Dividends within a group of companies
Shareholders have often an interest that profits and reserves within a group can be quickly distributed to them. As for the distribution of dividends a two-stage process is required – first with a dividend from the subsidiary to the parent company and then from the parent company to the shareholders – this takes considerable time. The parent company cannot distribute this dividend until it has recorded it as income, established distributable reserves and had the shareholders’ meeting approve the corresponding financial statements. This means that at least one further business year passes before the original profit of the subsidiary can be distributed to the shareholders of the parent company.
The Swiss Handbook of Auditing provides that this two-stage process can be accelerated if the following requirements are met:
- The subsidiary’s balance sheet date is not later than that of the parent company;
- The general shareholders’ meeting of the subsidiary has decided on the distribution of profits before the general shareholders’ meeting of the parent company takes place;
- The simultaneous dividend is disclosed in the notes to the financial statements of the parent company.
With this proceeding, profits or distributable reserves of subsidiaries can be distributed to the shareholders of the parent company shortly after they have been approved as dividends to the parent company.
Confirmation by the Swiss Federal Tax Administration regarding the accelerated distribution of dividends
The Swiss Federal Tax Administration (SFTA) has recently confirmed that the accelerated distribution of dividends from subsidiaries to the parent company and the shareholders of the parent company will be accepted from a Swiss withholding tax perspective. The parent company must record the dividend in the financial statements (of year n) in the year prior to the subsidiaries’ dividend resolution (against transitory assets). In the financial statements for the following year (n+1), the deferred recording has to be reversed and the dividend actually paid is recorded as income from the subsidiary.
The SFTA has reviewed this procedure with respect to the withholding tax and has come to the conclusion that the withholding tax can be reclaimed – in accordance with the general reclaim requirements – in this accelerated procedure or can be settled by the notification procedure.
Reclaim of withholding taxes / Notification procedure
Within a group of companies the so-called notification procedure can be applied. If a Swiss company holds at least 20% in an other Swiss company, this other company is not required to pay the 35% withholding tax to the SFTA. It is sufficient to notify the SFTA of the dividend with the corresponding forms within 30 days. This procedure can also be applied if the parent company is domiciled outside of Switzerland and if the company holds the minimal interest in the Swiss company as foreseen in an applicable double tax treaty (DTT). However, in such case the approval from the SFTA must be obtained in advance.
The above procedure can not be applied by individuals. Individuals resident in Switzerland can reclaim the withholding tax only with the declaration in their private tax return. Individuals resident outside of Switzerland can reclaim part of the withholding tax (usually 20% of the 35% withholding tax) if a DTT is applicable. The same applies in principle to companies if they do not reach the required minimum interest in a Swiss company.
In cooperation with the tax advisors of Reichlin Hess AG we would be happy to support you with any questions you may have regarding this topic.