Withholding tax on interest, dividends and royalties

When a company pays dividends, interest or royalties to a foreign beneficiary, the source state often withholds a tax before the money even leaves. These are withholding taxes. Understanding when they apply, at what rate and how to reduce them is decisive: a poorly managed withholding can tie up liquidity for months or turn into a definitive cost. The picture changes depending on the type of income.

Dividends: the Swiss withholding tax

In Switzerland, dividends distributed by a GmbH or an AG are subject to withholding tax of 35%. The rate is deliberately high, because its function is a guarantee: to encourage the declaration of income and allow its recovery.

For a shareholder resident in Switzerland, the 35% withheld is fully recoverable by correctly declaring the dividend: it effectively becomes an advance payment.
For a foreign shareholder, recovery goes through the applicable double taxation treaty, which reduces the rate to the treaty rate and allows the excess to be refunded.

Without invoking the treaty, the foreign shareholder risks bearing the full 35% as a dead cost: not a substantive problem, but a procedural one.

Interest: a lighter taxation

On interest, the Swiss picture is more favourable. As a general rule, the 35% withholding tax hits only certain categories, in particular interest on bonds and on deposits with Swiss banks. Interest on an ordinary loan between companies or between a shareholder and their own company is, as a rule, not subject to withholding tax.

Two aspects call for attention, though:

intra-group financing must respect market rates (transfer pricing) and the thin-capitalisation rules: excessive interest can be reclassified as a hidden profit distribution, with withholding tax applied;
the beneficiary’s state of residence may still provide for its own withholding or taxation, to be coordinated with the treaty.

Royalties: the foreign variable

On royalties — fees for the use of trademarks, patents, know-how, software — Switzerland does not apply a domestic withholding tax. The typical problem is therefore the mirror image: it is the Swiss company that, by paying royalties abroad, receives flows subject to withholding in other countries, or the Swiss beneficiary that receives royalties already reduced abroad.

Here the treaties are essential: they set the maximum rate the source state may withhold on royalties and make it possible to reduce the levy or recover it. Ignoring them often means suffering withholdings higher than due.

The role of treaties and procedures

The common thread across all three types of income is the double taxation treaty. In practice you follow one of two routes:

relief at source: you directly apply the treaty rate, where the treaty and the procedure allow it (often subject to prior authorisation or notification);
refund: you withhold the full rate and request the return of the excess with the relevant form, within the prescribed deadlines.

For groups with qualifying participations there is also the notification procedure, which in certain cases allows the obligation to be met without physically paying the tax, avoiding the withhold-and-refund cycle. These are tools that require precise requirements and deadlines to be met.

Recurring mistakes

Treating the 35% as a definitive cost: it is almost always recoverable if you follow the procedure.
Letting the refund deadlines lapse: the right expires and the withholding becomes a cost.
Off-market intra-group interest: risk of reclassification as a hidden dividend.
Ignoring the foreign withholding on outbound royalties: you pay more than due by not invoking the treaty.

How we deal with it

At SIH ONE we map the flows of dividends, interest and royalties, identify for each the domestic and treaty rate, choose between relief at source, the notification procedure and a refund, and check the consistency of intra-group rates. The aim is that not a single franc of tax stays tied up or lost through a missed formality.

Do you pay or receive dividends, interest or royalties across borders? Let’s optimise your withholding taxes.