overview over cantonal tax law developments of selected cantons (fribourg, geneva, jura, neuchâtel,...

April 2011

Tax News

Dear Reader,

The fi rst quarter of 2011 is already behind us. In this issue we would like to provide you with up-to-date information about a number of exciting developments during the period.

We report on initial fi ndings from the practical implementation of the new capital contribution principle, and explain the current situation arising from the amended double taxation agreement that was signed by the fi nance ministers of Switzerland and Germany on October 27, 2010. We also take a look at legislative changes and developments in Western Switzerland, Zurich, and Aargau in the second part of our canton update.

The disagreement in parliament on single rate VAT and fi scal exceptions is also highlighted, as is the controversy surrounding changes to the laws governing the handling of systemic risks by the big banks, under the keyword «Too big to fail.» Furthermore, we focus on the dialog between the EU and Switzerland in relation to the adoption of the EU Code of Conduct.

The Foreign Account Tax Compliance Act (FATCA) is practically a perennial theme, and we explain the USA’s plans to close any gaps in the regulations that may still exist.

Table of contents

Editorial

3 Contribution of capital principle – fi rst practical experiences with 2010 annual fi nancial statementsRainer Hausmann

3 Switzerland, Germany amend double tax treatyDaniel Käshammer, Christian Wasser, Marlene Kobierski

4 Overview over cantonal tax law develop-ments of selected cantons – Part 2Diverse authors

6 Disagreement in parliament on the introduction of a single VAT rateBarbara Henzen, Ladina Nick

7 “Too big to fail”Hans-Joachim Jäger, Rolf Geier

8 EU dialogue with Switzerland – solution within reach?Markus F. Huber

9 FATCA regulations will change the fi nancial services landscape from 2013 onwardsHans-Joachim Jäger

10 Switzerland: New Federal Law on the taxation of equity based compensation schemes to be introduced in 2012Markus Kaempf, Louise Barrelet

11 Current developments regarding Swiss pension fundsCharlotte Climonet, Sandra Beer

12 Withholding tax developments for employees resident in Switzerland and abroadAndreas Tschannen, Lukas Naef

13 VAT classifi cation criteria service contracts / property purchase contractsSusanne Gantenbein, Simone Wassmer

14 Potential new regulations relating to intermediation services in the fi nancial sectorBarbara Henzen, Olivia Schwarz

t

Finally, we take a look at the future, explaining the scope for interpretation offered by the new Federal law on the taxation of equity-based compensation systems that will come into force in 2012, and how it may be implemented in practice.

You will fi nd these and many other practical topics summarized in this issue. We wish you an interesting and informative read.

Sincerely,

Dominik BürgyPartner, Tax Leader [email protected]

Tax News Ernst & Young April 2011 2

In addition to ordinary annual fi nancial statements, a topic

much discussed over the past few weeks has been the practical

implementation of the contribution of capital principle. There has been

a never-ending list of questions to be answered. Very often, these

revolved around how to post capital contribution reserves, responsibi-

lities regarding reclassifi cations or whether to present capital con-

tribution reserves in the balance sheet or the notes. The focus has no longer been so much on purely technical tax considerations and

the most contentious issues have been the same to a certain extent.

However, there were always new to-pics to discuss. Three major issues

are treated again below.

1. Does the cost of a capital contribution reduce capital contribution reserves?The Federal Tax Administration has apparently issued internal guidelines according to which the costs of a capital contribution reduce capital contribution reserves. This applies irrespective of whether these costs are posted through the income statement or charged directly to equity capital. The Federal Tax Administration is therefore not applying the principle of authoritativeness on this point and is making a tax adjustment accordingly. This may have a serious impact on shareholders, as considerable costs are incurred, particularly when lar-ge capital increases are carried out. The Tax Administration’s approach is hard to understand if, depending on the situation, the principle of authoritativeness is used on one occasion but then not on another. The courts will defi nitely have the last word on this subject too. See also the next point in this regard.

2. Can capital contributions that were previously offset against earlier losses also be shown in reserves from capital contributions?The circular on the contribution of capital principle explicitly states that capital contributions that were cancelled through the elimination of loss carry-forwards under commercial law, may not be shown as reserves from capital contributions for tax purposes. Moreover, losses that were charged to those reserves from capital contributions may reduce these defi ni-tively. It is worth noting here that accor-ding to the Federal Tax Administration, the principle of authoritativeness must

Contribution of capital principle – fi rst practical experiences with 2010 annual fi nancial statements

Rainer Hausmann, Partner International Tax Services; Zurich, [email protected]


be applied when it comes to writing off losses, but not when it comes to the cost of capital contributions, which is why tax adjustments are made. The only constant here is that both are charged to share-holders. As mentioned, the courts will defi nitely be able to give rulings on these matters.

3. Can the use of the premium for direct depreciation in previous years be made retrospective again?The Code of Obligations allows the pre-mium to be used for depreciation, but such depreciation is very rare and dis-couraged in legal literature. There appear to be problems if this type of depreciation stated in a previous year is made retro-spective for the purposes of reporting a higher capital contribution. This would require an adjustment to fi nancial state-ments that had already been approved and would be very diffi cult to carry out in practice. Furthermore, the Federal Tax Administration could take the view that capital contribution reserves set against losses are permanently lost.

Switzerland, Germany amend double tax treaty

Daniel Käshammer, Senior Manager German Tax Desk New York; [email protected] Wasser, Senior Manager Tax Services Zurich, [email protected] Kobierski, Assistant Tax Services Bern, [email protected]

On 27 October 2010 the finance ministers of Switzerland and

Germany signed a new protocol that will amend the double tax

treaty between the two states. It includes changes of the dividend

article, the non-discrimination clause, the mutual agreement

procedure and the exchange of information. Furthermore, the

ministers declared their intention to solve jointly the conflict

regarding Swiss bank secrecy and tax evasion.

