits from foreign sources are partially taxed in Switzerland and partially allocated to the distribution entities abroad (and as such exempt under Swiss income tax law)  generally 50% of remaining 70% commercial income is exempt </li></ul><ul><li>At the cantonal and municipal tax levels generally 70 to 95% of foreign source commercial income can be exempt </li></ul><ul><li>Effective overall tax rate on the foreign source commercial income : 5 to 9% </li></ul><ul><li>Swiss and other income fully taxed, but foreign source income may benefit from cantonal and municipal privileged taxation </li></ul>www.ilf.ch
  14. 14. Off-shore Branch Swiss Company Swiss Company with Off-shore Branch head office functions, supervision, invoicing, financing trading, execution, logistics, documents, transport, customer relations, etc. Possible to get advance ruling (APA) in Switzerland based on functional analysis (functions, assets and risks) and/or transfer pricing report Effective overall tax ranges from 0 to 12% (safe harbor likely around 5 to 6%) international profit allocation
  15. 15. Off-shore Principal Swiss Company Swiss Company with Off-shore Principal principal trading, assumption of risks head office functions, supervision, invoicing, financing trading, execution, logistics, documents, transport, customer relations, etc. Possible to get advance ruling (APA) in Switzerland based on functional analysis (functions, assets and risks) and/or transfer pricing report Effective overall tax ranges from 0 to 12% (safe harbor likely around 5 to 6%) trading profits service fee
  16. 16. The use of off-shore companies   <ul><li>Although Switzerland generally takes a relaxed approach towards off-shore companies (tax haven companies), one needs to be careful when using them for tax planning. If a taxpayer wishes to use off shore companies it is generally recommended not do so unless an advance tax ruling is obtained from the Swiss tax authorities </li></ul><ul><li>The use of off-shore companies also triggers effective management questions for a range of Swiss taxes (income tax, withholding tax, VAT, etc.). This implies that if the off-shore company doesn't have enough substance and has certain links to Switzerland, the Swiss tax authorities may consider it being a Swiss resident company and tax it as such </li></ul><ul><li>Under the Swiss holding system , which can effectively provide for a participation exemption , off-shore companies can be held by a Swiss parent company and dividends received and capital gains realized can be tax-free. There is no subject-to-tax requirement, there are no CFC rules and no activity tests etc </li></ul><ul><li>Off-shore companies that own shares in a Swiss company, however, are subject to the high Swiss dividend withholding tax of 35%. In certain cases this can be reduced to 0%, e.g. by interposing an EU holding company, but Switzerland will strictly test the substance and beneficial ownership at that level and may eventually look through to the ultimate shareholder and still apply the 35% rate </li></ul><ul><li>  </li></ul>www.ilf.ch
  17. 17. General value shift towards IP www.ilf.ch Source: WIPO IP PANORAMA 01 Slide 6/23 http://www.wipo.int/sme/en/multimedia/flash/01/ In the « New World » intangible assets are becoming more valuable than traditional tangible assets
  18. 18. Best Global Brands 2008 www.ilf.ch source: www.interbrand.com
  19. 19. www.ilf.ch Intangible assets: more than just IP Source: http://www.buildingipvalue.com/08_KI/46-50Deloitte.pdf
  20. 20. Key Building Blocks of IP value www.ilf.ch © Jeremy Lack, 2009 Type Purpose Method of Creation Potential Lifespan Copyrights / Authors Rights Rights relating to original/creative works, including literary, dramatic, musical, artistic works (incl. software). Automatic (possible fixation requ’t); © Life of author + 50-70 years Databases (EU) Additional sui generis rights for substantial investments in obtaining, verifying or presenting data. Automatic 15 years from creation Trade secrets Rights given to owners of confidential information (technical or commercial) that is valuable, specific, and ascertainable, and which is treated as such. Automatic, but must be continuously maintained as such Indefinite Domain Names Right to a unique alpha-numeric address on the Internet, obtained from ICANN. Registration only (via registrar) Indefinite, if renewed Designs / “Design Patents” Rights to original appearance of the whole or a part of an industrial or handcrafted product resulting from the features of the lines, contours, colors, shape, texture, and/or materials used. Mainly registration, but can be automatic (e.g., unregistered EU). 14 (USA) or 25 (EU) years if renewed (unreg’d EU = 3 years) Utility Patents Rights to exclude others from making, using or selling inventions that are useful, novel and non-obvious in exchange for publishing this information. The inventions must be sufficiently described to be practicable by a person of ordinary skill in the art. The claims define the scope of the right. Registration only (NB. US add’l requirements of “first to invent” & subjective duties) 20 years from date of application (if they issue) Trademarks Rights to exclusive use of words, symbols, objects, colors, sounds, smells etc., by which consumers can identify the source of products or services. Use (™) or registration (®) by classes of goods (Nice). Indefinite, if registrations are renewed, and brand is used.
