Extended International Transposition

Background & Definition

Since 2020, the Federal Tax Administration (FTA) has expanded the scope of international transposition by introducing the concept of extended international transposition. This newest administrative practice is aimed at specific cases where structuring results in an unjustified erosion of the Swiss tax base.

The extended international transposition applies in particular to acquisitions of Swiss companies by Swiss acquisition vehicles that are outside the group.

Under the concept of "extended international transposition", the FTA includes situations in which the withholding tax base is transferred to a tax-free zone, such as in the sale of a Swiss company to a purchaser who is not entitled to a full refund of the Swiss withholding tax.

In this context, the FTA refuses the reimbursement of withholding tax or to apply the declaration procedure for distributions made by a Swiss company, to the extent that the Swiss acquisition company is able to distribute, without withholding tax, reserves to an acquirer who cannot request reimbursement.

This is not a rule that is applied systematically, but rather a tool that the FTA reserves the right to use in specific cases of abuse, where repayment of the withholding tax would make it possible to circumvent the logic of taxation. In other words, an arrangement will only be requalified if it results in a tax saving contrary to the law (article 21 para. 2 of the Withholding Tax Act (LIA). That said, it can sometimes be difficult for the taxpayer to provide the necessary evidence to enable the tax authorities not to qualify the transaction as an extended international transposition.

What are the characteristics and conditions?

This refers to the indirect acquisition of shares in a Swiss company by a person (individual or legal) resident abroad, who would not normally be entitled to a full refund of withholding tax.
This acquisition is carried out via a Swiss acquisition vehicle (intermediary company), financed by debt or equity in the form of reserves from capital contribution (RCC) or share capital.
The funds (debt or contribution) generally come from a foreign group company of the acquisition vehicle that is not, or only partially, entitled to tax treaty benefits.

Consequences

This type of structure enables the Swiss vehicle to subsequently distribute reserves exempt from withholding tax to the foreign investor, thereby circumventing the limits on the right to reimbursement laid down by law and international treaties, which justifies the FTA's intervention on the grounds of abuse of rights.

Example of a typical case of extended international transposition

Through a Swiss acquisition company (Swiss Holding), a foreign company acquires a Swiss corporation (Swiss target company) for CHF 100 million. To finance this transaction, the Swiss holding company is endowed by the foreign company with CHF 100 million in the form of reserves from capital contributions (RCC). The acquired company had CHF 5 million in RCC. A few years later, the Swiss company pays a dividend of CHF 8 million to the Swiss holding company.

In the above structure, the Swiss holding company is fully financed by the foreign company via RCC, without any external financing. This allows the Swiss holding company to receive dividends from the Swiss target company and pay them back to the foreign company without withholding tax, in the form of a RCC repayment. However, the foreign company would not have been entitled to the refund if it had held the target company directly. The FTA therefore considers that such structuring circumvents the purpose of the withholding tax and undermines the Swiss tax base, which justifies the denial of the refund under article 21 para. 2 LIA.

The effects of extended international transposition can, in some cases, be neutralized a posteriori, notably by reclassifying RCC as other taxable reserves.

Structure accepted by the FTA: transfer of RCC

The Swiss holding company transfers CHF 95 million from its RCC to other reserves, so that the balance of its RCC no longer exceeds CHF 5 million (which represents the amount of the RCC). The FTA then accepts the withholding tax refund, as the reclassification of the RCC into other reserves makes them taxable, thus eliminating any loss of tax base.

Conclusion

The FTA is increasingly vigilant with respect to structures aimed at circumventing Swiss withholding tax, relying in particular on the concept of extended international transposition to challenge abusive arrangements. Given these risks, it is essential for companies to carefully anticipate the tax consequences of their structures, especially in the context of international acquisitions

If you are planning to restructure or acquire a company, our M&A team is here to support you and provide tailored advice for your specific situation.