Exchange of informationThe new protocol adopts the standards of Article 26 of the OECD model con-vention (OECD-MC) with regard to the

exchange of information. In line with this regulation, the competent authorities of Switzerland and Germany will exchange such information as is foreseeable relevant for carrying out the provisions of the treaty as well as the domestic tax laws of both states with respect to taxes of any kind. Therefore, the parties are not allowed to decline providing information solely because the information is held by a bank, another fi nancial institution, a nominee or an agent of a fi nancial institution. The protocol states that “fi shing expeditions” are not allowed. Accordingly, there must be suffi cient evidence to identify the person involved in the investigation. Likewise, the parties are not obliged to exchange information on an automatic or spontaneous basis. Finally, taxpayers are entitled to use the usual domestic procedural rights to

In this second part of our overview of the changes made to cantonal

tax law for 2011, we will be considering the caontons of Aargau

and Zurich as well as the French-speaking Switzerland, i.e. the

cantons of Fribourg, Geneva, Jura, Neuchâtel, Vaud and Valais.

One change occurring in all of the French-speaking cantons is the entry into force on January 1, 2011 of all mandatory Federal legislation (or its incorporation into cantonal laws) regarding the Corporate Tax Reform II, including new thresholds for participation exemption (on dividends or capital gains) and new rules on tax-exempt replacement purchases. Only the other changes are listed below.

Canton of Aargau

Implementation of corporate tax reform IIThe canton of Aargau already implemen-ted a number of changes envisioned in corporate tax reform II before 2011, such as the expanded replacement provision. The remaining provisions which had to be implemented came into effect on 1 January 2011. These included (i) extending the participation exemption (Beteiligungsabzug), (ii) introducing the capital contribution principle, (iii) valuing securities as business assets more advantageously, (iv) deferring taxation on the transfer of property from business assets to private assets and (v) allowing tax relief for liquidation profi ts at the end of self-employment in specifi c cases.

Federal Supreme Court ruling on partial taxation of holdings

The legislature of the canton of Aargau has not yet corrected its provisions, deemed illegal under a Federal Supreme Court ruling of 25 September 2009, on the partial taxation of qualifying holdings. The ruling stated that the restriction of the partial taxation to holdings in Swiss-domiciled companies violates the Federal Constitution. Furthermore, according to the Supreme Court, the application of the partial taxation for (qualifying) holdings is also unconstitutional for wealth tax purposes. This may also apply to the more general regulations in Aargau where for wealth tax, a 50% reduction in the tax value applies to shares in domestic corporations and cooperatives that are not traded on an organized basis.


Overview over cantonal tax law developments of selected cantons – Part 2

Author index at the end

oppose a disclosure, including the rights of fi rst notifi cation or of an administrative appeal, before the requested state is allowed to exchange the information.

Further changes included in the protocolThe new protocol also includes, among others, the following changes:

• The threshold for qualifi ed participa-tions, eligible for the 0% withholding tax rate, decreases from the current rate of 20% (without any specifi c holding period) to 10% combined with a holding period of at least 12 months. If a dividend is distributed within the fi rst 12 months of holding, the 0% rate may be claimed retroactively, once the one-year holding requirement is fulfi lled.

• Furthermore, the protocol clarifi es that dividends distributed by a quoted German real estate corporation (REIT-AG), a German investment fund or a German investment corporation are

calendar year next following that in which the Protocol enters into force, whereby specifi c details apply for the individual provisions.

Declaration of intent to end the tax disputeTo end the tax dispute between Switzerland and Germany, the two states signed a non-binding letter of intent to introduce a withholding tax on taxpayers who prefer not to “offi cially” declare their income out of their passive assets. This letter of intent follows the one Switzerland signed with the United Kingdom on 25 October 2010. The contemplated withholding tax on past and future capital income will provide for a tax burden comparable to the regular taxation in Germany.

Furthermore, the parties concluded that they seek for an amicable solution regarding the issue of the purchase of data relevant for tax purposes (i.e., data CD) as well as the market access of fi nancial service providers.

subject to a residual withholding tax of 15%.

• The non-discrimination article now includes a new paragraph in line with article 24 para. 4 of the OECD-MC. Based thereon, interest, royalties and other disbursements paid by a compa-ny to a resident in the other state are deductible for income tax purposes, similar to such payments within one state. The same applies for any debts with regard to capital taxation when the oblige is a resident of the other contracting state.

• The mutual agreement procedure is extended by introducing an arbitration clause and detailed regulations as regards procedural aspects.

The Protocol will enter into force after the implementation procedures of both contracting states have been completed and the contracting states have notifi ed each other accordingly. The provisions of the new protocol will generally apply on or after the fi rst day of January of the


Canton of Zurich

Implementation of corporate tax reform IIUnder statutory law, Zurich will not implement the federal corporate tax reform II provisions until the beginning of 2012, subject to the adoption of the planned referendum on 15 May 2011. In the meantime however, the relevant provisions of the Tax Harmonization Act apply directly. Accordingly, the cantonal tax authorities have already amended various directives to refl ect the new (material) legal situation (see taxation of companies with qualifi ed holdings as well as holding, domiciliary and mixed compa-nies; valuation of securities and assets for wealth tax; coordination of (corporate) income tax assessments and property tax assessments for business assets and of legal entities). The proposal for the referendum also provides for corporate income tax to be offset against capital tax in future.

Shareholders’ debt waiversOn 30 June 2010, the Zurich Administrative Court issued a ruling con-cerning the tax treatment of debt waivers by shareholders in the event of restructu-ring. Under it, Zurich’s current cantonal practice must be applied for the purpose of direct federal taxes as well as cantonal and municipal taxes. This practice states that an investor’s debt waiver in a company undergoing restructuring should as a general rule be treated as a tax-free capital contribution. The debt waiver may only be reclassifi ed as a taxable gain if the shareholder committed to the waiver in his function as business partner similar to third-party creditors. This differs from the Federal Tax Administration’s current rules where, for direct federal tax, ge-nerally every debt waiver is classifi ed as taxable income and may only be treated as tax-neutral in exceptional cases. The Federal Tax Administration has appealed the ruling to the Federal Supreme Court. The Tax Offi ce of the Canton of Zurich has therefore decided to wait for the Supreme Court’s decision before dealing with any debt waivers that would be assessed dif-ferently under Zurich and Federal rules.

Allocation losses within the cantonThe canton of Zurich applies the monistic system to the taxation of property gains,

which means that the sale of business property is subject to property gains tax. While gains from the sale of business property under the dualistic system are subject to regular corporate income tax and it has always been possible to offset them against any operating losses, offsetting between different cantons with regard to properties located in monistic cantons became only mandatory following several Federal Supreme Court rulings issued between 2004 and 2006. However, offsetting is still not permitted within the canton, at least for the time being. Although the Zurich Administrative Court recognized that the Zurich regula-tions are unconstitutional, it decided not to intervene directly in legislation due to the division of powers principle. The ruling is the subject of an appeal to the Federal Supreme Court and is therefore not yet legally binding. Those people affected should keep an eye on further developments and adjust their approach accordingly.

