Brochure QI external audit
9 Pages
English
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Brochure QI external audit

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9 Pages
English

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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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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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