The participation exemption in Switzerland can provide tax relief for companies that receive participation income from subsidiaries. Zürcher Treuhand tells you what you need to know about the participation exemption.
The participation exemption is a reduction in corporate income tax for enterprises in Switzerland that hold significant stakes in other companies. Certain criteria must be met; generally, the participation exemption is particularly relevant for parent and holding companies.
An example of how the participation exemption works: A parent company "A" receives a dividend from company "B," in which it holds a significant stake. Without the participation exemption, company A's tax liability would increase even though company B's profits have already been taxed. The participation exemption allows company A to reduce its own corporate tax proportionally.
The participation exemption reduces the burden of double taxation, making Switzerland a more attractive location for companies. This exemption is available only for corporations and cooperatives, not for associations or foundations.
Participation exemption, explained simply
The participation reduction applies to participation income, such as dividend distributions, as long as legal conditions are met. It also applies to capital gains from the sale of equity holdings, such as the sale of stock shares. However, capital gains must meet more stringent legal requirements than dividends.
Not covered by the participation exemption:
The precise management of participation income should be handled by accounting experts. If your company too needs personal support, Zürcher Treuhand is here for you. We assist companies in all aspects of incorporation, tax management, and accounting — contact us now.
The amount of the exemption depends on the company's own profit and the value of the participation income (management costs of the income are also relevant).
The participation exemption reduces the corporate tax that would be owed without the exemption by a certain percentage. This percentage is calculated using the following formula: (Net participation income * 100) / taxable total profit = reduction in corporate tax in %
Practical example: Assume parent company A has CHF 80’000 in dividends and a capital gain of CHF 60’000, totaling CHF 140’000. After deducting management costs (usually around 5%), the net participation income is CHF 133’000. If the company's taxable total profit is CHF 1’600’000, the participation exemption is calculated as follows: (CHF 133’000 * 100) / CHF 1’600’000 = 8.3125
Thus, the corporate tax is reduced by 8.3125%.
Several legal requirements must be met for the participation exemption to apply.
Dividends
To qualify for the participation exemption on dividends, the company must:
Capital gains
The participation exemption for capital gains has stricter rules, all of which must be met:
The participation exemption also applies to holding companies, which primarily exist to hold and manage stakes in other companies and typically do not produce their own goods or services.
Since January 1, 2020, the so-called holding privilege for these companies has been abolished. Previously, they were exempt from corporate taxes at the cantonal and municipal levels and only had to worry about a reduced capital tax. Now, holding companies are taxed normally at the federal, cantonal, and municipal levels.
However, the participation exemption helps keep this tax burden within limits. According to our formula, the exemption would be 100% of the corporate tax, as all income in a holding company comes from participations. In practice, this is not entirely the case, as there are always certain variations and exemptions.
The participation exemption is a valuable tool for qualified Swiss companies. Through strategic planning and understanding of the specific rules, companies can significantly benefit from this exemption. A tax advisor is necessary to ensure proper management. Personal consultation with Zürcher Treuhand keeps you on the safe side — contact us today.
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The participation exemption in Switzerland can provide tax relief for companies that receive participation income from subsidiaries. Zürcher Treuhand tells you what you need to know about the participation exemption.
