The Swiss Federal Council announced plans on 3 April 2020 for interest withholding tax reform to strengthen the Swiss debt market.
Federal Council aims to strengthen Swiss debt market through tax reform
Bern, 03.04.2020 - The debt market in Switzerland is to be strengthened by means of a tax reform. In addition, the Federal Council wants to close a loophole in the withholding tax system. During its meeting on 3 April 2020, the Federal Council initiated the consultation on amendments to the Withholding Tax Act.
The Federal Council is proposing to exempt domestic legal entities and foreign investors from withholding tax on interest-bearing investments. This will enable corporate groups to issue their bonds in Switzerland without withholding tax hurdles. Technically speaking, this involves a partial switch to the paying agent principle. As a rule, banks would thus levy the new withholding tax in the future. As a complementary measure, the transfer stamp tax on domestic bonds is to be abolished.
At the same time, the switch to the paying agent principle will also close a loophole with regard to individuals in Switzerland and make income from foreign interest-bearing investments subject to withholding tax.
Consequences of the reform
It is estimated that the new withholding tax will lead to a one-off reduction in receipts of CHF 750 million. However, this has no budgetary impact, as provisions have been set aside.
Furthermore, at the current level of interest rates, recurrent static receipt reductions estimated at CHF 165 million can be expected (of which 90% for the Confederation and 10% for the cantons). Static additional receipts estimated at around CHF 35 million will result from the closure of the loophole. The abolition of transfer stamp tax on domestic bonds will result in an estimated receipt reduction of CHF 50 million for the Confederation. Caveats are attached to all components of the static effects on receipts, owing to the limited data available and the uncertainty regarding future interest rate levels.
The reform means that bonds previously issued abroad can now be issued in Switzerland. There is also the possibility that more intragroup financing activities will be located in Switzerland, which will strengthen the Swiss debt market. From a dynamic viewpoint, the reform will therefore result in additional receipts for the Confederation, cantons and communes, as it will provide stimulus for value creation and financial sector jobs in the medium to long term. There are clear indications that, from a dynamic viewpoint, the reform has a very favourable cost/benefit ratio. Even for the Confederation, which will bear almost all of the static receipt reduction, the reform could be self-financing in around five years.