Treaty Entitlement in Switzerland

Background

In multinational group structures, reclaiming Swiss withholding tax (WHT) on dividends paid to a foreign parent remains a recurring challenge.

Swiss tax authorities – in line with the OECD Model Tax Convention (Articles 4 and 10) – require the recipient company to qualify as a treaty beneficiary. Central to that determination is whether the company has sufficient economic substance to rule out any element of treaty abuse (“treaty shopping”).

When is substance required?

The Swiss Federal Tax Administration (FTA) reviews substance whenever an intermediary entity in a group leads to a more favorable WHT outcome.

If no tax-rate advantage results from the interposition, no abuse is presumed, and substance requirements are not triggered.

Under Article 4 OECD-MA, a company is resident where it is subject to tax by virtue of its place of incorporation or effective management.

However, mere residence does not always suffice – where there is doubt, the FTA examines whether the entity carries genuine business substance.

The three Swiss substance criteria

Swiss practice recognizes three alternative (and in some cases cumulative) forms of substance:

1. Personnel substance – own or group-assigned staff and operational presence in the country of residence.
2. Functional substance – multiple participations across jurisdictions and an active holding or management function.
3. Balance-sheet substance – an equity ratio of at least 30 percent based on statutory financial statements.

Typically, one criterion is sufficient for straightforward structures. In more complex or mixed cases (qualified treaty shopping or combinations of rule- and treaty-shopping), at least two criteria are expected.

Private equity and fund structures

In fund scenarios, treaty entitlement is assessed based on the ultimate investors.

If the investor base is undisclosed, the FTA presumes qualified treaty shopping and expects at least two substance tests to be met.

Where at least 80 percent of investors would be entitled to treaty benefits directly, no further substance test is required.

Foundations and trusts

For structures involving trusts or foundations, the decisive factor is the economic attribution of the dividend income – to the settlor, the beneficiaries, or the entity itself.

Depending on control and transparency, the same substance rules apply as for corporate holdings.

Key takeaway

Economic substance remains the determining factor for Swiss WHT reclaims on intercompany dividends.

Groups should periodically review their holding and financing structures against OECD and FTA criteria, focusing on:

• personnel and operational activity,
• capitalisation and funding mix,
• participation management and governance.

Crowe view:

“Substance is not a formality – it is the foundation of treaty entitlement. Well-documented, well-structured holdings ensure certainty and prevent costly reclaims.”