Switzerland Fact-File Part 5:
Small Business Incentive Programs

5.4 Switzerland Individual Business Tax Holidays

Tax Holidays for Individuals in Business

A tax holiday of up to ten years may be granted for federal, cantonal and communal taxes for new businesses investing in certain regions of Switzerland. The criteria to qualify for this holiday include:

• Turnover
• Number of employees
• Amount of initial investment
• The existence of any competitors

A tax holiday on federal taxes may be granted for companies investing (mainly, although not exclusively) in manufacturing or production sectors and which are:

• Located in specific regions (generally those deemed to be less economically ‘strong’, including mountainous, rural and border areas)
• Planning to remain there in the long term
• Intent on creating jobs
• Embarking upon research & development projects, especially in conjunction with technical colleges or universities
• Developing new products for sale

Altogether, 30 regions throughout the country have been defined as areas where these incentives can apply to new investors.

To apply for a tax holiday, the applicant must submit a business plan together with an estimate of the amount of tax savings the holiday would bring. All requests must be submitted to the canton – the cantonal authorities will make the final decision on the application.

In addition to waiving tax liability for up to 10 years, the Confederation may also waive real estate transfer taxes during this period. The extent of any tax holiday is subject to individual negotiations.

The following variations on the stock company can also sometimes benefit from tax-privileged treatment:

A Holding Company is defined as such if it holds either a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least CHF2m Swiss (known as a "participating shareholding").

Swiss holding companies enjoy the following relief from corporate income tax:

• At federal level a holding company pays a reduced level of corporate income tax on any dividend income received from the subsidiary or the company in which it holds a "participating shareholding". The reduction in the level of corporate income tax payable depends on the ratio of earnings from "participating shareholding" to total profit generated.
• At cantonal or municipal level no corporate income tax is payable on income represented by dividends so long the corporate entity meets the cantonal definition of a holding company.

Furthermore holding companies which hold a minimum of 20% of the share capital of a subsidiary pay reduced corporation tax on any capital gains made on the sale of that shareholding so long as

• The shareholding was held for at least one year and was purchased after 1st January 1998;
  

or

• The shareholding was purchased before 1st January 1997 and will be disposed of after 1st January 2007.

Fribourg is currently considered the best canton in which to locate a holding company for corporate income tax purposes.

A Domiciliary Company is defined as:

• Both foreign-controlled and managed from abroad;
• Have a registered office in Switzerland (i.e. at a lawyer's premises);
• Have neither a physical presence nor staff in Switzerland;
• Carry out most if not all of their business abroad;
• Receive only foreign source income.

As such, a Domiciliary Company enjoys the following relief from corporate income tax:

• At a federal level there are no tax advantages in terms of corporate income tax payable on income and gains;
• At a cantonal and municipal level, the corporate income tax rate may be substantially reduced or even reduced to zero; taxes levied by the cantons are calculated according to a formula that relates the company's paid up share capital and reserves to profit.

An Auxiliary Company is essentially a domiciliary company that in addition may carry out a certain proportion of its business in Switzerland. Auxiliary companies can exist in only certain cantons. An auxiliary company may:

• Have Swiss offices and staff;
• Be in receipt of Swiss income (which is taxed at normal rates) though most of its income must be from a foreign source.

Auxiliary companies enjoy the following relief from corporate income tax:

• At a federal level no exemptions are granted on corporate income tax;

At a cantonal and municipal level the level of corporate income tax payable on income and capital gains varies among the 7 cantons that give favourable treatment. However, in general Swiss-sourced income is taxed at 5% whereas foreign-sourced income is tax exempt. The tax concessions can vary and an advance tax ruling should be sought.

A Service Company is a company whose sole activity is the provision of technical, management, marketing, publicity, financial and administrative assistance to foreign companies that are part of a group of which the service company is a member.

Service companies may not in general derive income from third parties (i.e. companies outside their corporate group). Service company status is obtained by way of an advance tax ruling.

Service companies enjoy the following relief from corporate income tax:

• At a federal level relief is not available on corporate income tax payable;

At a cantonal and communal level corporate income tax rates will be adjusted depending on the international orientation of the services provided. There are a number of ways of calculating annual taxable profit for cantonal and municipal purposes but generally speaking annual taxable profit will be the equivalent of 8.5% of the payroll or 5%-20% of overheads (unless overheads are very low in which case a higher percentage rate will be used).

A Mixed Company is one which has the characteristics of both a domiciliary company and a holding company but which does not qualify as either. A mixed company gets the following relief from corporate income tax:

• At federal level no relief is granted;

At a cantonal and municipal level a mixed company may pay reduced tax or be totally exempt if it meets the following conditions:

• It is foreign controlled;
• A minimum of 80% of its total income comes from foreign sources;
• The company has close relationships to foreign entities.

Introductory Guides

Switzerland Artist Tax Guide

Switzerland Contractor Tax Guide

Switzerland Entrepreneur Tax Guide

Switzerland Professional Tax Guide

Switzerland Small Business Tax Guide

Switzerland Sportsperson / Entertainer Tax Guide

Fact-File

Part 1: Switzerland Business Formation for Individuals

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