Tax breaks attract foreign holding firms

Zug in central Switzerland is a favourite location for foreign holding firms Keystone

An increasing number of international firms are taking advantage of controversial corporate tax breaks by setting up holding companies in Switzerland.

Numbers leapt 25 per cent last year to more than 20,000, with foreign firms making up a larger proportion. Switzerland is locked in a dispute with the European Commission (EC) over tax breaks awarded to such companies.

Credit risk assessment firm Dunn & Bradstreet found that 2,113 holding companies opened up shop in Switzerland in 2007. Of this number, 577 were foreign owned – nearly three times as many as were founded in 2000.

Under Swiss law, cantons can exempt taxes on holding, mixed and management company profits earned abroad. Several cantons, notably Zug, Schwyz and Obwalden, take full advantage to attract firms from abroad.

Some European countries have complained at the drain on their own tax revenues, prompting the EC to intervene. It maintains that the tax breaks represent an unfair subsidy, a charge that Switzerland denies.

But as the row drags on unresolved, more and more international firms are taking advantage of the favourable Swiss regime. The number of holding companies in Switzerland has shot up 75 per cent in the last seven years, now administering around SFr500 billion ($505 billion).

Foreign owners now make up 27 per cent of these companies, most notably from Germany which accounted for one in every 10 such enterprise founded in Switzerland last year. Dutch, French and Italian firms are also present, but to a lesser extent.

Tax cutting race

“Enterprises in high tax countries generally have the need to optimise their tax burden,” Bernhard Grisiger of Dunn & Bradstreet told swissinfo.

“The Swiss do not feel that their tax regulations are a loophole, but the European Union very probably does feel this, because their revenues are disappearing into another country.”

The race to lure foreign companies has sparked a flurry of tax cutting measures in many Swiss cantons in recent years.

Obwalden raised the stakes in 2005 by dramatically slashing its levies. It now offers the lowest combined federal, cantonal and municipal corporate tax rate of 13.1 per cent, according to Grisiger.

Grisger added that low cantonal tax rates would probably remain in place for some time yet. He argued that the only solution would be for other countries to cut their levies, as abolishing the Swiss system would merely result in companies relocating to other countries with favourable tax rates, such as Singapore.

Swiss Finance Minister Hans-Rudolf Merz reiterated on Wednesday that Switzerland rejects the EC accusation of unfair corporate tax practices.

Speaking in parliament, Merz said Switzerland would continue dialogue, but would not enter into negotiations with the EC on the matter.

swissinfo with agencies

Holding boom

The Dunn & Bradstreet report found that the holding company boom continues in Switzerland with 323 enterprises founded in the first two months of 2008.

This is a 19.7% increase on the number of newly established holding companies in January and February last year.

The total number of new holding firms in Switzerland doubled in 2007 compared with 2000.

D&B calculates that while foreign owned holding companies make up just over a quarter of the total number, they make up around 55% of the total assets managed by such enterprises.

Holding Companies

Holding companies do not trade or offer services, but exist merely to retain shares in other firms.

Swiss federal law defines a holding company as having a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding has a market value of at least SFr2 million. A federal tax rate of 8.5% is levied on holding companies.

However, cantons can choose whether or not to tax the dividends on holding companies if their profits are derived from outside Switzerland.