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FRIENDLY TAXATION AND TAXE OPTIMIZATION |
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Geneva has a simple strategy for attracting investment: create a favorable economic and fiscal environment which is supportive of industry. On the one hand, Geneva authorities do this by maintaining political and social stability: companies in Geneva can plan ahead. On the other, they have created a tax regime friendly to business. Some of its features are outlined below.
Federal taxes
Like the United States, Switzerland, has a Federal as well as a State tax system. The statutory federal income tax rate is 8.5%. Due to the deductibility of federal and cantonal/communal income taxes, the effective federal rate is 6.44%.
Geneva cantonal and communal taxes
Unlike the US, the greater part of a corporate or individual tax burden in Switzerland is at the State (cantonal) not Federal level. Geneva cantonal and communal income taxes are imposed on resident corporations at a flat rate. The ordinary combined effective cantonal and communal income tax rate (after deduction of taxes at both levels) is 17.80%. Corporate equity is taxed at a rate of 0.4%, except in those years in which there is no taxable income, in which case the rate is 0.45%. For certain activities, the Geneva tax administration may grant tax rulings that offer more favorable income and equity tax rates. If a company operates in more than one canton (for example, its head office is in Geneva and it has permanent establishments in other cantons), its taxable profits are allocated among the cantons. The allocation method is determined on a case-by-case basis according to guidelines established in decisions of the federal Supreme Court. The Swiss constitution prohibits inter-cantonal double taxation.
Tax relief/holidays
To help new companies get off the ground and to help existing companies develop, the Geneva government is authorized to grant tax privileges, upon the fulfillment of certain conditions. Industrial and commercial firms may apply for such tax privileges. The tax holiday privileges are granted for a maximum duration of ten years. Within this limit, different types of agreements may be obtained. As an example, a firm may be granted a full initial year exemption from cantonal and communal taxes, which would then annually decrease by 10% over the ten-year period. Another possibility is a full exemption from cantonal and communal taxes for the first five years, which would then annually decrease by 16.66% up to the tenth year. Other advantages worthy of mention are the following:
• The sliding scale of tax relief might be used in those years in which the company has a taxable profit;
• Full offset of losses against profits is possible during the entire period of tax relief;
• A tax-free reserve for future investments can still be constituted;
• A tax ruling can still be negotiated from the beginning which can be applied to the taxable income not exempted by the holiday;
• The Geneva Professional tax may be covered by the terms of the tax holiday.
Corporate taxes
Switzerland’s corporate tax rate is the lowest in Western Europe. This means that even with no special tax ruling or tax holiday of any sort, your company's maximum tax rate in Geneva, will be significantly lower than in the rest of Europe.
Corporate tax privileges
The Geneva authorities grant tax privileges to certain types of foreign companies based in Geneva. These tax rulings either entitle the beneficiaries to lower rates of cantonal tax on part or all of their income, or exempt their income from cantonal tax altogether. Lower rates of equity tax may also apply. These rulings are granted for a period of five years and can be renewed upon request provided that the conditions are still fulfilled.
• Principal company ruling: The principal company ruling, which applies for both federal and cantonal taxes, is granted to companies that assume certain regional functions (e.g., R&D, purchasing; marketing strategy, administration, etc.) Generally all profits of the principal company are deemed to be sales profts, unless the principal company assumes responsibility for the manufacturing function. If this is the case, 30% of its profits are deemed attributable to the manufacturing function and the remaining 70% is deemed attributable to the sales function. Under the federal principal ruling 50% of the profit of the principal company attributed to the sales activity is attributable to these foreign permanent establishments and thus exempt from taxation in Switzerland. The Geneva cantonal tax authorities grant an exemption of 80% at the cantonal level. The effect of this ruling is to provide a maximum overall effective taxation rate in Switzerland of 9.27%.
• Holding companies: Companies which hold durable financial participations in affiliated companies, and do not engage in any commercial activities are exempt from tax on their entire income, including capital gains on participations. Holding companies are exempted from cantonal and communal tax on their entire income, except income related to real estate located in the canton. In addition to the income tax exemption, these holding companies pay a cantonal and communal equity tax at a privileged rate of 0.07%.
