Switzerland To Amend Tax Treatment Of PEs
Switzerland is to amend federal tax legislation to prevent the double taxation of certain permanent establishments (PEs) located in the country.
The planned reform is the result of a consultation on the application of the flat-rate tax credit. It will affect PEs in Switzerland that have their registered office in a country with which Switzerland has a double tax agreement (DTA).
Under the current rules, cases of double taxation can arise if these PEs receive 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 these revenues. If the company’s country of domicile exempts from taxation the profits of the PE in Switzerland (the exemption method), it cannot credit the residual taxes from third countries to its own taxes. PEs are considered non-established persons under DTAs and therefore cannot claim Switzerland’s flat-rate credit, which is only available to persons established in the country.
The Federal Council has instructed the Federal Department of Finance to create the legal basis for a revision of the ordinance on the flat-rate credit. The aim is to prevent the double taxation of these revenues. The amendment will be included in the Council’s third tranche of corporate tax reforms, the Federal Act on Tax-Related Measures to Strengthen the Competitiveness of Switzerland as a Business Location.