PLEASE NOTE: THIS ARTICLE WAS ORIGINALLY SUBMITTED BY REVISUISSE PRICE WATERHOUSE, SWITZERLAND

France and Switzerland have signed an additional agreement to the existing income tax treaty of 1966/1969. It is expected that it shall enter into force sometime during 1998. The major changes are as follows:

Dividends

Dividends distributed to Swiss corporate shareholders holding an investment of at least 10% in the French company shall be exempt from French withholding tax, provided that (a) the Swiss shareholder is ultimately controlled by persons resident in Switzerland or in the European Union or that (b) either the French distributing company or the Swiss corporate shareholder is quoted on a recognized stock exchange.

Compared to the existing treaty, the substantial holdings rate has been reduced from 5% to 0% and it may be claimed for investments of 10% instead of 20% as provided by the existing treaty.

For portfolio holdings, i.e. investments of less than 10%, and cases where substantial holdings do not pass the ultimate control and stock exchange test described above, the unrecoverable French withholding tax will be 15% which is the same amount foreseen by the existing treaty.

A Swiss resident may claim the "avoir fiscal" on dividends paid by French companies; provided that he is (a) an individual shareholder or (b) a corporate shareholder holding directly or indirectly less than 10% in the French company. The refund of the "avoir fiscal" is subject to 15% withholding tax.

If a Swiss resident is not entitled to the "avoir fiscal", he may claim a refund of the advance payment ("pr‚compte") levied by the company on the dividend. The gross amount of the refunded "pr‚compte" is subject to 15% withholding tax.

Interest

Interest paid to Swiss residents will be fully exempt from French withholding tax. The existing treaty provides for a non-recoverable withholding tax of 10%.

Royalties

Royalties paid to Swiss residents will be subject to a 5% withholding tax. Unlike the existing treaty, leasing payments shall no longer be considered as royalty or license payments and therefore will not be subject to French withholding tax.

Capital Gains From Immovable Property

Capital gains from immovable property are subject to tax in the country where the property is situated. Capital gains derived from the sale of shares or other rights in a company, from a trusteeship or other similar bodies whose assets mainly consist of immovable property are considered to be gains from the sale of immovable property, unless the immovable property is used for the company's own commercial activities.

Limitation On Benefits

The existing limitation on benefits clause will remain unchanged. Since it is an important clause, we would like to remind you of its contents:

Foreign owned Swiss companies may claim a relief from French withholding tax on dividends, interest and royalties only, if the following conditions are cumulatively met:

  • the ratio of interest bearing debts due to non Swiss residents may not exceed six times equity
  • such debts may not bear interest at a rate exceeding the average yield of Swiss Government bonds plus two percentage points;
  • not more than 50% of dividends, interest and royalties for which a relief under the Swiss/French treaty has been claimed may be used in the current year to make tax deductible payments to non Swiss residents;
  • at least 25% of treaty protected income derived from France must be distributed as dividend.

In addition interest and royalties must be subject to Swiss income taxes on a federal, cantonal and communal level.

The content of this article is intended to provide a general guideline to the subject matter. Specialist advice should be sought about your specific circumstances.