Participation holding: structure and taxation

A participation holding is, in essence, a company that owns others. Put that way it sounds simple, but its effectiveness depends entirely on how it is built: the legal form, the participation thresholds, the dividend flows, the withholding tax and the economic substance. This article gets into the mechanics of the structure, beyond the general idea of “tax saving”.

The basic architecture

The typical structure is a pyramid. At the top, the holding — as a rule an AG (SA) or a GmbH (Sagl) — whose statutory purpose is to hold and manage participations. Below, one or more operating companies that carry out the market activity. The operating companies’ profits flow up to the holding in the form of dividends; the holding reinvests them, redistributes them to the shareholders or uses them for new acquisitions.

The choice of form depends on the objectives: the AG is more suitable when the entry of investors or the circulation of shares is anticipated; the GmbH costs less to set up (CHF 20,000 against the CHF 100,000 of the AG) and is simpler to manage for family or closed groups.

The tax engine: participation relief

The heart of a Swiss holding’s efficiency is participation relief. Without a corrective, the dividends flowing up from the operating companies to the holding would be taxed a second time, after already having been taxed at the operating level: an economic double taxation along the chain.

Participation relief corrects this effect: the holding’s profit tax is reduced proportionally to the share of income deriving from qualified participations. For it to apply, precise requirements are needed:

• for dividends: as a rule a participation of at least 10% of the subsidiary’s capital, or a market value of the participation of at least CHF 1 million;
• for gains on the disposal of participations: in addition to the 10% threshold, a minimum holding period (as a rule at least one year).

Without the requirements, the advantage simply does not apply. This is why the holding structure must be designed on the drawing board, before acquiring.

Withholding tax and dividend flows

A technical but decisive topic: the withholding tax of 35% on dividends. When a company distributes profits, it withholds 35% and pays it to the Confederation; the beneficiary recovers it if entitled to a refund.

Within a group, dividends between Swiss companies can benefit from the notification procedure, which replaces the actual payment of the tax with a simple notification, avoiding the cash outlay and the subsequent refund. On flows abroad, instead, the double taxation agreements come into play, which can reduce or eliminate the withholding under certain conditions. Designing the dividend flows taking these mechanisms into account is what makes the structure efficient in cash terms, not only in tax terms.

The current regime, without shortcuts

In the past there was a privileged cantonal tax status for holdings. That regime was abolished with the tax reform that came into force at the end of the last decade, to align Switzerland with international standards. Today holdings are taxed under the ordinary regime: participation relief remains the key instrument, but there are no longer any shortcuts based on special statuses. Whoever structures today must reason on this current basis.

Substance: the requirement that holds everything together

A holding cannot be an empty company. For the advantages to hold up before the Swiss and foreign tax authorities, substance is needed: effective management in Switzerland, decisions actually taken in the country, a representative domiciled in Switzerland, adequate accounting and documentation. Structures lacking substance are increasingly contested at the international level. A solid holding is one in which the legal form corresponds to a concrete organisational reality.

When this structure makes sense

The participation holding is worthwhile when you control several companies, when you are preparing the sale of an operating company, when you want to reinvest profits rather than distribute them, or to organise governance and generational transfer. For a single operating company with no group prospects, it usually adds only complexity and cost.

How we work at SIH ONE

At SIH ONE we structure participation holdings by taking care of the legal form, the thresholds that trigger participation relief, the management of withholding tax on intra-group and cross-border flows, and the substance needed to withstand internal and foreign audits. The goal is a structure that is efficient and solid, not just elegant on paper.

Are you planning the growth of a group or a capital transaction? Discover the services of the capital division and build a holding designed to last.