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Withholding tax reform at a glance

The Federal Council and Parliament want to abolish the withholding tax on interest on new Swiss bonds so that local companies can issue their bonds domestically again in the future and thus bring back jobs. The people vote on September 25th.

the essentials in brief

  • Switzerland is a large financial center, but it plays a relatively minor role in the bond issuance business. One of the main reasons is the withholding tax: Many Swiss companies issue their bonds abroad in order to make them exempt from withholding tax, especially for international investors, and thus make them more attractive – because for these investors, reclaiming the Swiss withholding tax is difficult and often not completely possible.
  • The Federal Council and Parliament therefore want to abolish the withholding tax on interest on new Swiss bonds. According to the Federal Council and business representatives, many local companies would in future issue their bonds domestically again. According to the proponents, this would also bring well-paid jobs back to the country in the finance departments of companies, as well as in banks and consultants. According to the Federal Council, tax revenue would increase on balance in the medium term as a result of the reform.
  • The SP called the referendum against the reform. According to opponents, large corporations and foreign investors are the main beneficiaries of the reform. The federal government, on the other hand, must expect tax losses. This is also because the elimination of withholding tax on interest on Swiss bonds will increase the tax loophole.

The template in detail

The traditional Swiss withholding tax is used to combat tax evasion. There is currently a withholding tax on dividends from Swiss shares and on interest from Swiss bonds and accounts. In the case of dividends and interest on bonds, companies pay only 65 percent of gross earnings to investors and deliver 35 percent to the Swiss tax authorities; with the accounts, the same applies to the banks. Swiss investors can reclaim this 35 percent when declaring the income in their tax return. For foreign investors, the repayment is more difficult and often only partially possible.

Because of the withholding tax, many large Swiss companies issue their bonds abroad so that the securities are not subject to this tax and they are therefore more attractive, especially for foreign investors. According to the Swiss Bankers Association, the total volume of outstanding bonds from Swiss companies in 2021 was around CHF 800 billion, of which CHF 470 billion was issued abroad. The Federal Council and Parliament want to bring this volume of business back to Switzerland.

The reform includes the abolition of withholding tax on interest on new Swiss bonds; so far only the interest on foreign bonds is tax-free. Income from bond funds should also no longer be subject to withholding tax.

Affected by the abolition are other financial products that are more complicated but are considered bonds for tax purposes, as well as fiduciary investments. The latter are typically short-term investments of up to twelve months, which Swiss banks currently hold with foreign banks in their own name but on behalf of customers in order to avoid withholding tax.

In the last two years, the Confederation has received around CHF 5 billion a year net from withholding tax. The vast majority (over 90 percent) came from dividends. The planned reform will not change anything in terms of dividends. The withholding tax on account interest also remains in place for domestic private investors; in the case of foreign investors (where the international exchange of information in tax matters takes effect) and domestic legal entities (where the security purpose does not appear necessary either), the withholding tax on account interest is to disappear. Overall, the reform abolishes around 5 percent of the withholding tax based on the previous net income for the tax authorities.

The Federal Council expects the reform to stimulate the economy. According to the government, many companies will be able to issue bonds again in Switzerland once the withholding tax on interest on new bonds is abolished. And banks are also likely to issue complicated financial products that are considered obligations for tax purposes again domestically. And fiduciary investments would quickly come back to Switzerland, according to the reformers. In addition, Switzerland would also become more attractive for foreign companies to issue investment securities. The Bankers Association has estimated, that with the reform, a total investment volume of around CHF 900 billion could come to Switzerland within five years (see chart).

In parliament, the SVP, FDP, Center and Green Liberals spoke out in favor of the reform. The abolition of withholding tax on interest on Swiss bonds has long been a concern in business circles. According to the proponents, the benefits of this reform far outweigh the costs, also from the point of view of the state. The Federal Council calculates, among other things, based on a study one of the Basel Institute BAK with more tax income in the medium term. A update The August 2022 study commissioned by the proponents confirmed the thrust.

According to the proponents, the increase in bonds issued in Switzerland and other investment vehicles would create additional well-paid jobs in the finance departments of companies, as well as in banks and consultants. This brings additional tax revenue to the state. Secondly, the elimination of interest on new bonds should lower financing costs for borrowers. The state, which often issues bonds, also benefits from this. According to a rough estimate by the federal government, the federal government, cantons and municipalities could reduce their financing costs by a total of CHF 60 to 200 million per year.

The short-term tax losses, on the other hand, are small because the elimination of the withholding tax is limited to new obligations; with an estimated term of the affected bonds of nine to ten years on average, the full losses would not be expected until after 2030. According to the reformers, these losses would be more than offset by the positive effects of the economic revival. In the ballot booklet, the Federal Council ventures out onto the branches: In the best-case scenario, the reform could “finance itself as early as the year it comes into effect”.

Without changes in behavior (i.e. without taking the economic revival into account), the Federal Council expects a drop in income of less than CHF 100 million for the first year and between CHF 215 and 275 million per year in the long term; the largest part falls to the Confederation. In addition, there are “non-quantifiable” effects due to certain special rules for sales tax. These estimates assume an average coupon rate of 1 percent. If interest rates were higher, correspondingly higher effects would have to be expected without changes in behavior. However, the positive effects of the reform would also be greater if interest rates were higher.

In parliament, the left bloc (SP/Greens) rejected the reform. The trade unions are also against it. The SP seized the referendum. Opponents raise four main points of criticism. First: The reform only benefits large corporations and foreign investors, while ordinary people in Switzerland have nothing to gain from it. Second: The Federal Council overestimates the economic benefits. Third: If interest rates are higher, the tax losses for the state are significantly greater than the Federal Council is planning. And fourthly: the abolition of withholding tax on interest on Swiss bonds will create a new tax loophole; tax evasion will thus increase, which will result in further losses for the tax authorities.

According to the referendum committee, the reform could lead to tax losses of “up to CHF 800 million” per year. This is at the expense of the citizens. Opponents also criticize the planned inequality between new bonds (no withholding tax) and bank accounts for residents (withholding tax remains).

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