Branch Office Tax Obligations
This blog will explain you the tax obligation differences between branch offices with permanent establishment and branches from abroad. The taxes on branch offices in Switzerland can be summarized the following:
Branch offices are subjected to the regular tax obligations in Switzerland and obligated to pay taxes for their business earnings. Branch offices from abroad are regulated in the double taxation agreement.
Branch Office Tax Obligations
From a tax law perspective branches are considered to ‘permanent establishments’. These ‘permanent establishments’ are where the business activities of a company are exercised. Permanent establishments are branches, production facilities, workshops, retail outlets, permanent representations and mines (Art. 51 Para. 2 DBG (Swiss Federal Law on Direct Taxes)).
Permanent establishments are subject to limited tax obligations (Art. 51 Para. 1 Letter b DBG). This means that the profits made in Switzerland are taxed at a minimum (Art. 52 Para. 2 DBG). The tax laws may provide for other taxes in addition to the tax on profits. Therefore the head office continues to be the main tax domicile and is taxed independently for its income.
The terms ‘permanent establishment’ and ‘branch’ do not coincide entirely, because permanent establishments can also be less independent than branches (see blog entry). The following objects are not recognised as permanent establishments: places for stacking goods, warehouses, processing warehouses, purchasing centres, information procurement, advertising agencies, research institutions, support services and preparatory activities (list corresponds to the OECD model agreement for the avoidance of double taxation of income and wealth taxes).
Branch Office Abroad
If a company from abroad establishes a branch in Switzerland, this shall also have limited tax liability and a tax on profits will be levied. Any losses incurred by the head office abroad are not taken into account. This regulation only applies in so far because a double taxation agreement (DTA) is in force between Switzerland and the country in which the head office is located. DTAs serve to protect against the double taxation of profits or other areas liable to the tax. To date Switzerland has signed 53 DTAs, 46 are still in force (see State Secretariat for International Financial Matters).
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