Brochure QI external audit

Bernhard Schopper

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INTELLECTUAL PROPERTY TAXATION IN INTERNATIONAL TAX SWITZERLAND Intellectual Property Taxation in Switzerland Year 2003 © 2002 ERNST & YOUNG LTD 1/9 INTELLECTUAL PROPERTY TAXATION IN SWITZERLAND Table of contents INTELLECTUAL PROPERTY TAXATION IN SWITZERLAND...............3 Corporate taxation..........................................................................................3 Taxation at source...........................................................................................6 Profit repatriation6 OUR OFFICES IN SWITZERLAND ..............................................................7 © 2002 ERNST & YOUNG LTD 2/9 INTELLECTUAL PROPERTY TAXATION IN SWITZERLAND Intellectual property taxation in Switzerland Switzerland is home to the World Intellectual Property Organization (WIPO). The country has introduced a number of interesting tax incentives for the management of intellectual property. For corporate income tax purposes, it is possible to pre-negotiate the expected costs relating to pure IP businesses and obtain a deduction of between 50% and 80% of gross royalty income in the form of a lump-sum tax deduction. Alternatively, significant relief is possible on royalty income if the Swiss business qualifies as a special-purpose branch, holding company or auxiliary company. The amount of source taxation on royalty income and the method of profit repatriation out of ...

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• Publié par: Erkyo
• Nombre de lectures: 33
• Langue: English

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INTERNATIONAL TAX

Intellectual Property

Taxation in Switzerland

Year 2003

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Table of contents

INTELLECTUAL PROPERTY TAXATION IN SWITZERLAND...............3

Corporate taxation

..........................................................................................3

Taxation at source

...........................................................................................6

Profit repatriation

...........................................................................................6

OUR OFFICES IN SWITZERLAND ..............................................................7

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Intellectual property taxation in Switzerland

Switzerland is home to the World Intellectual Property Organization (WIPO).

The country has introduced a number of interesting tax incentives for the

management of intellectual property.

For corporate income tax purposes, it is possible to pre-negotiate the expected

costs relating to pure IP businesses and obtain a deduction of between 50% and

80% of gross royalty income in the form of a lump-sum tax deduction.

Alternatively, significant relief is possible on royalty income if the Swiss

business qualifies as a special-purpose branch, holding company or auxiliary

company. The amount of source taxation on royalty income and the method of

profit repatriation out of Switzerland are largely dependent on whether the Swiss

operation is a company or a branch.

A common structure is the Swiss IP branch of a Luxembourg company, which,

as a result of the Luxembourg foreign branch exemption combined with low

Swiss federal and cantonal tax rates on royalty income, produces an effective

combined tax rate that can be significantly below 10%. A similar structure is

possible within the Netherlands. However, this Dutch combination has become

less popular following the 1997 changes in the Dutch application of the

provisions of the Netherlands/Swiss treaty to "passive" branches, moving from

an exemption system to a credit system. Consequently, the combined effective

tax rate has increased. Branches that qualify as "active" branches may still

benefit from a 90% branch profits exemption in the Netherlands, subject to

substance requirements.

Corporate taxation

Investment

The initial injection of IP is tax neutral if it is bought by the Swiss entity at an

arm's-length price. However, if the IP is contributed into a Swiss company

against a share issue or below the market value, then an issuance stamp tax of

1% is triggered. This is not the case if the IP is contributed to a Swiss branch of a

non-Swiss company. Alternatively, if the IP contribution is significant, it may be

possible to obtain relief if it qualifies as an IP business.

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Swiss VAT issues must also be considered. This is usually more of an

administrative or liquidity issue rather than a financial cost. Indeed, although the

7.6% Swiss VAT may be due by the Swiss acquiring entity, a corresponding

deduction is possible under the reverse-charge mechanism.

In order to participate in the future development of IP, Swiss entities may

conclude cost-contribution, cost-sharing, or contract-development agreements.

Restrictions are limited to transfer pricing issues. Though Switzerland uses the

rules laid down by the OECD, the Swiss approach to transfer pricing tends to be

rather pragmatic.

Basis of taxation

Swiss corporate income tax is generally levied on net after-tax income as

reported in the financial statements. The method of depreciating IP should be in-

line with usual business practice. Both the declining balance method (40%) and

the straight-line method (20%) are acceptable. Exceptional depreciation,

provisions, and corrections are often allowed for tax purposes as long as they are

substantiated as being commercially justifiable.

