Switzerland votes again on tax breaks for business

The Social Democrats and the Greens - shown here depositing signatures in April 2022 - are behind the referendum against the abolition of two taxes that affect Swiss companies © Keystone / Anthony Anex

Is there a need to lighten the tax burden on Swiss companies and their investors? This question is addressed by a nationwide vote slated for September 25. The political right wants to make it easier for companies to raise funds, while the left is denouncing a boon for multinationals.    

What is this about?   

In Switzerland, several taxes are imposed on companies and institutions looking for outside funding.     

One tax is on corporate bonds, which are issued by a company when it wants to borrow money. The investors who buy these “chunks” of debt lend a certain sum in exchange for a regular return on investment until the bonds mature. They earn interest, which in Switzerland is subject to withholding tax at a rate of 35%. This tax, which is aimed at preventing tax evasion, may later be reimbursed in whole or in part. 

Furthermore, there is stamp duty on the sale and purchase of securities (corporate stocks and bonds) by Swiss traders, such as banks and wealth managers, but also pension funds and local governments. This tax amounts to 1.5‰ for Swiss securities and 3.0‰ for foreign securities.    

The voters are to decide on legislation to abolish these two taxesExternal link. The legislation is being contested by a referendum.    

What is the aim of the reform?   

The government and a majority in parliament believe that the withholding tax makes Swiss corporate bonds unattractive to investors, since most other countries do not have such a tax. They find that Swiss conglomerates regularly get around this tax by issuing corporate bonds using offshore companies as intermediaries.   

The same thing holds for stamp duty on the sale of securities. The tax makes this business less attractive and prompts Swiss companies to contract it out to offshore traders.     

By getting rid of these taxes, the government and parliament want to make it possible for companies to issue Swiss corporate bonds which are competitive and thus stimulate the market here.     

Who called the referendum?  

Social Democrats, Greens and some trade unions gathered the 50,000 signatures needed to trigger a referendum. They maintain that the withholding tax was created to prevent those who make money on corporate bonds from evading tax. To abolish this withholding tax would, they believe, amount to “encouraging tax evasion by wealthy people in Switzerland and abroad”.     

The referendum committee External linkpoint out that many investors take no action to recover their tax withholding – which only shows their determination to shun any dealings with the taxman. Abolishing the tax will lead to an immediate drop in tax revenue with no compensation, they say.    

So according to those opposing the change, the abolition of this tax will do the Swiss economy no particular good, and ordinary citizens will have to pay for it through their taxes. They believe that the plan to abolish the withholding tax and the stamp duty are just part of a broader plan by the political right and business interests “to bring down taxes on large corporations and wealthy individuals, to the detriment of the community at large”.     

The left already waged a successful referendum campaign to oppose abolition of stamp duty on the issue of securities, which had been approved by the government and the centre-right majority in parliament. The nation’s voters went along with the arguments of the left, rejecting abolition of this tax in February.     

Who stands to gain if these taxes go?  

According to estimates from the Federal Revenue Administration, Swiss investors will benefit more from the abolition of the stamp duty, whereas foreign investors will benefit more from the end of the withholding tax. These reforms may trigger a decline in interest rates on Swiss corporate bonds, which would allow local governments as well as companies here to source investment capital at better prices.     

The referendum committee counters that the end of the withholding tax would only help 200 multinationals, finance companies and banks which currently issue corporate bonds. Small and medium-sized companies would get nothing out of it, as few of them raise funds through issue of corporate bonds.     

What would be the financial consequences?    

Abolition of the withholding tax on interest from corporate bonds will mean a drop in tax revenue which is at present difficult to estimate, as it depends on interest rates.     

With an interest rate of 1%, the Finance Ministry is assuming that the federal government and the cantons will have a shortfall of CHF170 million ($178 million) in annual revenue. But as the reform is expected to add value and create jobs, and thus lead to increased revenue, the finance ministry expects that it will have paid for itself in five years or so.     

Abolition of the stamp duty on trading in Swiss corporate bonds should result in a shortfall of CHF25 million yearly in federal revenue.    

The referendum committee thinks that these losses in tax revenue are being underestimated by the federal bureaucrats. If interest rates go up, it believes that the loss to governments at all levels will be more like CHF800 million annually.     

What are the arguments in favour of the reform?  

Parties of the centre and right as well as business lobbies favour the end of these two taxes, so as to increase the competitiveness of the Swiss business and finance sectors.     

The Swiss Bankers’ Association favours the idea of “remedying a disadvantageous situation which leads Switzerland to give away both taxes and jobs to other countries”. It maintains that companies, but also municipalities, public transport and hospitals could find easier and less costly financing thanks to this new approach.     

The centre-right Radical-Liberal Party maintains that withholding tax on profits from corporate bonds has no justification now, since the Swiss government has been participating in automatic information exchange internationally since 2014. “A foreign investor can’t hide whatever interest he makes on corporate bonds in Switzerland”, the party says.  

SupportersExternal link of the new legislation add that this is a gradual and careful reform, as there is still a withholding tax on dividends. If this had gone, it would have meant a considerable gap in revenue for the federal government. With abolition of just the withholding tax on corporate bonds, the referendum opponents believe that this reform will not affect the state coffers too badly and will eventually be worth “much more than it costs”.  

Translated from French by Terence MacNamee