Most Swiss hedge funds are legally set-up as contractual funds with a fund of funds structure. Swiss contractual funds are managed by a fund management company that takes the form of a Swiss corporation. Foreign hedge funds can have a Swiss advisory company that usually also takes the form of a Swiss corporation. As such, the management/advisory company is considered as a separate taxpayer in Switzerland and subject to corporate income tax at federal, cantonal, and communal level.
Dividend distributions from Swiss companies to their shareholders are subject to Swiss withholding tax at the rate of 35 percent (shareholders resident in Switzerland can claim a refund of the Swiss withholding tax; shareholders resident outside Switzerland may claim a partial or full refund of the Swiss withholding tax under the double tax treaty between their country of residence and Switzerland – if any).
Depending on the place of registration of the management company, the effective tax rate on the profit can vary from 12 percent to 24 percent.
There are no specific tax concessions, allowances, or exemptions that are available to management companies of Swiss hedge funds.
As a principle, the same applies to advisory companies of foreign hedge funds. In exceptional cases and as a pure matter of practice, advisory companies are successful in obtaining a tax status of an administration company (also called mixed company status), which applies to companies whose activities are mainly carried out abroad and whose Swiss activities are of insignificant character. Under such status, only a small part of the company’s foreign-source income is subject to ordinary taxation at cantonal and communal level (this status is not available at federal tax level). Swiss-source income (if any) is fully subject to ordinary taxation.
According to domestic legislation, a foreign company is subject to Swiss corporate income tax if:
A foreign company has a PE in Switzerland if it has infrastructure and carries out activities in Switzerland.
In the context of foreign hedge funds set up by Swiss residents, there are always certain tax risks when:
The risk is that the Swiss tax authorities, fully aware of all facts and circumstances, could either (a) consider that the foreign fund management company has a PE in Switzerland or (b) even consider that the tax residence of the fund management company is in Switzerland. As a result, the foreign fund management company would become subject to both Swiss corporate income and capital taxes. In a worst case scenario, there could be a full attraction, that is, the foreign hedge fund itself could be considered as a Swiss fund and, as a result, its income distribution or reinvestment would be subject to Swiss withholding tax at 35 percent.
The services rendered by a Swiss resident fund management company are generally exempt from VAT (standard rate of currently 8 percent). As a result, the input VAT incurred by the fund management company cannot be claimed back.
The services rendered by an advisory company are subject to VAT but zero-rated if the recipient of the services, that is, the fund management company, is located outside of Swiss territory. As a result, the full input VAT can be claimed back.
The taxation of Swiss investment funds depends on the way they are legally structured under the Federal Act on Collective Investment Schemes which entered into force on 1 January 2007. The basic principles of taxation can be briefly outlined as follows.
Swiss contractual funds, as well as SICAV, are generally treated as transparent for Swiss tax purposes and therefore do not constitute entities subject to Swiss corporate income and capital taxes in their own right. As a result, taxation is applied exclusively and directly to the investors (principle of tax transparency) and is determined by the tax laws in force in the country of their tax residence.
The above-mentioned principle of tax transparency also applies to the LP. Since the general partner (the member who bears unlimited liability) must be a limited company with registered office in Switzerland, it is considered as a separate taxpayer in Switzerland and is subject to corporate income and capital taxes in its own right.
The above-mentioned principle of tax transparency does not apply in the case of the SICAF. The SICAF is treated the same as any other limited company with registered office in Switzerland. As such, it is considered as a separate taxpayer in Switzerland and is subject to corporate income and capital taxes in its own right. The taxation at the level of the investors, who are shareholders, takes place only when the profit realized by the SICAF is distributed.
In principle, Swiss hedge funds are not considered to be eligible to claim treaty benefits according to the double tax treaties entered into by Switzerland.
However, as an exception, Swiss funds may obtain relief for withholding taxes on dividends and/or interest from the following jurisdictions.
The benefits of such treaty relieves can be applied only in respect of the portion of Swiss resident investors in the fund.
The Swiss fund itself is transparent and, as such, not considered as a VAT taxpayer.
As a principle, all income distributions made by Swiss contractual funds, SICAV and LP are subject to Swiss withholding tax at a rate of 35 percent (distributing fund). The yearly income of the fund is also subject to 35 percent withholding tax when the income is reinvested (accumulating fund).
As an exception, no withholding tax is due on the distribution or the reinvestment of net capital gains realized by the fund if such capital gains are clearly separated from the income received by the investment fund.
As a further exception, there is no Swiss withholding tax on the distribution or the reinvestment of income if:
Dividend distributions from the SICAF to its shareholders are subject to Swiss withholding tax at the rate of 35 percent (there is no exemption applicable for SICAF).
Contractual funds, SICAV, and LPs do not file corporate income tax returns. The SICAF is treated the same as any other limited company with registered office in Switzerland and, as such, must file the usual returns for corporate income tax purposes.
In principle, as far as income tax is concerned, the Swiss tax legislation does not distinguish between investments in Swiss or foreign investment funds. In both cases, distributed and reinvested fund income received from a contractual fund, a SICAV or a LP is subject to income tax while capital gains are tax-free for investors holding their assets for private investment purposes (if distributed with separate coupon or if the fund provides specific information on the portion of capital gain and income included in the distribution). This means that Swiss resident individuals are subject to income tax in respect of undistributed income of a foreign accumulating fund in the same way as for Swiss accumulating funds. The Swiss Federal Tax Administration published model calculation excel spreadsheets for the determination of the taxable income of foreign funds and fund of funds vehicles for Swiss tax purposes.
The income tax treatment for Swiss companies and individual investors holding units in a fund as business assets follows the accounting treatment if it is in line with Swiss GAAP. Swiss resident companies and life insurance companies would prefer to use corporate feeder vehicles because they are usually entitled to claim the participation exemption on dividend distributions and capital gains made on qualified investments (resulting in a virtually tax free income).
For more detailed information on the taxation of Swiss/non-Swiss resident investors in Swiss and foreign funds please also refer to the KPMG international funds and fund management survey.
There is no specific anti-avoidance tax legislation applying to an investor resident in Switzerland where the hedge fund is resident in Switzerland.
There is no specific anti-avoidance tax legislation applying to an investor resident in Switzerland where the hedge fund is resident offshore.
A Swiss resident individual investor holding his assets for private investment purposes will require details on the fund income and the tax value of his investments in order to complete his tax return. The taxable income and the tax value for net wealth tax purposes of numerous Swiss and foreign funds are published each year by the Swiss Federal Tax Authorities in an official tax information database (so called Kursliste).
The annual KPMG International Hedge Fund Survey looks at the taxation and regulation issues affecting hedge fund management.
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