Tax relief

Pure IP businesses: Businesses involved in IP management often incur costs that

are difficult to justify. To simplify matters, a Swiss business that is managed

from abroad and has no commercial or technical organization in Switzerland,

may distribute between 50% and 80% of its gross royalty income without any

form of substantiation. This is considered as generally accepted tax practice and

may be requested for Swiss federal, cantonal and communal income tax

purposes.

This is not, strictly speaking, a tax incentive. It is designed to minimize the

number of litigious cases involving not only the question of deductibility of

expenses, but also the question of whether or not the shareholders receive a

constructive dividend for the tasks that they accomplish on behalf of the

company. Any payments made in excess of the predetermined percentage of

gross royalties must be clearly justified.

From the remaining income, only administrative expenses and direct taxes may

be deducted. The difference is usually taxable at ordinary tax rates for Swiss

federal tax purposes. However, for cantonal and communal tax purposes, this

ruling may be combined with the rules applicable to auxiliary companies (see

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below). This may imply that the net taxable foreign-source income is reduced by

a further 80%.

Based on this ruling, the combined Swiss corporate income tax on royalty

income (before notional expenses) may be between 3% and 5%.

Finance Branches

: In order for Swiss finance branches to qualify for tax relief

on group financing activity, 3/4 of the branches' gross profits should be derived

from financing activities, and 3/4 of their assets should be invested in financing

activities. However, in order to obtain this tax relief on royalties, IP rights or

royalty income must represent less than 1/4 of the company's activities. If royalty

income exceeds this threshold, it may be possible to have two branches to

maximize tax-planning opportunities.

As with pure IP businesses, the combined Swiss corporate income tax on royalty

income (before notional expenses) may be between 3% and 5%.

Auxiliary (administrative) companies

: Auxiliary companies only have

administrative activities in Switzerland and are exclusively engaged in

commercial activities abroad. Although Swiss federal tax law does not provide

for any particular relief for auxiliary companies, there are special rules for

cantonal and communal income tax purposes. Indeed, companies that qualify for

auxiliary company status are subject to tax on foreign-source royalty income at

substantially reduced rates.

Each canton has its own particular interpretation of the law. In Geneva, for

example, 20% (or less) of foreign-source commercial income is taxed at ordinary

rates. Foreign-source income includes income derived from the purchase and

sale of goods and services abroad, income derived from the use of intangible

property abroad (license fees, royalties, etc), and income for services rendered

abroad.

Hence, the combined Swiss corporate income tax on net royalty income may be

between 8% and 12%.

Holding Companies

: Holding companies are exempt from cantonal corporate

income tax. However, with the exception of relief for qualifying dividend

income, they are subject to ordinary federal corporate income tax. Depending on

the canton of residency, there is complete tax exemption on income from

dividends, interest, royalties, capital-gains etc. However, in order to qualify as a

holding company, at least 2/3 of the assets (or income) must be derived from

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long-term participations. Therefore, IP rights or royalty income must represent

less than 1/3 of the company's activities.

According to this ruling, the combined Swiss corporate income tax on net pre-tax

royalty income is 8.73%.

Taxation at source

Switzerland's treaty network is comprised of more than 65 comprehensive tax

treaties. Since 1965, all of Switzerland's bilateral tax treaties were largely

inspired by the OECD model tax convention. Treaty relief is available to Swiss-

resident IP companies but not to IP branches of non-Swiss companies. Treaties

provide for a reduction of tax at the source on royalties, as defined by the country

of source, and any unrecoverable source tax can be credited against Swiss taxes.

Switzerland has no controlled foreign corporation (CFC) legislation. However, in

order for Swiss companies to qualify for treaty relief on their foreign source

royalty income, it is necessary to respect Swiss domestic anti-abuse rules, which

have recently been significantly relaxed. For pure IP businesses, these rules

generally imply that a maximum of 50% of gross treaty-favoured income may be

used to make deductible payments to non-residents of Switzerland.

Profit repatriation

Profit repatriation largely depends on whether the Swiss IP entity is structured as

a company or branch. Repatriation from a branch is tax neutral, whereas profit

distributions (dividends) from Swiss legal entities suffer a withholding tax of

35%. This may nevertheless be reduced in-full or in-part under applicable

international tax treaties.

Royalties, management fees, service fees, and technical assistance fees are

generally not subject to Swiss withholding tax. This is also true of interest

income accruing on inter-company loans for as long as they are not re-

characterized as bonds or bank deposits.

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