Switzerland has currently signed double taxation agreements with over 100 countries. This network is constantly being renewed and expanded. While one occasionally reads about negotiations on free trade agreements, the technical and complicated double taxation agreements are hardly ever in the news. This is surprising given that the group of beneficiaries is much larger. This group ranges from Swiss pensioners living abroad, to private individuals who own shares or real estate abroad, to multinational companies with foreign subsidiaries. For SwissHoldings, the focus is naturally on the latter. The agreements are of enormous importance for a functioning international trade and cross-border investment activities. So it is worth taking a closer look.
Wherever people live and work across borders, there are overlaps between states. These need to be regulated. In international tax law, this is done, among other things, through double taxation agreements (DTAs). DTAs are essential instruments for ensuring that companies, and also individuals, are not taxed in two countries for the same income or assets. For multinational companies and investors, DTAs are of central importance, as they eliminate uncertainties and create a clear tax structure for cross-border activities.
Contents and mode of operation of the agreements
These agreements primarily regulate three issues. First, there is the obvious question of which country is allowed to levy taxes. The primary purpose of this is to avoid double taxation. For multinational companies, for example, it must be regulated where the profits of a subsidiary are taxed or who is allowed to tax the interest income from a loan from the parent company to the subsidiary. The second issue concerns the amount of tax. For example, countries agree on the maximum amount of tax that may be levied when both states are entitled to tax selected types of income (dividends, interest, royalties and licence fees). The amount of tax on dividends from shareholdings, for example in subsidiaries, and the abolition of withholding taxes on such dividends, are relevant in this area. Lastly, the DTAs set out how to proceed in the event of disputes. The facts of the case are often complex and require interpretation.
Legal certainty and the promotion of cross-border economic relations
By answering these questions, it becomes clear how various cross-border transactions are regulated. In this way, the agreements create legal certainty. This is of central importance for companies and for Switzerland. It is the basis on which companies can plan for the long term and an important location factor for the country. Furthermore, the agreements also offer two states the opportunity to make investing in and trading with the contractual partner more attractive.
Excursus: Abolition of withholding taxes deepens trade and investment relations
One example of this is the abolition of withholding taxes, for example on dividends from shareholdings. So if a company from country A invests in country B and sets up a subsidiary for this purpose, the subsidiary’s profit distributions will not be taxed a third time when they cross the border, in addition to the profit tax in country B and the income tax of the shareholders in country A. This makes cross-border investments more cost-effective and thus more attractive. International business relationships are facilitated. This makes the company from country A more successful. For country B, the range of goods and services increases, which is reflected in lower prices for consumers in country B. Of course, these effects work in both directions.
In short, DTAs not only contribute to a stable and predictable tax environment, but also promote international trade and investment. They make the contracting states a more attractive business location with successful companies and a larger and more affordable range of goods and services.
This editorial is part of a series that aims to provide background information on tax topics in an accessible way.