• Auxiliary companies: Auxiliary status applies to Geneva-based companies which perform their commercial activity outside Switzerland. As only 20% of foreign-source commercial income is taxed at the ordinary tax rate, the resulting effective tax rate amounts to 4.15%, including both cantonal and communal income taxes. Foreign-source interest income from third parties is taxed at 15% of the ordinary tax rate. This results in an effective tax rate of 3.15%, including both cantonal and communal income taxes. Foreign-source interest income from affiliates is taxed at 2.5% of the ordinary tax rate. This results in an effective tax rate of 0.54%, including both cantonal and communal income taxes. Dividend income and capital gains on durably held participations are exempted from cantonal and communal income tax. Equity is taxed at ordinary cantonal and communal rates. However, if 20% or more of the auxiliary company’s assets consist of participations, a privileged rate of 0.07% will apply to the part of the equity proportionate to the ratio between these participations and the total assets of the company.
• Service companies: Companies which provide affiliated companies with assistance in administrative, technical and scientific matters. For tax purposes, a minimum remuneration for these services is required, in order to achieve a taxable income equal, generally, to 5% of expenses. This mark-up is then taxed at ordinary rates for federal tax purposes. At the cantonal level, this income is taxed at ordinary rates for the portion attributable to Swiss sources. However, for the portion attributable to foreign sources, the income is taxed at only one-fifth of the ordinary rates. The service income is characterized as foreign source if the related expenses are incurred outside Switzerland: 50% foreign if incurred outside Switzerland by employees resident in Switzerland and 100% if resident outside Switzerland. An optional service company tax ruling may be granted in certain circumstances which typically would represent a more favorable method of determining the portion of income attributable to foreign sources. This ruling may be obtained only if the services are provided mainly for the benefit of foreign entities. This ruling provides for an arbitrary allocation of 50% of income as Swiss source and 50% as foreign source. This arbitrary allocation is normally more favorable than under the direct allocation method required under a normal service company ruling. Each source of income is then taxed under the rules applicable to a normal service company.
• Finance Branches: This structure usually consists of a European holding company with a Geneva-registered branch that uses funds obtained from the home office to finance affiliates within the Group. There is a minimum funding requirement of CHF 100 million. The branch is typically funded by a non-interest bearing current account with the home office. However, for income tax purposes, there is a presumption that the branch operations are funded as a subsidiary with a debt to equity ratio of 10:1. The debt in this ratio is presumed to be interest bearing, which is tax deductible by the branch but not taxable to the home office. In addition to this favorable method of determining taxable income for federal and cantonal purposes, Geneva also grants finance branches the privileges of the auxiliary company tax ruling. The overall effect of these tax advantages can result in a combined Swiss tax rate of less than 1%. The utilization of a European holding company means that their treaty network is applied to the branch’s transactions with the affiliates in other countries rather than that of Switzerland. This situation is advantageous when the treaty network of the holding company’s country is more extensive than Switzerland’s.
Personal taxes
Personal income tax in Geneva is also very favorable compared with other European cities. The maximum marginal tax rate is among the lowest (and at the highest income ceiling) in Europe. As social costs for both employer and employee are low, take-home pay in Geneva is high in proportion to gross salary as well as in net figures.
Value-added tax
Switzerland's VAT rate is by far the lowest in Europe, at the maximum rate of 7.6%. Multinational companies with purely headquarter or international trade functions may apply for reimbursement of VAT paid on those goods and services purchased in Switzerland.
Accounting / Bookkeeping
Swiss accounting rules are clear, short and simple. By law, profit and loss and financial statements must be shown each year, according to standard commercial principles. Accounting may comply with any of the international standards (e.g., US-GAAP, IAS, FER).
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QUOTE:
“Geneva has made real efforts in its corporate tax
rates. From a fiscal point of view, Geneva is not expensive.”
Stephane
Garelli, professor of international business policy, IMD
QUOTE:
“Swiss tax authorities understand
business and are open to finding solutions. A company arriving in
Geneva will know how it will be treated before, during and after its
stay and it will know that these rulings have been respected for the
past 40 years.”
Daniel Gremaud, Partner, Tax and Legal Services, Price Waterhouse Coopers
To learn more about Geneva's ranking in terms of fiscal and tax conditions, please consult the appropriate section of "International comparisons", the yearly publication presenting independant comparative data on all major business locations.
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