Repatriating foreign profits and dividends

A group with operating companies abroad sooner or later faces the same question: how to bring profits home accumulated beyond its borders without losing a substantial part to taxes along the way. Dividend repatriation is a classic junction of international taxation and, for a Swiss holding or company, the good news is that the Swiss system offers effective tools — provided you know the conditions.

The path of a foreign dividend

When a foreign subsidiary distributes profits to the Swiss parent, the dividend can be hit twice:

• in the subsidiary’s country, with a source withholding on the outgoing dividend;
• in Switzerland, where the dividend flows into the taxable profit of the company that receives it.

Without corrections, the same wealth risks being taxed first abroad and then in Switzerland. Two mechanisms prevent this from happening: the double taxation treaties reduce the source withholding, while the participation deduction mitigates the domestic levy.

The participation deduction

It is the central tool of the Swiss system. When a company holds a qualifying participation in another company, the dividends received benefit from the participation deduction, which very significantly cuts the profit tax relating to that income. The aim is clear: to prevent profits, already taxed at the level of the operating company, from being fully taxed again as they move up the corporate chain.

The relief generally requires exceeding minimum participation thresholds (in terms of capital quota or value) or an adequate holding period. The exact conditions must be checked in the specific case, but the principle is that a strategic and stable participation is treated differently from a mere financial investment.

Reducing the foreign source withholding

The second front is abroad. The double taxation treaty between Switzerland and the subsidiary’s country sets the maximum rate that country can apply on the outgoing dividend. For significant participations between companies the treaty rate is often reduced, in certain cases down to zero for parent-subsidiary relationships.

To obtain the benefit, however, it is not enough that the treaty exists: a procedure is usually required (request for the reduced rate, forms, certificates of residence) together with compliance with anti-abuse rules, which deny the advantage to structures without real economic substance. A dividend received without having activated the procedure can suffer the full withholding, with recovery only possible and belated.

The Swiss withholding tax, in reverse

Watch out for the opposite flow too. When it is the Swiss company that distributes dividends to its own shareholders, the 35% Swiss withholding tax (imposta preventiva) applies, withheld at source and recoverable by the beneficiary who correctly declares the income or who qualifies for a notification procedure. For foreign shareholders, recovery depends on the applicable treaty. In planning the group you must therefore consider not only the repatriation to Switzerland, but also the final step toward the ultimate shareholders.

What to watch

• The classification of the participation and compliance with the thresholds for the participation deduction.
• The existence and terms of the treaty with the subsidiary’s country.
• The formal procedures to obtain the reduced rate at source.
• The economic substance of the structure, to overcome the anti-abuse clauses.
• Coordination with the withholding tax on subsequent distributions.

Recurring mistakes

• Distributing before activating the reduction of the treaty withholding.
• Building pure conduit holdings with no activity or staff, exposed to anti-abuse challenges.
• Ignoring the participation requirements, losing the domestic deduction.
• Failing to plan the last mile toward the shareholders, where the withholding tax comes into play.

How we work at SIH ONE

We analyse the structure of groups with foreign subsidiaries, we check the applicability of the participation deduction, we manage the treaty procedures to reduce the source withholding and we coordinate the repatriation of profits with the Swiss withholding tax, ensuring the economic substance of the structures.

Do you have profits accumulated in foreign companies and want to repatriate them while minimising the tax burden? Discover our tax advisory services and plan your dividend flows efficiently.