Switzerland pursues to relieve permanent establishments from double taxation

Switzerland pursues to relieve permanent establishments from double taxation

The Swiss Federal Council has started a consultation on changes to the flat-rate tax credit to relieve permanent establishments of companies that are located in Switzerland double tax for.

The proposed change attributes to permanent establishments in Switzerland that are part of a company domiciled in a country with which Switzerland has signed a double tax agreement (DTA).

If these permanent establishments get revenue from dividends, interest, or royalty payments from a third state with which Switzerland has a DTA and a non-recoverable withholding tax (residual tax) is levied on this revenue by the third state, cases of double taxation can arise under current law (that is, residual tax is levied on the revenue and it is taxed in Switzerland if it refers to the permanent establishment).

If the company's country of domicile eliminates the profits of the permanent establishment in Switzerland (that is, exempts them from taxation – the so-called exemption method), it cannot credit the residual taxes from third countries to its own taxes, as it does not levy any tax on the revenue in question.

In such circumstances, a flat-rate credit of the residual tax from third countries has not been possible in Switzerland until now, as foreign companies' permanent establishments are considered as non-established persons under DTAs. Only persons established in Switzerland can claim the flat-rate tax credit at present.

In the future, the granting of the flat-rate tax credit to foreign companies' permanent establishments in Switzerland will be conditional on a DTA existing between each of the countries involved (that is, Switzerland, the third country, and the country of domicile of the company to which the permanent establishment belongs). Also the permanent establishment must be taxed according to the current law in Switzerland.







In recommendation to the Model Tax Convention, the Organization for Economic Cooperation and Development advised that member states use bilateral or domestic law solutions to solve the problem of lack of credit possibility for withholding taxes from third states. The proposed change takes into account this recommendation.  

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