Commercial securities tradingIn two rulings in 2010, the Zurich Administrative Court upheld its regulations on the «commercial nature of activities» which differ from those of the Federal Supreme Court. Accordingly, still all criteria of self-employment have to be met cumulatively to determine whether private asset management or whether commercial securities trading is taking place (respectively whether the capital gains generated are tax-exempt or taxable). This specifi cally includes demonstrating clear participation in the market place. The case is still pending before the Federal Supreme Court.

In 2009, the Federal Supreme Court confi rmed in a similar case its own set of criteria on commercial securities trading under which not all indications have to be met cumulatively. Unlike the Zurich Administrative Court, it maintained that in carrying out securities transactions, the taxpayer appears to clearly act on the market irrespective of whether they carry out the transactions themselves or autho-rize a third party to do so. Furthermore, it deemed the «systematic approach» and «use of specialist knowledge» criteria to be no longer appropriate, as these are met by nearly everyone today. It set greater store instead by the «level of transaction volume» and «use of

considerable borrowed funds to fi nance transactions» criteria. It may be assumed that the Federal Supreme Court will retain its rather broadly formulated rules.

Voluntary declaration of tax evasion and simplifi cation of the additional taxation in case of inheritance In March 2010, the canton of Zurich published a leafl et on the voluntary declaration of tax evasion with immunity from prosecution and on the simplifi ca-tion of the additional taxation in case of inheritance. It states that any taxpayer who voluntarily report tax evasion or tax fraud themselves for the fi rst time and fulfi ll other criteria set out in the leafl et would not have to pay a penalty tax. However, additional tax and default interest would still be payable. If heirs report that a deceased person made incorrect declarations, the additional tax due on the corrected positions would only apply for the last three years prior to death rather than the last ten years, as was previously the case. Like corporate tax reform II, Zurich plans to implement these requirements of the federation into statutory cantonal law at the beginning of 2012. In the meantime, the correspon-ding provisions of the Tax Harmonization Act apply directly in this matter as well.

Revision to reduce the tax burden on individuals This revision of Zurich tax law, which in-cludes the elimination of the two highest progressive tax brackets and an increase in numerous deductions, is also subject to a referendum on 15 May 2011 along with two counter-proposals. If adopted, the changes will probably come into effect in 2012.

Canton of FribourgA new law on intercommunal fi nancial equalization, which entered into force on January 1, 2011, has been implemented by the canton of Fribourg to reduce the fi nancial disparities between municipali-ties.

In addition, a reduction of corporate tax rates has been introduced (shown below before multipliers, e.g. consolidated can-tonal/communal multiplier for Fribourg is 187.3%):


Disagreement in parliament on the introduction of a single VAT rate

Barbara Henzen, Partner Indirect Tax Zurich, [email protected] Nick, Assistant Indirect Tax Zurich, [email protected]

On 14 March 2011, the Council of States debated the second part of the Swiss value-added tax (VAT) reform, including the introduction

of a single VAT rate. In contrast to the National Council, the Council

of States has decided not to refer the draft back to the Federal

Council. The single VAT rate was also debated controversially in the

Council of States however: The small chamber’s decision not to refer the draft back was a close

19 to 18 vote.

The Swiss VAT reform is scheduled to be carried out in two stages. The fi rst stage has already been implemented with a total revision of the VAT Act that came into effect on 1 January 2010. On 24 June 2010, the Federal Council submitted the politically disputed second part of the reform to the parliament. The Federal Council had fi rst considered a number of possible reforms and examined three alternative models. The fi rst alternative involved replacing the three current rates with a single rate of 6.5% and abolishing most fi scal exceptions. The second alternative also foresaw merging the three current tax rates into a single rate of 7.1%. However, existing fi scal exceptions would

have remained in effect as no changes to them were planned. The third alternative evaluated corresponds to the dual rate model already submitted for consultation, in which the standard rate of 8 % would remain unchanged. Exceptions would be repealed to the same extent as in the fi rst model. However, these areas would be subject to a reduced rate of 3.4%. In the end, the Federal Council has decided to support the fi rst alternative and to propose the introduction of a single rate of 6.5 %.

The National Council rejected the Federal Council’s proposed single rate on 15 December 2010 and referred the matter

• Corporate income tax rate applicable to all types of companies, associations and foundations was cut to 8.5% (having been 9.5% in 2010).

� • Capital tax applicable to corporations and cooperatives will from now on be calculated at the rate of 0.16% (0.18% in 2010).

� • Holding and domiciliary companies pay tax on capital at a rate of 0.017% (0.019% in 2010), and the rate remains unchanged at 0.008% for capital above 500 million francs.

� • Capital tax rate applicable to associ-ations, foundations and other legal entities was cut to 0.255% (0.285% in 2010).

Canton of GenevaNo other changes.

Canton of JuraNo other changes.

Canton of NeuchâtelIncome tax should offset capital tax with entry into force in January 1, 2011.

However, the entry into force will only be effective subject to two cumulative conditions :

• referendum against this law change should be rejected by popular vote on April 3, 2011 and

� • another cantonal law on children care should be accepted by popular vote on April 3, 2011.

On March 24, 2011, the Federal Court cancelled the vote, however originally set on April 3, 2011, following an appeal fi led by two citizens of the canton of Neuchâtel. After alignment of the two bills in Parliament, it is anticipated, in the event of a favourable vote of the Neuchâtel Parliament, that the vote of the people of Neuchâtel, this time only on the referendum against the tax rules, may be held in summer 2011.

Canton of VaudA new law on intercommunal fi nancial equalization with entry into force as of January 1, 2011, was implemented by the canton of Vaud in order to reduce fi nancial disparities between municipali-ties.

The capital tax rate was reduced by half from 0.12% to 0.06% (before multipliers, e.g. the consolidated cantonal/ communal multiplier for Lausanne is 234.5%).

Canton of ValaisSince January 1, 2011, gifts and donations to non-profi t organizations based in Switzerland and benefi ting from tax-exemption (due to corporate goals of public service or non-profi t public activity) are deductible up to 20% of the net corporate income (10% in 2010).

