Switzerland Fact-File Part 2:
Individual Business Domestic Taxation

2.8 Switzerland Business Profit Retention

Rules Governing the Retention of Profit in Formal Business Structures

The retention of profits will ensure a company has good working capital at its disposal. In theory, reinvesting profits defers income tax liability (or corporation tax if an incorporated company) and should enhance the prospects of a business being more profitable in the future. Retaining profits, after the distribution of dividends and payment of tax, is intended to earmark funds for future expansion or as reserves. Reinvesting profits might be harder where shareholders are involved, as they may well be looking to receive a dividend by way of the profits being distributed rather than the profits going back into the company again.

The European Commission adopted the Small Business Act for Europe in June, 2008. The Act contains legislation governing the retention of profits by SMEs. Although Switzerland is not a member of the EU, it has adopted many of the provisions in EU fiscal legislation and has entered into bilateral agreements with many countries and tends to follow EU guidance on taxation rules.

In Switzerland, a company may hold reasonable retained earnings, with the definition of ‘reasonable’ to be determined by the tax authorities, usually based on the size and form of the company.

A tax rate of 0.15% (average rate) is levied on the registered capital and retained earnings of companies. Rates though, can vary from canton to canton. Further information on cantonal variations can be found here. Sole proprietors and any non-incorporated business, including general partnerships, are not permitted to retain profits, ie they will be charged to tax.