IN600 The Advantages Of Using A Swiss Company To Hold Investments Owned By Turkish Residents Or Companies
Turkish shareholders with foreign portfolio investments, should consider owning these investments through a Swiss company, in particular if these investments are held in Switzerland.
What are the Key Advantages?
a) Profit, taxed in Switzerland, will be at a rate of between 10.1% and 13.99%. This is in comparison to the relevant corporate tax rate in Turkey of 22%, or the Turkish personal income tax rate of 35%, if the Turkish resident owns the portfolio directly.
b) Exemption of equity fluctuations from tax, rather than being subject to a tax rate of 22% in Turkey.
c) Reducing the information that needs to be provided to Turkey under CRS Regulations.
d) Turkey has a double taxation treaty with Switzerland, the tax clauses of which came into force on 1 January 2013.
Turkish CFC Rules and Swiss Corporate Tax
The Turkish corporate tax rate is 22%, while personal income tax ranges from 15% to 35%.
Many Turkish individuals and corporations have substantial banking assets abroad, particularly in Switzerland.
Under Turkish CFC rules, Turkish residents holding portfolio investments through ‘low’ tax companies, outside of Turkey, must pay Turkish income tax of 35% on the foreign company’s profits, there is no deferral.
If the foreign company’s corporate tax rate is above 10%, no personal income tax is paid in Turkey, but in the foreign jurisdiction where the relevant foreign tax rate will apply.
- Swiss companies are interesting as their corporate tax rates vary between 10.1% and 13.99% (depending on which Swiss canton they are located in).
Investment Currency Fluctuations
The significant decline of the Turkish Lira against all major currencies triggers taxable foreign exchange gains, when held by Turkish individuals and corporate taxpayers.
Investment currency fluctuations are taxed in Turkey, even when not realised. A Swiss company is not taxed on investment currency fluctuations, as long as the gains are not realised (eg not sold).
Equities are registered at their acquisition value in Swiss financial statements, as long as they are not sold. It would only be if they were sold that a profit would be realized and therefore subject to tax.
This is also relevant to intercompany loans, denominated in currencies other than Turkish Lira.
- The use of a Swiss company can therefore negate the need to pay Turkish tax on currency fluctuations. Such fluctuations will be taxed in Turkey, if the investment is held directly by a Turkish resident or if the investment is held by a foreign company with a corporate tax rate of less than 10%.
If a Swiss company distributes dividends to a Turkish shareholder, the effective withholding tax rates are 15% for an individual shareholder and 5% for a corporate shareholder.
A tax credit is available in Turkey against Turkish income tax.
Exchange of Information – Swiss Portfolio Investments
The exchange of information between Switzerland and Turkey will come into force in January 2020, with the first exchange of data in 2021.
If a ‘discretionary investment management agreement’ is provided to the relevant Swiss bank or independent asset manager (professional managed list), the Swiss Company will qualify as a Financial Institution (FI). In this instance, the directors of the Swiss Company will only need to provide details of; the shareholders, lenders and, net asset value of the company to the Turkish Tax Administration, via the Swiss Tax Authorities.
Without a ‘discretionary investment management agreement’, the Swiss Company qualifies as a passive non-financial entity (NFE). In this instance the reporting obligations of the relevant bank, to the Turkish Tax Administration, will be far greater. These obligations will include information regarding; shareholders, lenders and assets, income, interest, and movements of funds (across all bank account transactions).
Companies may alternatively qualify as active NFEs, if they operate an active trade or business with less than 50% passive income (gross), or have less than 50% of assets that produce passive income. If a Swiss company qualifies as an active NFE, no data needs to be exchanged by the Swiss authorities to the Turkish Tax Administration.
If you would like additional information regarding the use of a Swiss company to hold portfolio investments, owned by Turkish residents and/or companies, please contact Christine Breitler at the Dixcart office in Switzerland: firstname.lastname@example.org