Authors

Aargau, Zurich

Christian Wasser, Senior Manager Tax Services Zurich, [email protected]

David Schneider, Assistant Tax Services Zurich, [email protected]

Fribourg, Geneva, Jura, Neuchâtel, Vaud and Valais

Eric Duvoisin, Manager Corporate Tax, Tax Services Geneva, [email protected]

Viviane Disière, Assistant Corporate Tax, Tax Services Geneva, [email protected]


back to the Federal Council. The National Council has instructed the government to work out a dual rate model with exceptions. The National Council wants the food plus the hotel and restaurant industry to be subject to a reduced tax rate, but did not specify what that rate should be. Furthermore, the National Council voted

In November 2009, the Swiss Federal Council had commissioned

an expert party to propose changes in the Swiss law. These

changes should prevent default situation of banks, which are

considered relevant for the Swiss economy (so-called “too big to fail” institutions). Within the proposed legal changes, there

are also accompanying measures pertaining to the Swiss tax

law – notably in the field of the Swiss issuance stamp tax and the Swiss withholding tax on interest

payments.

Banks are currently considering to issue contingent convertible bonds (“CoCo bonds”) which can be converted into equity once a bank falls short of certain equity thresholds. From a political angle, and to prevent that Swiss banks need to issue their CoCo bonds in a foreign jurisdiction, it seems desirable that Swiss banks can issue their convertible bonds in Switzerland and under the regulations of the Swiss domestic law. In particular, the issuance tax on the issuance of the bond itself, on the issuance of new shares subsequent to a possible conversion as well as the burden of the withholding tax are perceived to be a strong impediment to the decision of issuing these bonds in Switzerland. Hence, the proposed changes:

a) Issuance stamp taxThe working party proposes to (i) generally abolish the issuance stamp

tax on bonds and money market papers entirely and (ii) to abolish the issuance stamp tax on shares / stock in particular, that had been issued subsequent to the conversion of a CoCo bond. (i) This is supposed to render the Swiss fi nancial market more attractive for those domestic debtors wishing to issue bonds in Switzerland and to alleviate the inter-company fi nancing through treasury centers in Switzerland. In addition, the proposal (ii) is supposed to enable Swiss banks to issue CoCo bonds under Swiss law and still provide a tax treatment that also appears attractive for foreign investors.

b) Withholding taxesIn the area of withholding taxes, the proposed changes are more radical: for interest payments (not though for dividend payments), the long established Swiss system of withholding tax is sup-posed to be transitioned from the debtor principle to a paying agent system – as is already known for the EU savings tax. Besides banks, every economic operator paying interest on bonds would need to withhold 35 percent of Swiss withholding taxes if paid to certain recipients.

Essentially, the paying agent would need to withhold on interest payments resulting from Swiss and foreign bonds if paid to Swiss resident natural persons. Where the recipient — irrespective of its legal nature — is resident in a non-treaty country, the Swiss paying agent also needs to withhold, albeit only on interest resulting from Swiss (or certain deemed Swiss) bonds, however, not on foreign bonds. With a re-cipient resident in a country, which has a comprehensive tax treaty with Switzerland

“Too big to fail”

Hans-Joachim Jäger, Partner Financial Services Zurich, [email protected] Geier, Partner International Tax Services Zurich, [email protected]

to expand the fi ve exceptions provided for in the draft. In the referral application, it demanded additional exceptions for healthcare and education, culture, sporting events as well as for charitable organizations. The Federal Council was instructed to avoid tax increases in the development of the new draft.

Following the Council of States’ decision on 14 March 2011, the National Council will reconsider its rejection of the draft. If the National Council should confi rm its earlier decision, the referral of the draft back to the Federal Council becomes defi nitive. New developments can therefore be expected. We will keep you informed.

(which usually include a clause on the ex-change of information), the Swiss paying agent is under no obligation to withhold. Finally, where the interest recipient is a natural person residing in a EU member country, the EU savings tax needs to be withheld (also on Swiss bonds under the proposed regulations) unless the payee chooses to be reported on.

The proposed measures are supposed to facilitate investments of foreign lenders in Swiss bonds where otherwise the Swiss withholding tax was considered a major impediment, both from a cash-fl ow and administrative burden perspective. At the same time, the paying agent system should ensure that Swiss resident taxpay-ers (notably natural persons) comply with their tax fi ling obligations (otherwise, the tax withheld would constitute a non-creditable charge) and that residents of non-treaty countries suffer the 35 percent withholding as a fi nal cost. In all other cases, the tax authorities have ways and means to either audit the payees’ tax compliance or request further information in their respective countries of residence.

Whilst the proposed measures appear to be helpful for the Swiss bond issuance market, paying agents are likely to face additional burdens: they need to have systems in place which must be able to clearly identify different categories of payees with a higher granularity of infor-mation (a task formerly not necessary). In addition to this, payment streams (including original issue discounts) origi-nating from both, foreign and Swiss-issued bonds need to be fl agged and will trigger a withholding.

The effective date for the accompanying tax measures described in this memoran-dum is not expected before calendar year 2012. The measures need to pass the parliamentary process and are potentially subject to a referendum before they can take effect.


EU dialogue with Switzerland – solution within reach?

Markus F. Huber, Doctor of Law (Dr.iur.), Partner International Tax Services Zurich, [email protected]

It is well known that one reason why multinational companies base

themselves in Switzerland is its fa-vorable tax environment. According

to the European Commission, this results in a lower tax burden on

their corporate profi ts in certain tax systems. Such taxation regimes

are a thorn in the Commission’s side. The dialogue between the

Commission and Switzerland on this issue was ineffective for a long

time, but recent developments indicate that an agreement is now

closer than ever. The recent discus-sions were used to sound out the

extent to which Swiss cantons are willing to consider certain changes at the levels of cantonal and muni-cipal taxation. It appears that the

cantons are prepared to rethink certain tax regimes under certain

conditions, but the result defi nitely depends on the approach of EU

member states as well.

BackgroundAt the beginning of 2007, the Commission informed Switzerland that it regarded certain cantonal tax regimes as instances of state aid for the private sector – which is frowned upon – because they are applied on a selective basis. It said that this distorted competition between companies, thereby restricting trade in goods. The Commission thus found these practices incompatible with the Free Trade Agreement signed between Switzerland and the EU in 1972.

