The Swiss holding: when it pays off and how it works

The holding company is one of the most cited and least understood structures. Many imagine it as a magic box for not paying taxes. It is not. A Swiss holding is a serious instrument of corporate organisation, with real advantages but also precise requirements. Let’s look at what it does, when it pays off and what it takes to make it hold.

What a holding is

A holding is a company — as a rule an AG or a GmbH — whose main activity consists in holding and managing participations in other companies. It does not produce goods or sell services to the end market: it owns controlling or participating stakes in operating companies (the subsidiaries) and coordinates their strategy.

The typical structure is a pyramid: the holding at the top, one or more operating companies below. The profits of the operating companies rise up to the holding in the form of dividends; the holding can then reinvest them, redistribute them to shareholders or use them for new acquisitions.

The heart of the advantage: the participation deduction

The central tax mechanism that makes a Swiss holding attractive is the participation deduction. 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 level of the operating company. This would create double — indeed, multiple — economic taxation along the chain.

The participation deduction corrects this effect: the tax on the holding’s profit is reduced in proportion to the share of income deriving from qualifying participations. The result is that intra-group dividends and, under certain conditions, capital gains from the sale of participations do not suffer significant double taxation.

For a participation to qualify, minimum thresholds must as a rule be met — in terms of the percentage held or the value of the participation — and, for gains on disposal, a minimum holding period. It is a technical detail, but a decisive one: without the requirements, the advantage does not apply.

What has changed compared with the past

In the past there was a privileged cantonal tax status for holdings, which strongly reduced the cantonal tax on profit. That regime was abolished by the tax reform that came into force at the end of the last decade, in order to align Switzerland with international standards. Today holdings are taxed under the ordinary regime, but the participation deduction remains the key instrument that preserves their efficiency.

Anyone considering a holding today must reason on this current basis, not on outdated schemes.

When it really pays off

A holding does not make sense for every business. It becomes interesting in specific situations:

• A group with several companies: if you control several operating activities, the holding centralises ownership, dividends and strategy.
• Preparing for an exit: with the sale of an operating company in view, holding the participation through a holding can make the treatment of the capital gain more efficient.
• Reinvestment of profits: those who want to reinvest profits in new ventures, rather than distribute them, find in the holding a natural vehicle.
• Governance and generational transfer: the holding facilitates the separation between ownership and management and the gradual entry of new shareholders or heirs.

For a single operating company with no group prospects, on the other hand, the holding often adds only complexity and cost.

The often-overlooked requirement: substance

A holding cannot be an empty company on a piece of paper. For the advantages to hold up before the tax authorities, in Switzerland and abroad, it needs substance: effective management in Switzerland, decisions actually taken on the ground, a representative domiciled in Switzerland and documented management.

This issue has become central at the international level: structures lacking substance are increasingly challenged. A well-built holding is one in which the legal form corresponds to an organisational reality.

How we work at SIH ONE

We help entrepreneurs and groups to assess whether a Swiss holding really is the right instrument, to structure it so that the advantages of the participation deduction are solid, and to give it the substance needed to withstand domestic and cross-border tax audits.

Are you planning the growth of your group or a capital operation? Discover the services of our capital division and build an efficient, compliant structure.