  21. 21. Switzerland – a top location for IP www.ilf.ch <ul><li>Multinational companies are rediscovering the value of intellectual property they have developed and acquired over the years </li></ul><ul><li>Many of them have already moved R&D, licensing or trademark operations to Switzerland </li></ul><ul><li>Fast moving consumer good industry has been driving this trend (partially with Principal companies) </li></ul><ul><li>More recently companies in the field of (bio)pharma and life sciences are setting up substantial IP operations in Switzerland </li></ul><ul><li>As a national IP champion (with companies like Novartis and Nestlé), Switzerland provides for top-notch IP protection and offers an infrastructure and service industry meeting the highest standards </li></ul><ul><li>Combined with attractive structures providing for low taxation, Switzerland is probably the preferred on-shore location to hold, own and exploit IP </li></ul>
  22. 22. Tax Aspects of Swiss IP Structures <ul><li>Swiss company beneficially owning and licensing intellectual property abroad : </li></ul><ul><ul><li>Limited use of the local infrastructure : tax advantages at the local tax levels (i.e. cantonal and municipal) </li></ul></ul><ul><ul><li>Effective overall corporate income tax burden of 9% to 12% (depending on the canton) on net licensing income and possible future capital gains on the IP </li></ul></ul><ul><ul><li>Deduction of expenses relating to the income (i.e. R&D expenses, salaries, legal fees, costs of financing and depreciation) </li></ul></ul><ul><ul><li>Extensive Swiss double tax treaty network with low WHT rates on royalties and tax credits for any residual WHT </li></ul></ul><ul><ul><li>Zero withholding tax in qualifying inter-company relations between CH and EU Member States (based on the EC-Swiss Interest and Royalty Provisions) </li></ul></ul>www.ilf.ch
  23. 23. International Group Company Company Swiss Company Group Contribution of intangible property Licensing Example Swiss Licensing Company Royalties
  24. 24. Some other Swiss tax considerations <ul><li>Swiss safe harbor guidelines for tax purposes : - debt-to-equity ratio of maximum 70%, a maximum EUR interest rate of 3.5% (2010) - maximum depreciation of 20% straight-line or 40% of declining book value </li></ul><ul><li>Rulings - confirmation from the Swiss tax authorities in advance , regarding : </li></ul><ul><ul><li>corporate income tax advantages </li></ul></ul><ul><ul><li>the cost structure and fees paid to related or unrelated foreign parties (advance pricing agreements) </li></ul></ul><ul><ul><li>valuation of the IP upon entry and upon exit </li></ul></ul><ul><li>Branch alternative - if the 35% Swiss dividend WHT tax is an important obstacle  Swiss licensing branch typically combines a company in an excellent treaty jurisdiction (e.g. Hungary or Luxembourg) with the Swiss corporate tax benefits </li></ul>www.ilf.ch
  25. 25. www.ilf.ch
  26. 26. Swiss anti-treaty abuse rules www.ilf.ch <ul><li>Switzerland has unilateral anti-treaty abuse rules (the 1962 Decree) limiting the use of Swiss double tax treaties by foreign-controlled Swiss persons  most notable rule is the anti-base erosion provision : not more than 50% of the (gross after residual WHT) treaty protected royalties can be paid out as expenses to parties not entitled to the treaty (i.e., persons or entities abroad)  NB depreciation of IP purchased from a foreign party falls in 50% limit !  NB2 Practice relaxed if the Swiss company employees at least one competent person </li></ul><ul><li>In addition, if and to the extent double tax treaties concluded by CH are used to reduce foreign withholding taxes, treaty based anti-abuse provisions apply  e.g. full Swiss taxation required under treaties with BE, FR and IT  e.g. LOB provisions in the treaties with the US, France and Colombia </li></ul>
  27. 27. www.ilf.ch Off-shore Branch Swiss Company Swiss IP Company with Off-shore Branch legal ownership, IP registration, head office functions, supervision e.g. licensing activities, R&D, invoicing, collection of royalties Possible to get advance ruling (APA) in Switzerland on the international profit allocation (functional analysis and/or transfer pricing report) Effective overall tax ranges from 3 to 10% (safe harbor likely around 6%) allocation of intangibles
  28. 28. Sublicensing while using Swiss treaties www.ilf.ch Final licensee Off-shore company Licensing IP Ownership Sub-licensing Royalties (≤ 50%) Swiss Company Royalties <ul><li>Switzerland does not levy withholding tax on royalties paid </li></ul><ul><li>Stringent anti-treaty abuse rules (base erosion test in particular)  generally up to 50% can be paid to off-shore IP owner </li></ul><ul><li>Effective overall tax rate around 6% plus residual WHT if any </li></ul>spread ≥ 50% tax rate 9 - 12%
  29. 29. Some Swiss VAT Aspects of IP <ul><li>The allocation or contribution of intellectual property to a Swiss entity (company or branch) is considered an import of services subject to 8% import VAT </li></ul><ul><li>Input VAT can be fully recovered - provided the company or branch : </li></ul><ul><ul><li>is a registered VAT payer (prior to the import of the intangibles into Switzerland and/or before making any payments abroad) </li></ul></ul><ul><ul><li>fulfills compliance rules and VAT formalities </li></ul></ul><ul><li>If licensing activities are conducted together with VAT exempt activities, VAT complications might arise, especially with regard to the refund of input VAT </li></ul><ul><li>Holding companies can now qualify as a VAT payer and as such reclaim input VAT </li></ul>www.ilf.ch
  30. 30. Thierry Boitelle Tax Partner [email_address] Geneva office Rue du Général-Dufour 11 CH-1204 Geneva Tel. +41 22 322 25 00 www.ilf.ch BONNARD LAWSON

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