Switzerland has always rejected this posi-tion. It pointed out that as a non-member state, it was not part of the internal EU market and was therefore subject neither to the competition rules of the European Community Treaty such as those on state aid nor to the EU Code of Conduct. Equally important for Switzerland’s stance

was the argument that the Free Trade Agreement only covered trade in certain goods and could therefore not serve as a basis for reviewing cantonal tax regimes to see if they distorted competition.

EU Code of Conduct on “harmful” tax measuresThe EU’s ministers of economic affairs agreed to the EU Code of Conduct in 1997. The code was designed to elimi-nate «harmful» tax competition between member states. The member states were encouraged not to introduce such measures and to abolish existing ones. The Primarolo Group was commissioned and thereupon undertook this task with great zeal. To date, 400 tax regimes have been investigated, of which more than 100 have ultimately been found to be «harmful».

It was already stipulated in the original EU Code of Conduct that the application of the Code’s principles and criteria to dependent and associated areas – in addition to member states – would have to be taken into consideration. The new development is that when the EU’s ministers of economic affairs met on 8 June 2010, they expressed their stance that non-EU countries would also have to apply the principles and criteria. At the time, the EU’s ministers asked the Commission to persuade Switzerland in particular to adopt the Code of Conduct. The fact that the EU has serious concerns about certain cantonal tax regimes is confi rmed by the fact that, in addition to the EU’s economics ministers, its foreign ministers also took a clear stand recently. At their meeting on 14 December 2010, they expressed their disappointment that the long-running dialogue with Switzerland had still not resulted in the abolition of certain cantonal tax regimes.

Cantons appear ready for dialogueAfter the EU was keen to see quick results on cantonal tax regimes rather than lengthy discussions on the whole EU Code of Conduct, the cantons for their part indicated that they were ready for dialogue. Nevertheless, the EU would

have to offi cially declare that the negot-iations would start from scratch without any pre-conditions. Furthermore, the allegation would have to be withdrawn that the cantons were breaching the Free Trade Agreement. Although the detailed outcome of discussions between the Swiss cantons is not known, it can be expected that Switzerland will be willing to accommodate the EU. In addition, the business world is becoming more vocal and demanding clarity on the future of the regimes in question.

The canton of Neuchâtel has already presented an «EU-compliant» tax reform package in anticipation of this develop-ment. Under the proposal, the controver-sial tax regimes would make room for the tax rate of all legal entities to be halved which would place all companies on a level footing. The draft has an important hurdle to negotiate in April when voters go to the polls on this issue.

There appears to be movement in the tax dispute with the EU. Both sides are willing to fi nd a solution. There are basically three areas that should be followed up on:

1. Reducing income tax rates.

2. Rethinking the subsidization system so that the cantons whose tax income is primarily from companies taxed at the normal rate can also lower cantonal and municipal taxes.

3. Discussions with the European Commission regarding the Code of Conduct, which should be pursued separately from the other two areas.

However, there are still some political obstacles that the draft will have to overcome.


The Foreign Account Tax Compliance Act (FATCA) came

into effect on 18 March 2010 when President Obama signed

the “Hiring Incentives to Restore Employment Act”. FATCA is

designed to discourage tax abuses by significantly extending and intensifying the requirements

laid out in the current Qualified Intermediary (QI) regime.

With the QI regime, the U.S. became one of the fi rst countries to set their sights on taxpayers’ assets deposited abroad, in order for these to be disclosed and taxed. However, until now, these regulations only covered U.S. securities which were held by U.S. persons directly, who have been disclosed as such to the fi nancial intermediary. As a consequence, interpo-sing a company or legal entity between the foreign bank and the former account holder, could have resulted in situations where there was no reporting to the U.S. tax authorities.

With the intention of closing this loophole, FATCA requires all foreign fi nancial institutions (FFIs) to enter into an agreement with the U.S. Internal Revenue Service (IRS). With this agreement, the institutions (participating FFIs) undertake to identify certain U.S. accounts and to report their assets. Essentially, the term “U.S. accounts” co-vers all account relationships that either U.S. natural persons or legal entities, which are substantially (i.e. more than 10%) held by U.S. persons, maintain with such FFI. To enforce compliance with this agreement and to encourage fi nancial institutions to enter into such agreement, FATCA introduces an impressive threat: U.S. withholding agents or participating FFIs are required to impose and deduct a 30% withholding tax from U.S.-sourced “withholdable” payments paid to non-participating institutions or those account

holders who fail to properly identify them-selves. U.S.-sourced payment encompass not only U.S. dividends and interest but also proceeds resulting from the sale of securities which yield revenues from U.S. sources.

It is estimated that the new regulations affect hundreds of thousands of fi nan-cial intermediaries worldwide, including banks, brokers, investment companies, certain insurance companies as well as fund structures.

In order to comply with FATCA, insti-tutions must adapt and revamp their operating models, ranging from the iden-tifi cation and documentation of clients, to the product portfolio and IT systems, through to the internal processes. These changes must occur group-wide.

The new regulations, which still need detailed clarifi cation by the IRS and the U.S. Treasury, have prompted numerous discussions among market participants. In particular, these discussions relate to questions on future business models, such as servicing U.S. clients and / or holding U.S. securities.

There is considerable time pressure, as the new regulations will apply to payments from the start of 2013. The new rules affecting dividend-equivalent payments have been in effect since September 2010.

Overview of key changes• Foreign fi nancial institutions are

required to enter into an agreement with the IRS or suffer 30% withholding tax on their own and their clients’ U.S.-sourced income as well as on any sales proceeds resulting from the sale of U.S. securities

• � Payments resulting from certain transactions previously not considered U.S.-sourced—e.g. certain payments under securities lending agreements or under swap contracts, which are referenced to U.S. securities—could

FATCA regulations will change the fi nancial services landscape from 2013 onwards

Hans-Joachim Jäger, Partner Financial Services Zurich, [email protected]

now qualify as U.S.-source payments

� Foreign (non-U.S.) securities held directly or indirectly by U.S. persons are now also included in reporting

� • New reporting and withholding obligations in addition to those of the existing QI regime

� • Identifi cation and documentation of clients becomes considerably more onerous, whereby the burden of proof partly resides with the fi nancial institution

� • Annual reporting to the IRS on all assets held by identifi ed U.S. persons and by foreign entities substantially owned by U.S. persons


Switzerland: New Federal Law on the taxation of equity based compensation schemes to be introduced in 2012

Markus Kaempf, Senior Manager Human Capital Zurich, [email protected] Barrelet, Senior Manager Human Capital Lausanne, [email protected],com

The new Federal Law on the taxa-tion of equity based compensation

schemes sets out the timing of the taxation of equity based compen-

sation (including restricted stock, stock options, restricted stock

units, stock appreciation rights, etc.) as well as the reporting

and withholding obligations for “imported” and “exported” equ-ities belonging to internationally mobile employees. The Swiss Tax

Harmonization Act obliges all Swiss Cantons to implement the new

Federal Law, with the consequence that the tax treatment will be the

same irrespective of which Canton the employee is tax resident within.

Nevertheless, based on the appro-ved wording of the new Federal Law, there is still room for interpretation

and practical implementation.

On 6 December 2010, after six years of debate regarding the wording , the Federal Parliament voted for the new Federal Law on the taxation of equity based compensation schemes. The new Federal Law is likely to be implemented from 1 January 2012, unless a citizens’ initiative is undertaken. The proposed transitional rules, which have not yet been fi nally approved by the Federal Council of Switzerland, stipulate that equity grants made prior to that date are still taxed under the current Cantonal and Federal rules, , respectively in accordance with existing tax rulings. However, if the tax year in which the taxable event occurred is not yet fi nally assessed, the taxpayer can make a claim for a revised tax treatment under the provisions of the new law. All equity grants made after the new law comes into force will be taxed in accordance with it. Existing rulings that either do not fall within the scope of the new legislation or are not in contradiction with it are still valid.

The timing of the taxation of restricted stock, restricted stock units and phantom plans (i.e. non-genuine participation rights) essentially remains unchanged,

at both at Federal and at Cantonal level, under the new Federal Law. However, the main changes relate to the taxation of stock options, especially in the French speaking part of Switzerland, and in cross-border situations.

According to the new Federal Law, a diffe-rentiation is made between unrestricted and restricted stock options, as well as between tradable and non-tradable stock options.

The point of taxation of employee stock optionsUnrestricted and tradable stock options are taxable at the date of grant and the taxable value equals the fair market value of the option at grant. Any gain from selling or exercising the option is considered to be a tax-free private capital gain (unless the benefi ciary qualifi es as a commercial security dealer).

However, restricted stock options that are not tradable are taxed at the date of exercise. Consequently, the gain realized at exercise (i.e. the difference between the exercise price and the fair market value of the underlying share at exercise) is deemed to be employment income and is taxed accordingly.

Based on the current wording of the new Federal Law, it is debatable whether stock options that have a restriction period but become tradable after the restriction lapses become immediately subject to tax based on their fair market value at the fi rst trading day (i.e. taxation at vesting) or if they are also subject to tax at exercise/sale.

Stock options that entitle an employee to receive a cash payment instead of acquiring actual shares (either volun-tarily or mandatorily) are regarded as non-genuine participation rights and are therefore exclusively taxed at exercise. It is debatable whether an option that is tradable but envisages a cash settlement is taxable at grant or at exercise/sale.

Taxation of equity based compensation plans in cross-border situationsWhere stock optionswith a vesting period partially vest whilst a taxpayer is tax

resident in Switzerland, the portion of the benefi t taxable in Switzerland has to be calculated on a time-apportionment basis. The allocation is based on the time spent in Switzerland during the vesting period as a proportion of the total vesting period. This rule follows the OECD re-commendation published in 2004. In this regard, it has to be further analyzed how the cross-charge of related costs between foreign and Swiss based companies within the same group will impact the allocation method. This is due to the Directive issued by the Cantonal tax authorities of Zurich in October 2009 which states that the amount charged back to Switzerland is the minimum amount subject to income tax in Switzerland. A further question is whether Switzerland must have a valid double taxation treaty in place with the country from which the equities are being exported and imported to Switzerland. Presently, the Canton of Zurich only grants an exemption on a time-apportionment basis for imported equities if the exemption is claimed under a double tax treaty.

It is also interesting that the new Federal Law only addresses stock options for cross-border situations. Consequently, the Cantonal tax authorities can still apply their own cross-border taxation rules for restricted stock units, stock appreciation rights etc.

Extended withholding taxationAccording to the new Federal Law, any gain that is realized when a taxpayer is no longer tax resident in Switzerland but where a portion of the realized gain is subject to tax in Switzerland based on the time-apportionment rules (i.e. if the taxpayer was at least partially tax resident in Switzerland during the vesting period), the Swiss based company is obliged to withhold Federal tax at a fl at rate of 11.5%. On top of the Federal tax, the employers also need to withhold the Cantonal/Municipal taxes. In this regard, it is still unclear what tax rates the Cantons will apply (fl at or progressive rates).

Next stepsEmployers should review their current equity based compensation schemes and related tax rulings in light of the new


Federal Law in order to guarantee com-pliance from a reporting and withholding perspective. Special attention is required

for internationally mobile employees because of the possible trailing liabilities in Switzerland and other countries.

Current developments regarding Swiss pension funds

Charlotte Climonet, Senior Manager Human Capital Geneva, [email protected] Beer, Senior Manager Human Capital Zurich, [email protected]

This article contains two current developments regarding Swiss 2nd pillar pension funds (occupational

pensions). The fi rst part relates to changes in the tax consequences

of making voluntary buy¬-backs of missing contribution years. In the

case of a lump sum capital with-drawal within the blocking period of three years after the buy-back, the

tax relief is disallowed retrospec-tively in the year in which the buy-

back was made. The second part deals with the transfer of foreign

pension assets into Swiss pension funds and the conditions that have

to be met.

1. Changes in the tax deductionof 2nd pillar buy-backs

Following a Federal Supreme Court ruling of 12 March 2010, the Swiss Tax Conference published guidelines on the tax deduction of 2nd pillar buy backs that should be applied in all cantons.

The publication reports that any excepti-onal 2nd pillar buy-backs will not be tax-deductible if there is a lump sum capital withdrawal taken within the three-year blocking period following the buy-back.

The main points are the following ones:

�• Tax relief on 2nd pillar pension buy-backs will not be allowed if there is a lump sum capital withdrawal within the three-year blocking period following the buy-back. It is not important whether the withdrawal includes the amounts bought back or whether it came from ordinary pensioncontributions. The three-year blocking period is now included as an objective criterion for assessing tax deductibility. It is no longer necessary to prove any tax evasion for the deduction to be refused. Exceptions should only be permitted in cases of divorce.

• If the tax deduction has already been accepted, and then a withdrawal is subsequently made within 3 years, the tax authorities will re-open prior tax years and retroactively disallow the deduction.

• In cases where a tax deduction is not accepted, the amount that was denied as a deduction is exempt from taxation at the withdrawal.

• The new rules apply to 2nd pillar buy-backs made after 19 August 2010 which was the publication date of the Federal Supreme Court’s ruling. However the Geneva Tax Authorities will only apply this rule to buy-backs made after 1 January 2011.

• In practice, the tax authorities will not refuse a deduction for 2nd Pillar buy-backs if the contribution is immaterial. For he Zurich tax authorities, the con-tributions are considered as immaterial if the buy-back amount is less than CHF 12’000. The Geneva tax authorities have not yet defi ned any ceilling.

• The tax deduction taken at the begin-ning of the three-year period could be disallowed retrospectively by the tax authorities in the case of people who leave Switzerland within the three-year blocking period and transfer their pension assets into a vested benefi ts account.

2. Transfer of foreign pension fund assets into Swiss pillar 2

Under revised Art. 60b of the Federal Act on Occupational Pensions that has applied since 1 January 2011, insured persons may transfer foreign pension assets into Swiss pension funds as long as they fulfi ll certain criteria.

According to provisions introduced in 2006 on the avoidance of tax evasion, the annual buy-backe amount for insured employees who move to Switzerland from abroad is limited to 20% of insured salary within the fi rst fi ve years. Under the mo-difi ed Art. 60b, this restriction does not

Whenever employees have been resident in Switzerland during the vesting period or at exercise, special attention is required.

apply to the transfer of foreign pension assets into Switzerland if the following criteria are all met for such transfers:

• The foreign pension fund transfers the assets directly to the Swiss pension fund.

• The rules of the Swiss pension scheme allow for this type of transfer from for-eign pension funds. It should be noted that not all Swiss pension funds will want to meet the potentially extensive administrative reporting obligations that may arize through accepting the transfer of foreign assets.

For example, the UK pension law requires reporting obligations by the foreign pension fund for a period of fi ve years.

• The insured person does not claim tax deductions for the transfer of pension assets.

The 20% limit continues to apply to any buy-back after foreign assets have been transferred into a Swiss pension fund.

This type of transfer from abroad is limited to the maximum amount the insured person can buy-back as per the pension fund regulations.

If a transfer is being considered, attention must be paid to the fact that the purchase contribution for the insured employee is thereby reduced in the Swiss pension fund. The matter should therefore be analyzed on a case by case basis.

Next stepsEmployers and employees should note the following:

1. The impact of the new tax regulations on purchases into pension funds

2. The consequences of transferring foreign pension fund assets into Swiss pension funds for employees who relocate to Switzerland.


Withholding tax developments for employees resident in Switzerland and abroad

Andreas Tschannen, Executive Director Human Capital Zurich, [email protected] Naef, Manager Human Capital Zurich, [email protected]

In assessing the tax situation of a person resident abroad but

employed in Switzerland, the Federal Supreme Court based its ruling of 26 January 2010

on the anti-discrimination rules stipulated by the Agreement on the Free Movement of Persons.

Employees residing abroad may not be treated worse than

employees residing in Switzerland. The ruling has since led to

selective adjustments in cantonal withholding tax regulations

but has not brought about any fundamental changes. Cantons

with traditionally restrictive regulations in granting additional

allowances for international weekday residents (e.g. pillar 3a

contributions, dual accommodation costs, high return travel costs,

etc.) will only examine applications for adjustments to tax rates and individual deductions on

the condition that 90% of the family's worldwide income is

generated in Switzerland. Cantons with liberal regulations in this area will continue to examine

granting deductions as part of the application to adjust withholding

tax rates.

BackgroundOn 26 January 2010, the Federal Supreme Court approved the appeal of a Swiss national who resided in France but worked in Geneva. When this national mo-ved residence from Switzerland to France, the income earned in Switzerland became subject to withholding tax. No longer a resident of Switzerland, this taxpayer could no longer submit a tax declaration and was therefore unable to benefi t from (additional) individual deductions.

In the claimant’s case, this meant discrimination, as individual deductions are not contained in withholding tax rates. Based on the anti-discrimination rules stipulated by the Agreement on the Free Movement of Persons, the Federal Supreme Court granted the claimant the same deductions as those enjoyed by residents of Switzerland. As a result of this decision, individual deductions that were previously rejected now have to be granted by cantonal tax authorities.

International weekday residents domiciled abroadThis mainly concerns international weekday residents who are domiciled abroad and work in Switzerland. A number of cantons (e.g. Basel-Stadt, Basel-Landschaft, Zug, Schwyz) have until now rejected individual deductions, e.g. there was no deduction for pillar 3a contributions or dual accommodation costs. Other cantons (e.g. Zurich, Berne, Aargau, Schaffhausen) have already looked at relevant applications to take in-dividual business expenses into account. We should assume that the regulations will not change much in these cantons.

“Quasi-residence” – cantons with restrictive regulations (e.g. Basel-Stadt, Basel-Landschaft, Zug, Schwyz)

These cantons will now permit individual deductions for international weekday residents if 90% of the family’s worldwide income is generated in Switzerland. Given the example of the canton of Geneva, it is conceivable that the cantons will apply ordinary income tax rates in order to avoid discrimination. In addition, married persons may apply for the married persons’ withholding tax rate, whereby the family’s worldwide income, including interest income, rental income and other income, is taken into account to determine the tax rate. Wealth tax is not taken into consideration.

Any application must be submitted to the relevant tax authority by 31 March of

the following year. It cannot be assumed that the German-speaking Swiss cantons will extend the submission deadline. The canton of Geneva accepts applications until 31 August of the following year.

Application for rate adjustment – cantons with liberal regulations (e.g. Zurich, Berne, Aargau, Schaffhausen)

If the canton already granted individual deductions for rate correction purposes before this ruling on international week-day residents, there will be little change to its withholding tax regulations, as anti-discrimination rules were not broken. Applications for calculating corrections to withholding tax must be submitted to the relevant tax authority by 31 March of the following year. One exception to this is the canton of Aargau where correction applications are taken into account up to fi ve years after the end of the tax year.

Taxation of foreign working days

As international weekday residents do not have tax residence in Switzerland because they regularly return to their main residence abroad, only the number of working days physically carried out in Switzerland (= Swiss working days) can be subject to Swiss taxation (provided that Switzerland has signed a double taxation agreement with the foreign country of residence). The right to tax non-Swiss working days therefore lies with the foreign country of residence. Exemption from these foreign working days should be applied for in all cantons by the end of March of the following year in order to avoid the risk of an application being rejected. For example, the Zug Tax Authority tends not to handle revision ap-plications based on international double taxation for those subject to withholding tax if they are submitted after 31 March of the following year (not so, for instance, in the canton of Zurich where applications will still be accepted after 31 March for a revision, provided the 90-day revision period has been observed).


Foreigners living in Switzerland with a permit “B”For foreign employees who live in Switzerland but have no permanent residence permit “C”, withholding tax deduction normally represents the fi nal tax charge if gross annual income is

VAT classifi cation criteria service contracts / property purchase contracts

Susanne Gantenbein, Senior Manager Indirect Tax Geneva, [email protected] Wassmer, Manager Indirect Tax Bern, [email protected]

The tax position of construction self-supply has been abolishedd

under the new VAT Law. Now the distinction between taxable service contract and tax-exempt purchase

contract is the crucial issue. The Federal Tax Administration

(FTA) published its practice, retrospectively applicable from

1 July 2010 (voluntary from 1 January 2010), on making this

distinction in its VAT Info 04 (construction). Under the previous

VAT Law, it was a question of whether purchase or pre-purchase

contracts were in place prior to the start of construction, but now it

is important to determine who the land being developed belongs to,

when payment is made and whether there are extra costs to the fixed

price offered for the land and building due to changes based on

individual purchaser requirements1.

Land belongs to the developer:A sale (land and building) is normally tax-exempt without credit if the following criteria have all been met:

• The purchaser acquires an off-plan property for which a development project is in place;

• A fi xed price (set in advance by the developer) is paid for the land and buildings;

• The purchaser can only exercise limited infl uence on the construction, structure and design of the building (including work in surrounding areas) and service providers (tradesmen);

• There is only one contract (purchase contract between developer and purchaser of land and building);

• Risk and use are only transferred to the purchaser upon completion;

• Payment is made only after the buil-ding has been completed and is ready for occupation (a down payment of up to 30% of the purchase price is still in line with this criterion).

If not all of these criteria have been met or if the additional costs exceed 5% of the fi xed price (7% if the land is not sold by the developer but a building right is granted), only the sale of the land is

1 Even before publication of the defi nitive practice by the FTA, Hans Rutschmann submitted a «removing VAT barriers on property sales» motion (10.4030) on 16 December 2010 in the National Council. The motion has not yet been dealt with in the assembly. It is geared specifi cally towards the criterion of funding and calls for the beginning of construction as the relevant time for the distinction, as was formerly the case.

less than CHF 120,000 (otherwise a subsequent assessment is made using the tax form). As the withholding tax rate is based on a weighted average of municipal tax rates in the canton, these foreign em-ployees cannot benefi t from a favorable municipal tax base. Bearing in mind anti-

discrimination rules, it could be argued that the municipal tax base should also be used in cases where gross annual income is less than CHF 120,000. However, there has not yet been a seminal court ruling on this matter.

tax-exempt without credit, and taxable goods and services have been supplied in respect of the building.

Land belongs to the purchaser:If a property is being developed that already belongs to the purchaser (cus-tomer), this always means that taxable goods and services are being supplied.

Land belongs to a third party:In this instance, usually only the sale of the land is tax-exempt without credit. Construction of the building is classifi ed as a taxable supply of goods and services. It is normal practice to deviate from this rule if the purchaser of the land and the developer are closely related parties. In this instance, the same classifi cation criteria apply as if the land belonged to the developer.

The criterion of additional costs not exceeding 5% (or 7%) of the fi xed price in particular may mean that a fi nal assess-ment of the nature of the contract is only possible retrospectively. To counteract any risks, the contracts should ideally be analysed from a VAT perspective before the project starts.

The authors will be happy to answer any questions from affected companies about the above issues.


The definition of taxable finder's fees in the financial sector could

change, with the result that more services in this area will be exempt

from tax in future.

According to the draft VAT Sectors Information 14 “Financial Sector”, inter-mediation under Art. 21 para. 2 point 19 letters a) to e) of the VAT Act should now be taken to mean any activity carried out by an intermediary that consists of working towards concluding a contract in monetary or capital transactions between two parties without the intermediary being a party to that contract and without having self-interest in its contents.

Intermediation may involve providing a contractual party with opportunities to conclude a contract, making contact with the other contractual party or negotiating on behalf and on the account of the client on the details of reciprocal services. It must always relate to an individual sales transaction that is to be brokered. Signing an actual agreement is not a requirement. These activities were previously generally classifi ed as taxable fi nder’s fees (servi-ces in the fi eld of advertising or providing information).

The new defi nition of a fi nder’s fee can be found at 5.10.2 letter c) of the draft brochure and is as follows:

If intermediation is not based on a specifi c sales transaction or is unrelated to transactions that are subsequently car-ried out by the customer, there has been no intermediation under Art. 21 para. 2 point 19 letters a) to e) of the VAT Act. Instead, such acquisition of customers is to be viewed as a service in the fi eld of advertising or providing information. Irrespective of how the corresponding compensation is determined, it is taxable according to the type of service supplied in each given case.

If the change provided for in the draft comes into force, it may have a major impact in terms of sales (more exempt sales for intermediaries and therefore lower input tax deduction rates) and in terms of input tax deduction (lower input tax charge for those who purchase these services). We therefore recommend checking the VAT treatment of relevant transactions as soon as the fi nal version of the brochure has been published.

The draft VAT Sectors Information 14 “Financial Sector” provides for this change to come into effect retrospec-tively to 1 January 2010. It is debatable whether this retroactive applicability will be permitted, at least in cases where the new regulations work in favor of the taxpayer.

Potential new regulations relating to inter-mediation services in the fi nancial sector

Barbara Henzen, Partner Indirect Tax Zurich, [email protected] Schwarz, Senior Consultant Indirect Tax Zurich, [email protected]

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